5 ms·

Notes on Shutting Down an S-Corp

108 points by zrail 8y ago

sheeshkebab 8y ago
Isn’t an s corp a passthrough? Why all the complexity with w2 (if he is alone)...
- deleted 8y ago
  [deleted]
- zrail 8y ago
  (Author here) S corps have to pay the owners a reasonable salary on W-2. The benefit is being able to determine how much SE tax you pay.
  - sheeshkebab 8y ago
    I see... I’ve been using llc’s without s corp for all my consulting and side projects for a while (easy to start and kill them off). It looks like S corp does add quite a bit of overhead though - although maybe it lowers taxes? Is that the reason?
    - zrail 8y ago
      You can significantly lower your SE taxes due (Social Security and Medicare) by giving yourself a salary lower than your profit. This comes at a cost of additional overhead (payroll and an accountant to prep the tax form, which is not a DIY project for at least the first year). There’s a threshold of about $100k profit where this begins to make sense.
    - MatthewMcDonald 8y ago
      It can lower your tax liability significantly. Mr Money Mustache has an article that covers some potential benefits: https://www.mrmoneymustache.com/2016/02/10/should-you-do-your-own-taxes/ https://www.mrmoneymustache.com/2016/02/10/should-you-do-you...
  - tptacek 8y ago
    It's pretty fucked up that people do this, and if running this particular tax dodge complicates people's lives, God bless the bureaucracy. You should not get to underpay payroll taxes, roping off a big chunk of your income as "profit sharing", simply because you happen to own an S-Corp. I've heard this is a big audit flag, but even if it wasn't, I think doing it is pretty close to immoral.
    - zrail 8y ago
      First, there are no morals involved in taxes. I don’t make the tax laws and I have no responsibility to pay more tax than I owe. If Congress wanted to close this then they would. I believe it was a plank of Hillary’s campaign. Second, there’s a very narrow window where it actually makes sense. Above $128k of salary you don’t pay Social Security tax at all, just Medicare. “Underpaying” social security reduces your future annuity, so it’s not like this is a panacea. Third, paying yourself zero salary and taking profit sharing distributions is indeed a massive audit risk. I’ve never done that and don’t ever plan on it (see: article title).
      - tptacek 8y ago
        Right: that narrow window is what makes it so crazy-making. Virtually everybody who employs this dodge is comparatively privileged. Most people don't get to opt a big chunk of their income out of Medicare/Social Security taxes; why should tech company operators? We're an LLC filing as S-Corp, for what it's worth. I just don't play this particular game.
        zrail 8y ago
        I am all for Congress removing this as a benefit of S corps and simultaneously removing or significantly lifting the Social Security wage cap. That’s a thing I would vote for. Until it happens, though, people are going to continue doing this. Congress removed a similar dodge for C corps almost 80 years ago, so it can certainly be done. S corps aren’t just used by consultants, FWIW. The structure makes a lot of sense for companies with lots of profit and more than owner employees, where the owners can justifiably claim they don’t generate all the profit from their personal services.
- gm-conspiracy 8y ago
  Worse-case scenario, you are eligible for unemployment.
  - zrail 8y ago
    Varies considerably by state. In Michigan business owners are not eligible for unemployment. They also don’t pay unemployment tax for themselves or family members.
    - chrishynes 8y ago
      For Federal taxes and most states, business owners aren't eligible for unemployment but still have to pay the tax.
    - gm-conspiracy 8y ago
