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Nevada S Incorporations

S Corporations - Nevada

An S-Corporation or "pass-through" type corporation is a separate entity from yourself for both tax and asset protection purposes. The classic phrase:

"I AM NOT THE CORPORATION AND THE CORPORATION IS NOT ME."

will guide your management of your corporation. The corporation and its employees in the execution of their work are liable only for the assets of the corporation and do not hold personal liability. The corporation will file a separate tax return US Form 1120-S, and employee those it deems necessary (ie you) to do business. The corporation will need to file an election to act as an S-Corporation within 75 days of its incorporation on an IRS form 2253. If the deadline is missed, you can apply annually to shift to S-corporation status.

The key difference for your S-Corporation is both a good and bad thing. Any income the corporation derives will be passed through to its owners via a K-1 distribution form from the IRS and taxed at your personal tax rates. Good news - the corporation's income will be taxed at your personal rates. Bad news - corporation rates (for C-Corporations) tend to be lower than personal tax rates for small businesses.

The IRS requires that you draw a market based and documentable salary from your corporation. You need to take the time to research the typical salaries for your industry and line of work -- and document those facts in writing or notes from telephone conversations. Websites such as hotjobs.com and monster.com can guide you to salary surveys for your industry. Why is your salary so important? Because there are five other ways to take money out of your corporation, and most all of them are far preferable to salary. In particular, your salary is subject to FICA taxes up to a cap of approximately $88k in tax year 2004 and your salary will be taxed at your personal tax rates. For many small businesses, corporate tax rates are far lower than personal tax rates:

Your S-Corporation will pass through its income to its owners -- who will pay tax at their personal tax rates. Cash stuck in your corporation doesn't do you much good -- does it? What are the other five ways to take cash out of your corporation?

  • Distributions - Your corporation can declare distributions. However, you will be taxed at 5% if you are in the 10% or 15% personal tax bracket, and 15% if you are in any other tax bracket. Depending on your personal tax rates, distributions can be a good way to take money out of your corporation (subject to market based salary rules).
  • Rents - Your corporation can rent space in your home or other commercial property and pay a market-based and documented rent to you. Remember, you are not the corporation, and the corporation is not you. A formal lease should be signed for these activities.
  • Loans - Some financial advisors recommend loans as one of the best ways to take money out of your corporation. Your corporation can loan you money at a market based and documented interest rate -- you must make payments on this loan. However, the loan term can be up to 5 years depending on IRS regulations (consult with your CPA). The loan proceeds are not taxable, however, the corporation will realize income on the interest that you pay on the loan.
  • Fringe Benefits - As both primary shareholder of your corporation, and primary employee, there are a number of highly favorable benefit plans that you can set up including Simple IRAs, Cafeteria Plans, and many others. In addition, business travel including meals is deductible subject to appropriate business need. One key benefit not available to S-Corporation owners is a Medical Reimbursement Plan - a popular way to derive medical expense benefits from your closely held corporation.
  • Royalties - You can license intellectual property (copyrights, trademarks, patents) to your corporation for a monthly fee or one-time payment.

Orange County CPA, Shaun Lawrence, writes, "... S corporations maximize their potential when the owner’s services to the corporation are not typically highly compensated in the industry. For example, let's say that you invent a product and your corporation earns profit of $250,000 per year. Your duties to the corporation are relatively basic -- managing the staff and sales department.  You pay yourself a fair market industry salary for that position, such as $35,000 per year. In this hypothetical scenario, the remainder of the corporation's profits is not subject to personal payroll taxes.  There is not always a 1:1 correllation of a corporation's profits to the manager's personal income, which this scenario reflects....

This site will detail the benefits available to you once you incorporate in plain language. We also provide helpful references to carefully screened providers of incorporation services. Please take the time to check out a variety of our incorporation services from the links on this site.

This information site does not provide legal or accounting advice. For legal or accounting advice, please consult a professional such as a Certified Public Accountant or Attorney.

 

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