A downside to S Corps is the limitation on who can be a shareholder, and what kind of shares it can issue. There can be no more than 100 shareholders in total, and no one may take their shares in anything other than their personal names (or in their living trust’s name). So, forget transferring your S Corp shares into an irrevocable trust, limited partnership or children's trust. And, you can't have any non-U.S. resident shareholders, either. Everyone who holds shares in an S Corp must file a U.S. resident tax return. And, you can only have one class of shares, which can be confining, especially if your plans include taking your company public or looking for outside investors. If you breach any of these requirements the IRS will strip your company of its S Corp status, and automatically turn it into a C Corporation, which may have a negative tax consequence.

Another downside is asset treatment. Both C and S Corps are not great vehicles if your business will hold appreciating assets, such as land, buildings, stocks, bonds, etc. The tax on them upon sale or upon distribution will be much greater if held in a corporation than if held in a limited liability company or a limited partnership. This is further explained in the book How to Use Limited Liability Companies & Limited Partnerships, written by Garrett Sutton and available at www.successdna.com.

The steps to create a C or S corporation are the same. Articles of Incorporation are prepared and filed, Bylaws are prepared, directors are elected by the shareholders, officers are elected by the directors, and shares are issued to the shareholders. This may sound difficult but we will be there to guide you through it all.

The S Corp Declaration, the IRS Form 2553, should be filed within 75 days of the incorporation date, so don't delay if this is how you see your company proceeding. If you don't file within that 75 day period, the IRS can deny you S Corp status for a full year, meaning that your first year of operations will be conducted at C Corporation tax rates.

The shareholders, directors and officers of the company must remember to follow corporate formalities. They must treat the corporation as a separate and independent legal entity, which includes holding regularly scheduled meetings, conducting banking through a separate corporate bank account, filing a separate corporate tax return, signing all documents related to the business in their official capacity and filing corporate papers with the state on a timely basis. If these steps are not followed, a business creditor may be allowed to “pierce the corporate veil” and seek personal liability against the officers, directors and shareholders. Adhering to corporate formalities is not at all difficult or particularly time consuming. In fact, if you have our affiliate handle the corporate filings and preparation of annual minutes and direct your accountant to prepare the corporate tax return, you should spend no extra time at it with only a very slight increase in cost. The point is that if you spend the extra money to form a corporation in order to gain limited liability it makes sense to spend the extra, and minimal, time and money to insure that protection.

And remember, while there are some downsides to the S corporation there are some significant benefits as well. Work with your advisor to see if the S corporation is right for you.

The Subchapter S Corporation (or S Corp) is structurally the same as a C corporation (i.e., it has officers, directors and shareholders), but with one key difference.  An S Corp files an election with the IRS, called a Form 2553, that provides it with a flow-through tax structure as found in entities such as partnerships and limited liability companies.  That means, the company's income (and corresponding expenses, write-offs and deductions) will flow through to its shareholders, and be split among them according to each shareholder's ownership percentage.  The S Corp's taxes will actually be paid by its shareholders, at their individual tax rates, and in proportion to their individual ownership percentages.

From a taxation standpoint, an S Corp is a great fit for a company that offers a service, because in many cases the revenues can be split and paid to the shareholders in two categories:  salary and distribution (or profits) earnings.  A flow-through tax structure means that the profits and corresponding losses, deductions and expenses are divided up among the shareholders, in proportion to their ownership percentages, and reported on each shareholder's personal income tax return.  Therefore, if your income from an S Corp is split into two streams, salary and profits, each stream will be taxed differently.  Your salary stream will be subject to both income tax and payroll taxes which amount to a whopping 15.3% for Social Security and Medicare.  However, the profit income stream will be subject only to income tax.  So, by taking a reasonable salary from the S Corp and the rest in profits your taxes will be lower than if you were take your entire share of the earnings as salary. By allowing a percentage to flow through to you as profits you can save thousands of dollars a year in payroll taxes which, as we all know, we will never see the benefit from since Social Security is broken and bankrupt.