      Do you have citations for this? Not trying to be an ass, but my understanding, as the owner of an S corp, if you are paid as a W-2 employee, you are eligible for unemployment benefits. I only see 7 states that prohibit this, and Michigan is not one of them: https://www.nerdwallet.com/blog/small-business/unemployment-benefits-selfemployed/ https://www.nerdwallet.com/blog/small-business/unemployment-...
      - zrail 8y ago
        Seems I misspoke a little. Michigan recognizes an LLC taxed as an S corp as an LLC, ignoring the S corp entirely. https://www.michigan.gov/documents/uia/1080_394228_7.pdf https://www.michigan.gov/documents/uia/1080_394228_7.pdf NO BENEFIT ENTITLEMENT Unemployed worker performed services for a PARTNERSHIP of which any part is owned by the unemployed worker, or 100% which is owned by any combination of the following: * Unemployed worker * Unemployed worker’s child(ren) * Unemployed worker’s spouse * Both of the unemployed worker’s parents, if unemployed worker is under 18. On page 2, the document goes on to say that owners of a corporation are entitled to limited benefits. They have to pay in to UIA, however. As the owner of an LLC I didn't have to pay into UIA at all for myself or family employees (and in fact got a refund when I mistakenly paid in).
gk1 8y ago
Appreciate you sharing this, and glad to see it's for a good reason. For anyone considering forming an LLC S-Corp for their consulting/freelance business, don't let this scare or deter you. I've been running mine for over five years (I'm a consultant) and it's been mostly painless. I use Freshbooks for accounting and Gusto for payroll, so there's actually very little overhead day-to-day. The key thing for me was to find a great accountant. I went through two accountants before finding someone who's right for me. That has made a huge difference in how much I worry (or don't) about that part of the business.
- zrail 8y ago
  Yeah, the S-Corp is a fine entity choice for consultants and other small businesses that have above six figures in profit. It’s not good for side projects because, while overhead is low, it’s still not nothing.
- mseebach 8y ago
  Can you possibly share a bit about what makes an accountant right or wrong for you, please?
  - gk1 8y ago
    The first one did not specialize in small business, so he did not give me any specific advice. The second one was a bad communicator; took too long to respond, if at all, and did not fill me in completely on what he was doing. The one I use now responds quickly to any questions, makes sure I understand what’s happening, and proactively offers suggestions.
    - ilamont 8y ago
      Another issue is some accountants won't work with any product except Quickbooks, and are not willing to start using new tools.
  - patio11 8y ago
    Some experiences with this in my personal capacity: You want someone who has a working style which is compatible with your working style. There are a surprising number of accountants who cannot reliably receive a folder that has been Dropboxed to them. Some of them are good accountants... for other people. If you are e.g. an email person, you do not want a phone person accountant. You want an accountant where neither of you are annoyed with the other's expectations with regards to timeliness of replies to emails. You want someone who is capable of understanding the fundamental nature of your business. They don't have to be able to _operate_ the business, but they need to _deeply_ grok the mechanics of the business, because accounting is a facts-intensive profession and they need to understand your facts to apply GAAP and IRS procedure (etc) to them. You can be a great small business accountant without knowing what the difference between SaaS, Github Enterprise, and Microsoft Word is; you cannot be a great accountant for a software company without being able to understand the differences in those three products. You want someone who is generally good at accounting. Like any other profession, there is a competence curve. Don't hire the people at the left end of the competence curve. You want someone who is good at being a professional, partly because that will make interfacing with them