I have a side-business idea that I'm thinking of pulling the trigger on and investing in. As I will have some business partners in this, I think my best bet is to form an S-corporation (based on my reading of the internet). Main question:
When I invest money into the company, how is it impacted on my taxes? Do I get to deduct any activities related to this as business expenses on my personal taxes?
If anyone has done this, how did you go about valuing your novel idea for the company relative to sweat equity and capital investments made by other members?
Any tips/tricks/suggestions related to S-corps in any way?
In reply to ProDarwin:
I'll forward this question to my wife, she has dealt with this stuff before from the tax side.
This is the response I got from my wife;
Here are some helpful links with information on S-Corps in regards to advantages and disadvantages and how it impacts taxes....
http://www.bizfilings.com/toolkit/sbg/tax-info/fed-taxes/s-c-corporations-create-different-tax-consequences.aspx
http://www.bizfilings.com/toolkit/sbg/startup/incorporating/s-corporation-startups.aspx
I would strongly suggest speaking to a CPA who is experienced in Corporations and Partnerships, please note, that not all CPA's handle these types of returns; likewise they would be able to assist you with starting this type of corporation which will come in handy.
In the meantime, for individuals to claim the deductions associated with the S-Corporation, the S-Corporation must file an 1120S. This form is used to notify the IRS of the S-Corporation's fiscal activity for the year and will be used for comparison to the owners' individual returns. In addition, the S-Corporation is required to provide each individual shareholder a K-1. A K-1 is a document that details each shareholder's share of the earnings and expenses that the shareholder will report on their 1040, all information that is entered on Schedule E with flow onto their personal return. Typically, ordinary business expenses are items such as rent, taxes, depreciation, advertising, interest and employee benefits provided by the business. Similarly, expenses associated with rental income and capital losses are netted with rental income and capital gains.
One thing to mention: S corps don't limit liability as well as some other forms of business.
I ain't a corporate lawyer and depending on the number of zeros involved in this, you should consult one.
What are you really trying to accomplish with the corporate structure? S Corps are really useless for anything besides "handyman" type businesses. They provide a few tax advantages of corporations and nothing else. Go C Corp or Go Home. Or Limited Partnership, again depending on what you are trying to accomplish.
Duke
MegaDork
4/1/15 8:09 a.m.
I really don't know anything about business law, but I have noticed that a number of the consulting firms I work with are reorganizing as LLCs, and ditching the corporation bit. A number of recent startup firms are also founded as LLCs rather than anything else.
Dr. Hess wrote:
I ain't a corporate lawyer and depending on the number of zeros involved in this, you should consult one.
What are you really trying to accomplish with the corporate structure? S Corps are really useless for anything besides "handyman" type businesses. They provide a few tax advantages of corporations and nothing else. Go C Corp or Go Home. Or Limited Partnership, again depending on what you are trying to accomplish.
C Corp is a really bad idea, unless you enjoy double taxation. A LLP is a Limited Liability Partnership, which is unnecessary unless you have partners or anticipate having partners. It is legally complex to set up properly, especially if you're trying to shield the partners from the liability of the partnership.
S Corps fell out of favor some years ago when the LLC became more common. S Corps have some limitations and requirements (limited number of owners, distribution of income requirements) that generally make them less attractive than LLCs. They can still be appropriate for an individual, but as others have said, you should be consulting a CPA and possibly a lawyer to make sure you are accomplishing your goals.