An S Corp is also a great entity for businesses with low start-up costs that do not have to purchase a significant amount of assets to begin operations.  For example, buying a working laundromat would be an excellent choice for an S Corp.  You are purchasing a turnkey business - it's already operating, and you aren't going to be laying out significant cash to get it up and running.  So, you will have a pretty good income stream immediately, and that income stream can best be disbursed to you and your partners, if any, through the S Corp structure.  Two other great matches for an S Corp are network-marketing and Internet-only businesses.  In each case, the business is likely to have no storefront, low operating costs, and probably doesn't maintain a warehouse.  Most network marketing and Internet-only businesses drop-ship from their suppliers directly to the end consumer when they are delivering products at all.  Again, as these can be high-income, low cost operations, they work great in the S Corp structure.

Here's another reason we suggest S Corps for many service-oriented businesses: To avoid being characterized as a Personal Service Corporation, or "PSC" by the IRS.  PSCs are C corporations that are classified by the IRS as providing a service, such as consulting, to the general public.  Now, as you may know, the United States government, in an effort to boost the economy and keep business working, assesses C corporations with a pretty low initial rate - 15% on earnings up to $50,000.  That's quite a bit lower than you would pay personally, if you were receiving that same $50,000 as salary.  And that 15% rate is also lower than you would pay if your business was an S Corp.  So, to head off the anticipated revenue drain, the IRS closed that loophole by designating C corporations that provide services to be PSCs.  The additional tax rate for PSC earnings can be a flat 35% or the regular C Corporate rate plus 15% of the corporation’s undistributed personal holding company income.  That may be higher than you would pay through your S Corp, if you took a reasonable salary and the rest as profit income.  And, it's enough, in many cases, to make the difference between choosing an S Corp and C Corp. Next week we’ll look at one significant downside to the S Corporation.

Many promoters will tout the complete privacy offered by Nevada corporations and LLCs. But what they won't tell you is that the law has changed and privacy has been somewhat compromised.

Here is the law for corporations:

 In addition to any records required to be kept at the registered office pursuant to NRS 78.105, a corporation that is not a publically traded corporation shall maintain at its registered office or principle place of business in this state:

A current list of its owners of record; or A statement indicating where such a list is maintained.  The corporation shall:

Provide the Secretary of State with the name and contact information of the custodian of the list described in subsection 1. The information required pursuant to this paragraph shall be kept confidential by the Secretary of State.

Provide written notice to the Secretary of State within 10 days after any change in the information contained in the list described in subsection 1.

Upon the request of any law enforcement agency in the course of a criminal investigation, the Secretary of State may require a corporation to:

Submit to the Secretary of State, within 3 business days, a copy of the list required to be maintained pursuant to subsection 1; or
If a corporation fails to comply with any requirement pursuant to subsection 3, the Secretary of State may take any action necessary, including, without limitation, the suspension or revocation of the corporate charter The Secretary of State shall not reinstate or revive a charter that was revoked or suspended pursuant to subsection 4 unless:

The corporation complies with the requirements of subsection 3; or
The law enforcement agency conducting the investigation advises the Secretary of State to reinstate or revive the corporate charter.

The Secretary of State may adopt regulations to administer the provisions of this section.
It is important to note that Nevada is not asking for the owners of the entity up front. The requirement is that the registered agent either keeps a list of the owners or the name of a contact person who has a list of the owners. The Secretary of State will request the ownership list only when a law enforcement agency needs it for a criminal investigation. Not for a civil case mind you, but only for a criminal case.

What this means is that if your business and asset protection plans are on the up and up, your privacy will be protected. (If you are engaged in fraud and other crimes, we would ask that you go elsewhere.) But for the good guys, you will still maintain your privacy.

Two points are worthy of further note. First, for limited partnerships the only owners the new legislation aims for are the general partners. While the generals do indeed control a limited partnership, frequently they only own 2% or less of the entity, and are usually just a management corporation or LLC. The limited partners will own 98% of the limited partnership and, except for management, are the economic beneficiaries of the entity.

Whether the new law intentionally just wanted information only on the general partners or will be corrected to include the limited partners' identities remains to be seen. But for now, people very concerned about privacy may want to use Nevada limited partnerships.

The second point has to do with Wyoming. The corporate law of Wyoming does not have such an ownership disclosure procedure. Yet.
Apparently the federal authorities are working to get a similar legislation approved in other states, including Wyoming. We will keep you informed of such developments. Until then, once again, those very concerned about privacy may want to use Wyoming entities.

