This is probably 1st year MBA Stuff
I’m starting an S Corporation so the profit/loss will get transfered to me. I want to put $5000 in for starting cash and I am the sole owner.
My first instinct is to issue myself the 1000 shares at $5 per share. But thinking about it, the corp would show a profit (let’s say no other revenue and expenses 1st year to make it easy) which I would then be taxed on. I’m going to pay double taxes on my own money? I don’t think I can take the $5000 I put in as a personal capital loss since the 5K is the cost basis if I sell the stock as an individual.
Then I thought, why do I have to sell stock to transfer the money? Just put the 5K in the bank under the company’s name. But then, I wouldn’t really own the corporation will I?
What is standard way to do this? Do I issue myself all 1000 shares at $0? Seems like the most sensible way to do it, but when was the IRS last sensible? Am I missing something like a presumption that all owners split the stock evenly unless otherwise documented in bylaws? (Arizona if it matters)
You need an accountant. If you don’t know the answer to this question, then you don’t even know whether an S Corporation is the right choice for your business. Heck, you don’t even know whether it’s a properly formed S Corporation - most of my new clients don’t finish the process correctly, even if they got an attorney’s help. You need an accountant right at the beginning.
But, I’ll do my best. When you registered with the state, you set the initial number of shares available and the par value. Most people set the par value at $1 just to keep it simple, but any non-zero amount is fine for the IRS (see your state laws to see if this is true for the state). So, the par value at least prevents you from issuing stock for $0. If that’s the case, then you have the following basic options for your $5,000 investment:
Buy 5,000 shares at $1 each. Debit cash, credit common stock.
Buy 1,000 shares at $5 each. Debit cash, credit common stock for $1,000 and additional paid-in capital for $4,000.
Buy 1,000 shares at $1 each and loan the remainder. Debit cash, credit common stock for $1,000 and credit Note Payable to Shareholder for $4,000.
In no scenario do you or the corporation pay tax on the purchase.
Now, each of these has some nuances regarding your basis in the stock, your basis in the company, deductibility of losses, and the nature and tax implications of payments to yourself. Go find yourself an expert and make sure they explain it to you.
And equally a loan to the corporation isn’t revenue either. In both cases, the money coming into the corporation is balanced by a debt or obligation to a person other than the corporation.
A corporation has revenue generally by selling goods or services, not by raising capital.
Thanks dracoi. I had to take basic accounting for my econ minor so I have the rudimentary stuff down for the day to day stuff and I will hire a tax acct. for the year end depreciation, balance sheet, etc. stuff when that is due.
It is a very simple business in terms of day-to-day accounting but does involve rentals so I was advised to form it as an S corp rather than LLC or Sole Propriatorship to avoid the issues with passive losses on my personal taxes.
It could be that S Corp is the right choice for you… but a lot of attorneys and even accountants (who should know better) see it as a one-size-fits-all solution, and it’s not. Half of my new clients are S Corp owners who have not finished the S Election, were not told to pay themselves payroll, and who don’t even run the company in a way that gives them personal liability protection they thought they had.
I would really talk to an accountant now. It’s summer and things are slow. They’ll appreciate that you planned ahead and didn’t wait until the last minute. There are decisions you’re making right now that will affect how much tax you’ll pay in April… and those are things you may not be able to fix after December 31.
Dracoi, you aren’t in Arizona by any chance are you?
I was really leaning towards an LLC because I wanted a separate entity to buy the house and rent it when I move out to Colorado but was advised to go S Corp because of the whole passive loss thing AND he was concerned about the tax credit issue for being a “first-time home buyer” for when I rent a personal home the CO if I bought it as a LLC.
Probably not surpising to you, I was not told about the “reasonable payroll” and I really don’t think I’ll have over 25K in passive loss (that’s 2K per month!) but then again, I know loss can come from depretiation, etc. I think I got stuck with one of your Realty Investment = S Corp advisors and would love to sit down with someone that looks at it like you do.
I’m up in Washington state… but I do visit family in Tucson and Phoenix every year in December.
My recommendation is to look on Biznik.com. It can perform a search within a certain radius of you, and (most importantly) you can look at the compliments left by other users. Look for someone with a CPA or EA designation. (Hopefully, there aren’t a lot of other accounting pros around; on other forums, an EA vs. CPA flame war is a monthly occurrence.)