Can you talk to me about the advantages and disadvantages of making your company an S-Corporation (S-Corp)? We spoke with an accountant last night and he recommends that we reincorporate as such, but I'm not 100% sold. The fact that every partner will be evenly taxed (or credited) for the profits (or losses) bothers me, since a big part of our business is based on billable hours - hours of work you do for a client.
kate [email] said at 6:19 PM 06-21-2006: whoa, i have never heard about an scorp. all of our bands eventually become LLC's. i am reading about this now.
kate [email] said at 6:22 PM 06-21-2006: this is as opposed to filling out a W-9 for the main person in the band, and using their SS#, as they are not truly making all that money, and if they start really making a lot of money as a band, they get heavily taxed as individuals for money they did not in fact earn themselves.
josh [email] said at 8:08 PM 06-21-2006: LLCs are also a lot simpler to set up. But they are not as good for a business like ours... at least according to our accountant!
dave [email] said at 8:12 PM 06-21-2006: if i recall s-corps are related to c-corps in the regard that they can shield from personal liability. They act more like a partnership in regards to payouts. In a C-Corp you would have a structure setup where there are employees that receive wages. Shareholders could receive dividends, but they are at a capital gains rate rather than a individuals tax rate. With an S-Corp, you can operate the corp like a partenership, and payout the stakeholders in the form of dividends from earnings, but it shows up like regular income tax, rather than capital gains tax.
If you want to setup payschedules, rather than shareholder dividends and LLC might be the best route to take. LLC's provide corporate shielding and probably the highest level of control to board directors.
When we ran a music collective years back we filled as a non-profit LLC. It was the best way for us to operate it as we had when we were just booking shows, but gain the tax and litigation shielding.
woody [email] said at 8:19 PM 06-21-2006: I would think you could set up your own rules of ownership to suit your model. If the company will have no residual value each year, then you could state that share ownership will be rebalanced each fiscal year, based on the contributions of each owner. So if you contributed 30% of the revenue this year, you are deemed to own 30% of the business at the end of the year. Or whatever makes sense.
I can't quite see why you'd want your marginal tax rate instead of a dividend rate, even if it is double taxed, but maybe it's better.
woody [email] said at 1:01 AM 06-22-2006: Well, I guess I meant that it won't increase in value, so it's ok to "start over" the ownership equation each year. But it is probably best to come up with an equation that fairly divides ownership of the company assets too.
Dorkbomb said at 2:00 PM 06-23-2006: Choice of entity is a very complex inquiry and varies greatly depending on the laws of the state in question. If you want a second opinion, you would be well served to get one from an attorney who specializes in small business stuff or with whatever industry you are in, e.g., if IP or liability issues are an issue at all. S corps are creatures of federal tax law which don't affect how you are treated for state tax purposes generally. A lot of people are converting to these lately, and congress keeps making them more hospitable. LLCs are nice things too, and require fewer formalities, but are not for everyone. Again, the LLC laws of the state of incorporation will have a lot to do with that decision, so you should seek out someone who is familiar with those distinctions. http://www.tannedfeet.com/choice_of_entity.htm
craig [email] said at 2:03 PM 06-23-2006: I don't know lots of about corporate set-up, but apparently Nevada and Delaware are the best two states to incorporate in, and many companies do just that. You don't have to reside or do business in the state of incorporation.
