Examples:

• • Tom formed an S corp to avoid double taxation, but didn’t realize he had to pay himself a reasonable salary, costing him in IRS penalties.
  • ABC Widgets issued two classes of stock, violating S corp rules and voiding their tax election without realizing it.
  • A foreign investor bought shares in XYZ Inc, an S corp, not knowing his ownership would terminate the company’s S status.

How to Proceed:

• • Consult with a CPA and business attorney to fully understand S corp tax rules and legal requirements before electing this status.
  • Work with your advisors to establish a reasonable salary for any owners providing services to the company.
  • Properly report owner wages and withhold payroll taxes using IRS Form W-2.
  • Monitor your shareholder count and composition to ensure you stay under 100 and all are eligible individuals or entities.
  • Carefully review company stock and shareholder rights to confirm you only have one class issued.

FAQs:

• • What’s the difference between an S and C corp? C corps are separately taxable entities, while S corps provide pass-through taxation to avoid the “double tax”.
  • Can my S corp owner salary be $1 to avoid payroll taxes? No, the IRS requires reasonable compensation based on your duties, industry, etc. Skirting this rule risks an audit.
  • Will I lose my liability protection if I mess up the S election? No, the limited liability granted by incorporating remains even if you later violate S corp rules and revert to C status.
  • Can I be the only owner of an S corp? Yes, the IRS allows single-shareholder S corps.
  • What happens if my S corp exceeds 100 shareholders? You automatically lose S status and revert to a C corporation for tax purposes.

Examples:

• • Founding partners John and Bill had a falling out, but without a buy-sell in place, couldn’t agree on terms for John to exit the company, forcing a dissolution.
  • When Sarah died unexpectedly, her S corp shares passed to her foreign heir, terminating the S election since nonresident aliens are ineligible owners.
  • A buy-sell provision allowed Dave’s family to redeem his shares from the company and receive fair market value after his divorce, avoiding a tense stand-off.

How to Proceed:

• • Consult with a business attorney to draft a thorough buy-sell agreement customized to your S corp’s needs.
  • Identify triggering events for buyouts such as death, divorce, disability, retirement, etc.
  • Specify buyout terms, payment options, and non-compete provisions.
  • Have all shareholders sign the agreement and update as circumstances change.
  • Secure life insurance and any other funding mechanisms required by the buy-sell terms.

FAQs:

• • Is a buy-sell the same as a shareholder agreement? Buy-sells are a type of shareholder agreement focused on future ownership changes. Some use the terms interchangeably.
  • Can an S corp have different classes of shares with varying buy-sell terms? No, S corps can only issue one stock class so all shareholders must have equal buyout rights.
  • What if my S corp can’t afford to buy out a departing shareholder? Buy-sell terms can allow installment payments over time to ease the cash flow burden.
  • Does an S corp need a buy-sell if there’s only one owner? Single-owner S corps can still benefit from succession planning with buy-sells to facilitate future share transfers.
  • How often should a buy-sell be updated? Review and revise as needed every few years or after major events like new shareholders, marriages, divorces, etc.

Examples:

• • A 25% owner claimed he was owed 35%, but since the company never issued certificates, it couldn’t definitively prove his equity.
  • During due diligence for a major deal, the lack of share certificates spooked the buyer, tanking the acquisition.
  • When a founding partner tried to sell his stake to an outside investor, the absence of certificates delayed the transaction for weeks.

How to Proceed:

• • Ensure your incorporation paperwork specifies the number of authorized shares and to whom they’ll be issued.
  • Have an attorney draft official share certificates including the S corp name, shareholder name, number of shares, issuance date, and any transfer restrictions.
  • Obtain signatures from the appropriate corporate officers (president, secretary) on each certificate.
  • Distribute certificates to shareholders and have them sign a receipt acknowledging the issuance.
  • Record all certificate details in an official stock transfer ledger and update as ownership changes.

FAQs:

• • Can S corp share certificates be issued electronically? Digital certificates are permissible but some prefer to have paper certificates for extra security and clarity.
  • What if an S corp owner loses their certificate? The company can void the lost certificate and reissue a replacement with a new certificate number.
  • Do share certificates alone prove ownership? While certificates provide strong evidence, true ownership depends on proper issuance, payment for the shares, and corporate meeting minutes approving it.
  • What information must be on an S corp stock certificate? Include the owner’s name, issuance date, number of shares, and any rights/restrictions on transfer.
  • Can I handwrite share certificates? While handwritten certificates may suffice legally, it’s best to have professionally printed certificates for clarity, consistency and credibility.