easier and partially because a portion of the services of an accountant is to suit up occasionally and say "I am an accountant." to third parties. You want someone who can cause the appropriate reaction there. (Most commonly tax agencies, but there are a variety of potential counterparties, for example e.g. mortgage lenders, prospective landlords, immigration agencies if that is relevant to you, business counterparties, etc.) Some of y'all might have interesting situations, and very interesting situations often counsel having a specialist. A particular interesting situation which I have in my life is that I'm an American who lives in Japan; that fact substantially complicates accounting for my businesses or personal life, both with regards to tax preparation and with regards to just giving good financial advice, and I get far better results working with people who specialize in international clients than I get with (presumably) skilled accountants who are willing to work with international clients but don't wake up and breathe the US Japan Social Security Totalization Agreement. More relevantly to HNers, I think that you probably have special circumstances if: you do a material amount of investing in things that your average dentist does not, you own a material amount of equity, the character of your life is intrinsically international, etc. (Running a business is its own flavor of complication.)
ChuckMcM 8y ago
This is a good checklist, but I have observed that corporations with a "history" have value on their own. It is perhaps less well known than other parts of the equation, but when I created my first LLC it was a pain because as a "new" entity it had no credit history, no existence history, and every time it raised a bunch of flags with every new vendor. Once it had been around for a few years it was fine. When it came time to dissolve it I had a choice of just dissolving it, or selling it to a agent (typically a lawyer) after detaching myself from it. In the latter case that is the standard public notice of sale and disclaimer of association past the sale date between me and the company. When starting an LLC it can be advantageous to start with one that is 'on the shelf' as it were because it avoids the this is all new company unpleasantness. Most agents have a number of ambiguously named LLCs available for people who want to assign a holding company for trusts etc. Given that California charges you $850/year just to exist as an LLC it isn't profitable to create and hold such companies just to sell, but when it is time to sell there is some value there sometimes.
- gm-conspiracy 8y ago
  Are these referred to as "public shells"?
  - ChuckMcM 8y ago
    No, if you look at an advertisement for LLC creation like this one : (https://companiesinc.com/shelf-company-llc/ https://companiesinc.com/shelf-company-llc/) tend to refer to them as 'aged' or 'shelf' LLCs.
- mseebach 8y ago
  I've heard of this in the context of shortcutting regulatory stuff - if you want a banking license, find a small bank in some backwater and "merge" with them, if you want to list on a stock exchange, find a small, cheap listed company and do the same. You obviously need to maintain the regulatory compliance framework, but in many cases, this is cheaper and simpler than getting a license or listing on an exchange from scratch. Anyway, it surprises me that someone who cares enough to be suspicious of a newly formed LLC doesn't care enough to check that a given LLC is an empty shell that changed ownership very recently. If anything, you'd think that to be more suspicious, wouldn't you?
amingilani 8y ago
Thank you for this. I'd also love to see something similar for a DE C-corp since that's the preferred incorporation method for startups... then again, that might be very case specific if you have investors.
- zrail 8y ago
  Very case specific, yeah. The general process is the same after you get to the resolution part, I imagine, but distributing assets might end up being trickier

