S Corporation Filing & Finance/Taxes

[txpcorp]

Good evening.

I am a founder for a business concept that is about to transition into an S corporation status. Before we commence, I am in need of some general advice:

1) For Iowa Fee Scheduling, there are several documents of which are needed to be filed to be considered an official S Corporation. Am I only required to file Articles of Incorporation & Amendment?

2) For financial purposes, I am thinking of performing general bookkeeping activities personally. Through use of QuickBooks Pro, would it be easily performable to conduct bookkeeping activities for an S corporation that will consist of only 2 employees (including myself) initially, with very little equipment purchases, very little startup costs, low overhead, and only 1 base office to work from?

3) Finally, is it possible to register our S corporation's head office out of our apartment for the moment? I have heard about SOHO's, and our apartment has an empty room that can be converted over to an office for use with our company. I have also heard that you need an external office agent to be registered with the office location, someone who does not reside at this location, which is definitely doable given that this assumption is correct.


Thank you for your time in reading these inquiries, and their prospective solutions!

[cg410]

I can't be of much help for Iowa's requirements, but federal requirements are just file the S corp election form (2553) and then when it's tax time file form 1120-S. In New York, to convert from C to S all I had to additionally do was file NY's version of the 2553. In FL I didn't have to do anything. You can ask your state Department of Taxation (they usually accept phone calls) for Iowa's requirements.

Use any address you want as the corporation's address. If it operates out of your home, your home address is perfect (unless Iowa has some kind of rule against that -- doubtful).

--J

[txpcorp]

Thank you, sir! Your input is of great appreciation! Can you tell me briefly, because I know you are a busy person, how the cash flows through the S corporation and straight to the individual shareholders' income areas? Well, I mean, is this for just shareholders or for employees as well? And, do company profits (bottom-dollar; net income) become distributions to major shareholders' accounts as dividends, or can it be used for capital for improving the business, expanding on new projects, etc.?

[cg410]

No problem... you're welcome!

Cash can leave the company to the people that work for it in 2 ways: salaries and dividends. Salaries can be given to anyone in any amount that the shareholders choose, but salaries are subject to payroll taxes. Dividends are divided among shareholders based on the % of the shares they hold and are not subject to any taxes at the corporate level. Shareholders that actively participate in the company are required to take a "reasonable" salary (that is, they can't just take 100% dividends to avoid payroll taxes).

As best I understand, S corps are not required to distribute all of the profit (income after expenses, including salaries) to the shareholders, but the shareholders still have to pay taxes on the profit even if the money is not distributed (yet). The idea is that eventually either the money will be distributed to the shareholders (so the taxes would be due anyway) or the money will be lost by the (failed) company and the shareholders can then recoup their paid taxes with a tax credit for the lost investment.

Worth reading if the above didn't make things completely clear:

S corporation - Wikipedia, the free encyclopedia

The authors did a pretty good job on the article.

--J

[rdc]

Hi Jayson,

I think you're on the right track.

1): Technically, all that's usually required to form a corporation are filing of the Articles (and sometimes other ancillary docs like the Initial Report) with the state. But, you really also need several other documents to be drafted, perhaps most important of which are corporate bylaws. This is absolutely essential, too, if there is more than even a single shareholder (otherwise, if and when things come down to it, you will be up to the mercy of your state's default corporate "gap-filler' rules, and the courts, which can lead to disastrous results as a result of lack of planning). As you get deeper into this corporate planning areas, you may also need to plan for equity and voting concerns, generally via shareholder agreements.

And like cg410 said, you must file with the IRS to be considered an "S" corporation (don't neglect this!).

An additional thought on S-Corp taxes: yes, profit/loss "passes through" to shareholders, in proportion to share ownership. Payments to officer-directors is via dividends and salary (and bonuses and equity plans etc). Dividends are not subject to self-employment tax, but salary is. However, you can't do it all as dividends; CPAs generally use the 60/40 salary/dividend rule of thumb. You'll get more into that later... which leads me to your next question.

2) Yes, use Quickbooks, learn basic accounting, and you'll be fine. When you're profitable, hire someone to look over this and assist in tax planning.

3) I haven't heard that the agent has to be outside of the office; usually that's fine. But this is the sort of question that your state's Secretary of State could very easily answer (it varies a bit from state to state).

Hope this helps some.