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Tax Planning/Elections for company formation.


QUESTION: I'm the sole owner of a couple of S-corps but am entering a 50/50 "partnership" to purchase the asset of a sole-proprietorship trash collection company (in Virginia).  Both of us will be active managers, part-time.  Is there a way to form our company to save some on self-employment?

ANSWER: Jim - That's a very broad question.  Having an S-corporation affords you, among other benefits, the ability to pay yourself a "reasonable wage."  That is what the IRS requires of S-corporations.  

Having said that, you need to calculate the value of the services that you are providing to the entity in question.  If it is an S-corp, you must be appropriately compensated for the work you perform.

I hope that helps.

---------- FOLLOW-UP ----------

QUESTION: Thank you for your help.  I should have been much more specific.

Can the salary/dividend benefit be used with multiple owners?  Can an LLC pay multiple owners a fair wage plus dividends if we file Federally as an S-Corp?

Thanks again,


Jim - The LLC is a type of entity that you have to let the IRS know how you want to be taxed.  If you made NO election on the LLC, a one-member LLC is disregarded and you file a Schedule C; a two+ member LLC is, by default, a partnership.  You also have the option of electing C-corp or S-corp status.  

An LLC as a single-member or multi-member taxed as a sole prop or partnership, respectively, cannot issue salary.  All income passes through proportionally based on ownership interest.

An S-corp can pay a different amount of salaries to its shareholders, hence the reasonable wage for services performed.  Distributions have to be equal in proportion to ownership.

To answer your question, yes, multiple owners are involved in the wage and distribution issue, but it comes down to how the entity is taxed.

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As an Enrolled Agent, I am fully capable of providing tax advice as it relates to personal and business income taxes. Enrolled Agents are the only Federally licensed tax practitioners and are admitted to practice before all administrative functions of the IRS. My specialty is working with small business owners who file Schedule "C" and helping them to structure their business in such a way as to maximize as many tax advantages as possible. I also enjoy working with individuals who have both routine as well as complex tax situations. I prefer to concentrate on individuals and small business tax planning.


I have a 25 year background in financial services including tax, bookkeeping, insurance, real estate and securities. I was previously the Chief Financial Officer of a local and national franchise organization. I am currently semi-retired, but used to own (in partnership with another EA) an individual and small business financial engineering firm where I work with nearly 2,500 individuals and small business owners in nearly every state and almost every continent, assisting them in all aspects of their tax and financial well-being. I have prepared or reviewed more than 8,000 tax returns in my career.

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Enrolled Agent, Admitted to Practice Before the IRS, Accredited Tax Preparer, Fellow of National Tax Practice Institute, Certified QuickBooks ProAdvisor (1999-2011), Sleeter Group Certified QuickBooks Consultant, Life & Disability Insurance Agent License (California, Texas, Maine), Real Estate Agent License (California); Many years of continuing education in all these fields.

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