108 points by zrail 8y ago

sheeshkebab 8y ago

Isn’t an s corp a passthrough? Why all the complexity with w2 (if he is alone)...

deleted 8y ago
[deleted]
zrail 8y ago
(Author here) S corps have to pay the owners a reasonable salary on W-2. The benefit is being able to determine how much SE tax you pay.
- sheeshkebab 8y ago
  I see... I’ve been using llc’s without s corp for all my consulting and side projects for a while (easy to start and kill them off). It looks like S corp does add quite a bit of overhead though - although maybe it lowers taxes? Is that the reason?
  - zrail 8y ago
    You can significantly lower your SE taxes due (Social Security and Medicare) by giving yourself a salary lower than your profit. This comes at a cost of additional overhead (payroll and an accountant to prep the tax form, which is not a DIY project for at least the first year). There’s a threshold of about $100k profit where this begins to make sense.
  - MatthewMcDonald 8y ago
    It can lower your tax liability significantly. Mr Money Mustache has an article that covers some potential benefits: https://www.mrmoneymustache.com/2016/02/10/should-you-do-your-own-taxes/ https://www.mrmoneymustache.com/2016/02/10/should-you-do-you...
- tptacek 8y ago
  It's pretty fucked up that people do this, and if running this particular tax dodge complicates people's lives, God bless the bureaucracy. You should not get to underpay payroll taxes, roping off a big chunk of your income as "profit sharing", simply because you happen to own an S-Corp. I've heard this is a big audit flag, but even if it wasn't, I think doing it is pretty close to immoral.
  - zrail 8y ago
    First, there are no morals involved in taxes. I don’t make the tax laws and I have no responsibility to pay more tax than I owe. If Congress wanted to close this then they would. I believe it was a plank of Hillary’s campaign. Second, there’s a very narrow window where it actually makes sense. Above $128k of salary you don’t pay Social Security tax at all, just Medicare. “Underpaying” social security reduces your future annuity, so it’s not like this is a panacea. Third, paying yourself zero salary and taking profit sharing distributions is indeed a massive audit risk. I’ve never done that and don’t ever plan on it (see: article title).
    - tptacek 8y ago
      Right: that narrow window is what makes it so crazy-making. Virtually everybody who employs this dodge is comparatively privileged. Most people don't get to opt a big chunk of their income out of Medicare/Social Security taxes; why should tech company operators? We're an LLC filing as S-Corp, for what it's worth. I just don't play this particular game.
      - zrail 8y ago
        I am all for Congress removing this as a benefit of S corps and simultaneously removing or significantly lifting the Social Security wage cap. That’s a thing I would vote for. Until it happens, though, people are going to continue doing this. Congress removed a similar dodge for C corps almost 80 years ago, so it can certainly be done. S corps aren’t just used by consultants, FWIW. The structure makes a lot of sense for companies with lots of profit and more than owner employees, where the owners can justifiably claim they don’t generate all the profit from their personal services.
gm-conspiracy 8y ago
Worse-case scenario, you are eligible for unemployment.
- zrail 8y ago
  Varies considerably by state. In Michigan business owners are not eligible for unemployment. They also don’t pay unemployment tax for themselves or family members.
  - chrishynes 8y ago
    For Federal taxes and most states, business owners aren't eligible for unemployment but still have to pay the tax.
  - gm-conspiracy 8y ago
    Do you have citations for this? Not trying to be an ass, but my understanding, as the owner of an S corp, if you are paid as a W-2 employee, you are eligible for unemployment benefits. I only see 7 states that prohibit this, and Michigan is not one of them: https://www.nerdwallet.com/blog/small-business/unemployment-benefits-selfemployed/ https://www.nerdwallet.com/blog/small-business/unemployment-...
    - zrail 8y ago
      Seems I misspoke a little. Michigan recognizes an LLC taxed as an S corp as an LLC, ignoring the S corp entirely. https://www.michigan.gov/documents/uia/1080_394228_7.pdf https://www.michigan.gov/documents/uia/1080_394228_7.pdf NO BENEFIT ENTITLEMENT Unemployed worker performed services for a PARTNERSHIP of which any part is owned by the unemployed worker, or 100% which is owned by any combination of the following: * Unemployed worker * Unemployed worker’s child(ren) * Unemployed worker’s spouse * Both of the unemployed worker’s parents, if unemployed worker is under 18. On page 2, the document goes on to say that owners of a corporation are entitled to limited benefits. They have to pay in to UIA, however. As the owner of an LLC I didn't have to pay into UIA at all for myself or family employees (and in fact got a refund when I mistakenly paid in).

gk1 8y ago

Appreciate you sharing this, and glad to see it's for a good reason. For anyone considering forming an LLC S-Corp for their consulting/freelance business, don't let this scare or deter you. I've been running mine for over five years (I'm a consultant) and it's been mostly painless. I use Freshbooks for accounting and Gusto for payroll, so there's actually very little overhead day-to-day. The key thing for me was to find a great accountant. I went through two accountants before finding someone who's right for me. That has made a huge difference in how much I worry (or don't) about that part of the business.