Continuance is a unique Wyoming corporate rule that you need to know about. Through the process called continuance, the State of Wyoming allows a corporation, limited liability company or limited partnership to domicile in the State of Wyoming as if it had been organized there initially. Say you have great corporate credit and a good business history. You don't want to lose these benefits but at the same time you are sick of your home state's taxes. By filing what is termed the "Articles of Continuance" with the State of Wyoming, your existing entity can redomicile in Wyoming without losing a beat.

There are many advantages to being able to relocate your business to a friendlier state. One important benefit that many business owners do not consider has to do with the statute of limitations. All lawsuits have time limits. The statute of limitations refers to the legal deadline by which a lawsuit must be filed. These deadlines vary based on upon the type of claim being asserted. For instance, the statute of limitations in many states is six years for asserting a claim on a written contract, and four years for an oral contract. So if your business made a blunder, you could be held accountable for it, several years after the fact. Thus, it is important to maintain your entity for at least as long as the longest applicable statute of limitations. If you are thinking of closing shop, go ahead, but keep your entity active in the low annual fee sate of Wyoming. Let's look at an example.

Tom had owned and operated Ajax Construction, Inc. in Illinois for nearly twenty years and he was ready to retire. He knew that with a corporation there were some steps he needed to take before he closed shop, so he made an appointment with his attorney to ask about the best way to wind things up. Among the recommendations his attorney gave, Tom was informed that the statute of limitations in Illinois for construction issues could be ten years. Thus, Tom needed to keep his corporation active for ten years after he stopped working. Because it was a Illinois corporation, this was going to cost Tom $500 per year. Tom was understandably aggravated about this - after all, he was trying to retire. Tom, however, had a good attorney. After explaining the situation to Tom, he offered a solution to the financial drain of Illinois fees. Tom could continue his company into Wyoming. By continuing Ajax Construction, Inc. into Wyoming, Tom could maintain his limited liability status without a break and get away from Illinois' high rates. Wyoming would charge him only $50 annually. That means Tom could leave his corporation intact for ten years for $500 rather than $5,000! Tom gave his attorney the go-ahead to complete the necessary paperwork and retired a much relieved entrepreneur.

It should be noted that, as is typical, California is difficult in this regard. They won't allow you to continue into Wyoming. Instead, you have to form a new Wyoming entity to merge with your old California. When the merger is complete the California entity goes away, but the new Wyoming entity does not have the old California incorporation date. Still, you are better off implementing this strategy and saving the $800 annual California fees than not taking these steps.

When we talk about entity structuring we are focusing on the proper use of legal entities to protect your assets. Creating the right structure for you is a correct and acceptable thing to do.

But if you engage in money structuring - well, you are headed for big trouble. The case of Eliot Spitzer has certainly taught us one thing: It is getting harder and harder to discretely pay for sensitive transactions. What caught the former governor of New York with his pants down were these new post 9-11 anti money laundering rules.

Deposits on withdrawals that total more than $10,000 within the same day automatically prompt a currency transaction report to the federal government. But if you slice up the transactions - say deposit $9,000 into different bank accounts - to avoid detection that is called money structuring, which is strictly illegal.

I know - it's hard to imagine. But take the case of a newlywed couple who received $40,000 in cash at their Greek wedding. Rather than deposit it all at once and wait in lines to provide the bank with a bunch of information, they deposited it over time in smaller amounts. The new Big Brother software caught them and soon they were being investigated by the IRS. After a great deal of money spent in attorney's fees they were eventually not charged.

But here's the lesson, if you know about the $10,000 requirement and attempt to avoid it, you have committed a crime. And let's be honest, thanks to Eliot Spitzer, we all know about the $10,000 requirement now.

There are still a few ways for untraceable transactions to occur, at least until the feds find a way to shut them down.

Eliot Spitzer would still be governor if he had used a prepaid or stored value card. You can buy an American Express gift card with cash at a retail store in amounts as high as $500. For now there is no limit on the number you can buy.

Of course, cash is still a good way to go. But remember, if you withdraw more than $10,000 in cash in one day a report is sent to the feds. And once again, if you slice up withdrawals to avoid detection - money structuring - you are breaking the law. The best way to get your cash out is in smaller and more frequent transactions.

But listen to what we are discussing: How to get your money out of your own bank account without breaking a draconian law. Will this ever end, or only get worse?