Q: My company is organized as an S Corporation – is that the right structure for me?
A: The validity of the type of company structure can be dependent on the industry the company is operating in. S Corporations provide shareholders a level of protection because of the corporate entity, but can be limiting if
there is intention to add shareholders or sell the business in the future. Shareholders actually own a piece of
the company, so making changes in that ownership can be difficult. The value of the shares of stock is not easily
ascertained. Stocks held in publicly traded companies have an easily attainable market value, closely held corporations do not.
Q: I’ve been told I can take money out of my company without paying tax on it – is that right?
A: As an S Corporation, the IRS allows for shareholders to take distributions from it. The tax that is paid on the company profit is determined independently and is not always equal to the distributions taken. In theory, the company is turning a profit and generating excess cash flow, otherwise, the cash would not be there to take the distributions. There are, however, some limitations to those distributions.
Q: What limitations?
A: The IRS requires that shareholders, who take distributions, also take reasonable compensation. Small businesses can struggle with this due to cash flow. There are other reasons to be structured as an S Corporation. Contact a CPA or business advisor for more information about proper business structure. I95
Weyrich, Cronin & Sorra