Examples:

• • A creditor pierced the corporate veil to seize an owner’s personal assets, arguing the lack of meeting minutes proved the S corp was a sham.
  • Without records of the board vote electing her, the new VP’s authority was called into question during a crucial negotiation.
  • When the IRS audited an S corp’s loss deductions, the owner couldn’t find minutes authorizing the expenses, triggering penalties.

How to Proceed:

• • Hold an initial organizational meeting after forming your S corp to ratify bylaws, issue shares, appoint officers, and set your tax year.
  • Document all meetings of shareholders and directors with minutes noting the date, attendees, topics discussed, and any actions taken.
  • Promptly distribute meeting minutes to all shareholders for review and file in your corporate record book.
  • Maintain a capitalization table tracking stock issuances and transfers approved by directors.
  • Calendar and hold an annual shareholders’ meeting to elect directors and conduct other essential corporate business.

FAQs:

• • How often does an S corp need to hold board meetings? Most states require at least annual meetings, but best practices suggest meeting quarterly or monthly.
  • Can we skip the meeting formalities if I’m the only owner? Single-shareholder S corps should still record major decisions in minutes to preserve the corporate shield.
  • Who should take minutes at S corp meetings? Typically the corporate secretary has this duty, but another officer or director can handle it if specified in the bylaws.
  • What if we need to hold an emergency board meeting? Most bylaws allow special meetings called with 24 hours’ notice, and some states permit director consents in lieu of live meetings.
  • Where should we store our corporate meeting minutes? Keep a secure original copy on file at your main office and distribute digital copies to all directors and shareholders.

Examples:

• • When an S corp owner was sued for a business debt, his personal assets were on the hook since he often paid business expenses from his personal checking account.
  • The IRS disallowed thousands in business expense deductions on an S corp return because the owner pulled funds from the corporate account to cover personal charges.
  • A company was routinely short on payroll because the owner would tap business funds for personal bills, eroding employee trust.

How to Proceed:

• • Open separate checking and savings accounts in your S corp’s name and run all revenue and expenses through them.
  • Apply for business credit cards to charge company purchases rather than using personal cards.
  • Pay yourself a reasonable salary on a set schedule from the corporate account rather than taking ad hoc draws.
  • If you lend personal funds to your S corp, document it with a promissory note and repay on a fixed schedule at a fair interest rate.
  • Never pay personal bills or expenses directly from your S corp accounts unless they’re established fringe benefits.

FAQs:

• • Can I use the same bank for business and personal accounts? Yes, but make sure the accounts are completely separate to avoid commingling.
  • Does my S corp need its own tax ID number? Yes, you must obtain an EIN and use that rather than your personal SSN on corporate accounts and filings.
  • What if I need to use personal funds for a business expense? Pay for it personally then submit an expense report and have your S corp reimburse you.
  • Is it okay to use my S corp account for an occasional personal charge? No, even infrequent commingling of funds weakens your liability protection and accounting.
  • Can I use a joint account with my spouse for the S corp? It’s best to use an account in the S corp’s name only to avoid the appearance of commingling.

Examples:

• • An S corp owner paid herself a $20K salary for a job with a $75K market rate, triggering an IRS audit for payroll tax avoidance.
  • When an S corp got behind on payroll taxes, the IRS assessed crippling late fees and held the owner personally liable for the entire unpaid balance.
  • A startup tried to save cash by issuing 1099s to all workers, but a Dept of Labor audit forced them to reclassify them as W-2 employees with back taxes owed.

How to Proceed:

• • Consult with an accountant or payroll service to determine a reasonable salary for each S corp owner based on market data for similar roles.
  • Once you set an owner’s salary, pay it on a regular W-2 basis and properly withhold federal, state, and local payroll taxes.
  • Stay on top of evolving worker classification rules and carefully analyze each role to determine if it can legally be categorized as an independent contractor.
  • Make timely quarterly payroll tax deposits with the IRS and state agencies, and submit all required annual filings.
  • Distribute any S corp profits beyond owners’ salaries without FICA withholding, but still issue a Schedule K-1 to each shareholder.

FAQs:

• • • How much salary must an S corp owner take? There’s no set rule, but it must be reasonable compensation for the services you provide based on market rates.
    • Can I just take distributions without a salary? The IRS is clear that if you work for your S corp, you must pay yourself a reasonable W-2 salary before taking distributions.
    • What payroll taxes apply to S corp owner salaries? FICA (Social Security and Medicare) as well as federal and state unemployment taxes.
    • When do S corps have to deposit payroll taxes? Most use a monthly depositing schedule, but very small companies may qualify for quarterly deposits.
    • Do I have to take the same salary each year? No, your reasonable salary can change if your duties, market rates, or company performance changes substantially.