zrail 8y ago
Yeah, the S-Corp is a fine entity choice for consultants and other small businesses that have above six figures in profit. It’s not good for side projects because, while overhead is low, it’s still not nothing.
mseebach 8y ago
Can you possibly share a bit about what makes an accountant right or wrong for you, please?
- gk1 8y ago
  The first one did not specialize in small business, so he did not give me any specific advice. The second one was a bad communicator; took too long to respond, if at all, and did not fill me in completely on what he was doing. The one I use now responds quickly to any questions, makes sure I understand what’s happening, and proactively offers suggestions.
  - ilamont 8y ago
    Another issue is some accountants won't work with any product except Quickbooks, and are not willing to start using new tools.
- patio11 8y ago
  Some experiences with this in my personal capacity: You want someone who has a working style which is compatible with your working style. There are a surprising number of accountants who cannot reliably receive a folder that has been Dropboxed to them. Some of them are good accountants... for other people. If you are e.g. an email person, you do not want a phone person accountant. You want an accountant where neither of you are annoyed with the other's expectations with regards to timeliness of replies to emails. You want someone who is capable of understanding the fundamental nature of your business. They don't have to be able to _operate_ the business, but they need to _deeply_ grok the mechanics of the business, because accounting is a facts-intensive profession and they need to understand your facts to apply GAAP and IRS procedure (etc) to them. You can be a great small business accountant without knowing what the difference between SaaS, Github Enterprise, and Microsoft Word is; you cannot be a great accountant for a software company without being able to understand the differences in those three products. You want someone who is generally good at accounting. Like any other profession, there is a competence curve. Don't hire the people at the left end of the competence curve. You want someone who is good at being a professional, partly because that will make interfacing with them easier and partially because a portion of the services of an accountant is to suit up occasionally and say "I am an accountant." to third parties. You want someone who can cause the appropriate reaction there. (Most commonly tax agencies, but there are a variety of potential counterparties, for example e.g. mortgage lenders, prospective landlords, immigration agencies if that is relevant to you, business counterparties, etc.) Some of y'all might have interesting situations, and very interesting situations often counsel having a specialist. A particular interesting situation which I have in my life is that I'm an American who lives in Japan; that fact substantially complicates accounting for my businesses or personal life, both with regards to tax preparation and with regards to just giving good financial advice, and I get far better results working with people who specialize in international clients than I get with (presumably) skilled accountants who are willing to work with international clients but don't wake up and breathe the US Japan Social Security Totalization Agreement. More relevantly to HNers, I think that you probably have special circumstances if: you do a material amount of investing in things that your average dentist does not, you own a material amount of equity, the character of your life is intrinsically international, etc. (Running a business is its own flavor of complication.)

ChuckMcM 8y ago

This is a good checklist, but I have observed that corporations with a "history" have value on their own. It is perhaps less well known than other parts of the equation, but when I created my first LLC it was a pain because as a "new" entity it had no credit history, no existence history, and every time it raised a bunch of flags with every new vendor. Once it had been around for a few years it was fine. When it came time to dissolve it I had a choice of just dissolving it, or selling it to a agent (typically a lawyer) after detaching myself from it. In the latter case that is the standard public notice of sale and disclaimer of association past the sale date between me and the company. When starting an LLC it can be advantageous to start with one that is 'on the shelf' as it were because it avoids the this is all new company unpleasantness. Most agents have a number of ambiguously named LLCs available for people who want to assign a holding company for trusts etc. Given that California charges you $850/year just to exist as an LLC it isn't profitable to create and hold such companies just to sell, but when it is time to sell there is some value there sometimes.

gm-conspiracy 8y ago
Are these referred to as "public shells"?
- ChuckMcM 8y ago
  No, if you look at an advertisement for LLC creation like this one : (https://companiesinc.com/shelf-company-llc/ https://companiesinc.com/shelf-company-llc/) tend to refer to them as 'aged' or 'shelf' LLCs.
mseebach 8y ago
I've heard of this in the context of shortcutting regulatory stuff - if you want a banking license, find a small bank in some backwater and "merge" with them, if you want to list on a stock exchange, find a small, cheap listed company and do the same. You obviously need to maintain the regulatory compliance framework, but in many cases, this is cheaper and simpler than getting a license or listing on an exchange from scratch. Anyway, it surprises me that someone who cares enough to be suspicious of a newly formed LLC doesn't care enough to check that a given LLC is an empty shell that changed ownership very recently. If anything, you'd think that to be more suspicious, wouldn't you?

amingilani 8y ago

Thank you for this. I'd also love to see something similar for a DE C-corp since that's the preferred incorporation method for startups... then again, that might be very case specific if you have investors.

zrail 8y ago
Very case specific, yeah. The general process is the same after you get to the resolution part, I imagine, but distributing assets might end up being trickier