Dear Client:
If you have incorporated your business in the past two to three years. there are several issues you need to be careful with while conducting business as a corporation.
As you know, the officers of the corporation, in some instances, can be held personally liable for the corporation's actions. Here are some possible areas of concern: The first is failure to observe corporate formalities, such as corporate minutes, recorded especiaily for major decisions of the business owner: such as loans, expansions, purchases and transactions between the owner and the corporation. The minutes need to be kept up to date, with a total of four-six sets of minutes per year. Promissory notes should be made from the corporation on individual monies put into the corporation from stockholders. If an individual borrows money from the corporation, a note is necessary for audit purposes.
Another area of concern is vehicle use in the business. Vehicles need to be titled in the corporation name, in case an employee is involved in an accident. Also, company vehicles need to be used at all times when conducting company business.
Please pay only business related bills out of the corporate checking account. PERSONAL BILLS OR DRAWS SHOULD NOT BE PAID FROM CORPORATE FUNDS. Our office will be glad to provide the balance of your paid in capital account. This will need to be backed up with minutes. All other businesses owned by any of the stockholders should be kept separate and any money transferred or property transferred into or out of the cotporation should be treated acccordingly. Additionally, the business should not use personal assets, such as your home or personal savings, for corporate business collateral on loans. Personal and business assets are separate.
Also, in case of a legal dispute, corporate stock certificates need to be issued and signed by the corporate officers. This should be noted in the corporate ninute book. If you have not done this, please contact our office. Any equipment transferred into or out of the corporation needs to be backed up by corporate minutes and a written agreement and possibly a contract of sale or a promissory note executed.
Corporate income tax returns are due on the 15th day of the third month following the close of your tax year. Extensions can be granted for six months only. No further extensions are allowed. Estimated tax payments should he made during the calendar year to avoid penalties.
The penalty for filing a corporate retunt late is $500, so we need to be sure the corporate returns are filed in a timely manner. A sure way to do this is to keep the books current during the year, which enables us to do tax planning before the end of the tax year. Please take advantage of advice during the tax "off season" which will help you reduce tax owed.
Medical insurance premiums for corporate officers are deductible as well as life insurance (must be term iusurance) premiums are deductible to a "C" corporation.
Charitable contributions are totally deductible to a C corporation, but are limited to l0% of taxable income. Also, a C corporation (not an S corporation) can donate part of their inventory to charity and deduct up 1/2 of its fair market value, above its cost. You need to receive a written statement from the charity. Be aware if in retail, there could be sales tax due on this donation.
Normally, any monies you withdraw from your corporation will be taxed to you personally, unless you draw money out as a taxable dividend to you or a salary with taxes withheld. You can draw on previous paid in capital (money or goods you put into corporation personally). Any dividend is taxable to you personally and is NOT a deduction to the corporation. Therefore, you need to be careful when you write yourself a check out of the corporate account. Also, a spouse can draw a salary and purchase a retirement account and use as a personal tax deduction.
In regard to retained earnings (which is an accumulation of taxable earnings since incorporation date), there is an accumulated earnings tax with IRS. Retained earning account balances need to be below $250,000 at all times to avoid an income tax rate of 39.6%. We can set up an "appropriated retained earnings account" and set a balance in this account for future purchases, agent expenses, and expansion.
If you are currently a Sub Chapter S corporation, the corporate income is being carried to your personal return and added to your other income and is taxed at your personal rate. If you do not perform a personal service in your business such as health, law, or consulting, it might be beneficial to revoke the Sub Chapter S and pay taxes as a regular corporation at a base tax rate of 15%.
If you are an LLC, there needs to be a management agreement covering three out of the five characteristics of a regular C corporation. Also, an operating agreement - sharing of profits, voting rights, and capital accounts rules - should be written out, continuation or "life" of corporation.
Also, a single member LLC needs to file an entity election in order to be taxed at a corporate and not personal tax rate.
The bank account needs a corporate resolution, a signature card, and articles of incorporation.
The state needs an annual Franchise Tax Report and an election for tax status. This election can be revoked at a later date. Also, an election form for tax status of corporation and an application for federal ID# is needed for federal.
If you feel you may have a tax problem in 2011. I can prepare corporate tax estimates for you. Also, we can take a look at monies you have invested in the corporation and possibly regain for you tax-free.
Also, consider that the capital gains rate of l5% on most asset sales has returned to the ordinary tax rate of up to 36% and depreciation taken is also added back to the sale as income in tax year 2012.
Please keep in mind the corporation is a separate entity from your personal funds. Please respect this.
This is not in any way a complete list of rules for corporations. These are just some items you need to be aware of while conducting business as a corporation.
We will be happy to assist with any of your bookkeeping needs, including QuickBooks.
Sincerely,
Lynda Startzman
Razorback Financial
1611 South Greenwood
Fort Smith, AR 72901
Phone: (479) 478-9166