Examples:

• • An owner used his personal vehicle for business deliveries and got into an accident, opening himself up to personal liability since the car wasn’t owned by the S corp.
  • When an S corp was sued, creditors came after office equipment because most of it was still owned and insured by individual shareholders, not the company.
  • The IRS denied an S corp’s depreciation deductions for a machine because there was no clear documentation of the company purchasing it.

How to Proceed:

• • Conduct an inventory of all property used in the business and clearly designate what is owned by the company vs. individual shareholders.
  • If the company is using any major assets owned by individuals, have the S corp purchase or lease them officially.
  • Purchase any new business property, such as real estate, vehicles or equipment, directly in the S corp’s name.
  • Keep titles, deeds, insurance policies, and financial records for company property separate from those of any personal assets.
  • If a shareholder lends personal property to the S corp, document it with a clear lease agreement.

FAQs:

• • Can I deduct expenses for my home office on the S corp return? Only if you follow the strict IRS rules for claiming the home office deduction and keep thorough records.
  • What if I use the same computer for business and personal purposes? Track and document the percentage of business use and only deduct that portion of the cost.
  • Can I drive my personal vehicle for business travel? Yes, just keep a mileage log and have the company reimburse you at the IRS standard mileage rate to avoid muddying ownership.
  • How can I prove a purchase was for business and not personal use? Always pay with corporate funds and keep the receipt with clear documentation of the business purpose.
  • Can I let my family use business assets like a company car? It’s best not to, as this can pierce the corporate veil, but if you do, keep clear records and report any personal use as compensation.

Examples:

• • When an S corp opened a new office in a neighboring state without registering as a foreign company, it got hit with fines and couldn’t enforce contracts.
  • A company missed a key legal notice about a lawsuit because it never updated its registered agent when expanding to a new state.
  • An S corp faced a tax audit and penalties for failing to collect and remit sales tax in states where it had nexus.

How to Proceed:

• • Before conducting business in a new state, register there as a foreign corporation through the Secretary of State’s office.
  • Retain a professional registered agent service with a physical office in each state rather than trying to handle it yourself.
  • Consult with a business attorney and accountant to identify any state or local licenses, permits or tax accounts you need in the new location.
  • Register with each state’s corporate tax agency and department of labor to remit any income or payroll taxes owed there.
  • Maintain detailed records of income and expenses per state to accurately apportion tax liability and avoid double taxation.

FAQs:

• • What business activities trigger foreign registration requirements? Rules vary by state but often include having a physical presence, employees, or revenue from clients in that state.
  • Can’t I just form a new S corp in each state? You could, but registering as a foreign entity is usually simpler and maintains continuity for contracts, IP, and taxes.
  • Will my S corp election carry over to new states? Once elected federally, all states recognize your S status, but you may need to file additional paperwork in certain states.
  • Do I have to collect sales tax for online sales to states where I’m not registered? If you have economic nexus there, then yes, but rules vary by state based on sales volume and number of transactions.
  • Can I be taxed twice on the same income by multiple states? In theory no, as each state should only tax the portion of your income attributed to that state, but claiming the right credits and apportionments gets complex.

Examples:

• • An S corp fell out of good standing and couldn’t bring a lawsuit against a breaching vendor because it missed two years of annual reports.
  • The IRS rejected a company’s S corp election because it filed Form 2553 late and didn’t meet reasonable cause criteria for an extension.
  • A company’s authority to do business was revoked when it continued operating with an expired sellers permit.

How to Proceed:

• • Note annual report deadlines for your formation state and any foreign states and set reminders at least 30 days in advance.
  • Schedule an annual shareholder meeting at the same time each year and prepare minutes documenting all key discussions and actions.
  • Keep your corporate records in a secure digital format for easy updating and sharing with your attorney, accountant or shareholders as needed.
  • Work with an experienced CPA to gather all information for S corp tax returns and file by the March 15 deadline or request an extension.
  • Assign a point person to track expiration dates for any required business licenses or permits and renew them promptly.

FAQs:

• • Can I handle the annual compliance filings myself? You can, but it’s best to work with an attorney or corporate filing company to avoid costly errors and maintain proper records.
  • What happens if I miss a state’s annual report deadline? You’ll likely face late penalties, interest, and potential loss of good standing. Too many delinquencies can lead to administrative dissolution.
  • How do I know what licenses and permits my S corp needs? Consult with your business attorney and check with local, state and federal agencies that regulate your industry.
  • Do I have to hold an annual meeting if I’m the only shareholder? Yes, to maintain corporate formalities and liability protection, even single-member S corps should hold and document annual meetings.
  • How long do I need to keep S corp records? At least 7 years after filing each tax return, but as long as the company is active for key documents like Articles of Incorporation, bylaws, meeting minutes, and stock ledgers.

Examples:

• • An S corp neglected to file its initial beneficial ownership report within the 30-day window, immediately racking up potential fines.
  • When an S corp brought on a new 30% owner, it failed to update its beneficial ownership filing and fell out of compliance with the CTA.
  • A beneficial owner repeatedly ignored requests from the S corp for required information, putting the company at risk of penalties.

How to Proceed:

• • Consult with your business attorney to determine if your S corp qualifies for any exemptions from the CTA reporting rules.
  • Appoint a company officer to oversee gathering required information from all beneficial owners and applicants.
  • Submit your initial beneficial ownership report electronically through the FinCEN E-Filing System within 30 days of S corp formation.
  • Monitor your cap table and ownership changes vigilantly and file updated reports within 30 days, or confirm no changes annually.
  • Implement strict internal controls to protect the security and confidentiality of all beneficial ownership data collected and stored.

FAQs:

• • Which S corps must file beneficial ownership reports? Any S corp formed in or registered to do business in the U.S. after January 1, 2024, unless it meets specific exemptions.
  • What info must be reported about each beneficial owner? Their full legal name, date of birth, address, and a unique identifying number from an acceptable document like a passport.
  • Can I refuse to provide my personal info to an S corp I own? No, all beneficial owners must supply required data or face personal criminal liability of up to $10,000 and 2 years in prison.
  • How long must my S corp retain beneficial ownership records? For 5 years after the company terminates, per the CTA rules.
  • Can my S corp file beneficial ownership updates more often? Yes, and it should submit updates within 30 days of any changes rather than waiting for the annual update in many cases.

Questions: S Corp Basics & Compliance

• • 1. What’s the max number of shareholders an S corporation have?
    • A) 1
    • B) 50
    • C) 100
    • D) Unlimited
  • 2. What’s the difference between an S corp and a C corp for tax purposes?
    • A) There is no difference
    • B) S corps pay higher tax rates
    • C) S corps avoid double taxation with pass-through treatment
    • D) S corps can’t deduct business expenses
  • 3. A single-member S corp can skip annual meetings and minutes.
    • A) True
    • B) False
  • 4. How often must S corps file tax returns?
    • A) Monthly
    • B) Quarterly
    • C) Annually
    • D) Never, S corps are tax-exempt
  • 5. What’s the deadline to file S corp tax returns?
    • A) January 31
    • B) March 15
    • C) April 15
    • D) October 15

Answers: S Corp Basics & Compliance

• • 1. C) S corps can have up to 100 shareholders.
  • 2. C) S corps provide pass-through taxation, avoiding the “double tax” C corps face.
  • 3. B) Even single-shareholder S corps must hold annual meetings and keep minutes.
  • 4. C) S corps must file federal and state tax returns annually.
  • 5. B) S corp returns are due March 15, or September 15 with an extension.

Questions: S Corp Operations & Management

• • 1. S corp distributions are subject to self-employment taxes.
    • A) True
    • B) False
  • 2. S corp owners can pay themselves $1 salaries to minimize payroll taxes.
    • A) True
    • B) False
  • 3. Which of the following parties CANNOT own S corp shares?
    • A) Individuals
    • B) LLCs
    • C) Certain trusts
    • D) Estates
  • 4. What information is typically NOT included on an S corp stock certificate?
    • A) Shareholder name
    • B) Number of shares
    • C) Company contact info
    • D) Par value of shares
  • 5. S corps can have multiple classes of stock with varying dividend and liquidation rights.
    • A) True
    • B) False

Answers: S Corp Operations & Management

• • 1. B) S corp distributions are not subject to self-employment taxes, only owner salaries are.
  • 2. B) The IRS requires S corp owners to pay themselves “reasonable compensation” based on market rates for their role.
  • LLCs cannot be S corp shareholders. Only individuals, certain trusts, and estates qualify.
  • 4. C) S corp stock certificates typically don’t include company contact info, but do list the shareholder’s name, number of shares, and any transfer restrictions.
  • 5. B) S corps can have only one class of stock with identical rights for all shareholders.