Multiple Non-Incorporated Businesses

If you, alone, try to sell your services or a product for profit this venture is usually considered a business (in certain circumstances the hobby-loss rules may apply).  The income and expenses of this business operation are reported to the IRS on Schedule C of your Form 1040, with you being the sole proprietor (only owner) of this business.  This is true even if you are a LLC (single member).





Many individuals attempt to sell unrelated services or products.  When the activities are not related the reporting of those activities on your tax return must be kept separate.  This means you will prepare a separate Schedule C for each business activity.  If you combine unrelated or separate business activities onto one Schedule C you may be facing negligence penalties (Rev. Rule 81-90).





If two or more people work together in the non-incorporated activity with the intent of sharing the profits, then the activity is considered a partnership and not a sole proprietorship.  In this case, the activity would report it's income and expenses on a Partnership Return, Form 1065.  The exception to this is if the partnership is between a husband and wife.  When this is the case, if both the husband and wife materially participate in the business and intend on filing a joint tax return, they may each elect not to be treated as a partnership and file their respective income and expenses regarding the business on their own Schedule C.  This exception does not apply if the husband and wife business is organized as a LLC.  If the husband and wife business has organized as an LLC they must file a partnership return. 

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

C-Corporation vs. S-Corporation

When considering a C-Corporation vs. a S-Corporation there are many legal items to consider which are NOT discussed in this article, please see an attorney regarding these matters.

Aside from legalities here are some things to consider:

• If you plan to take out significant amounts of profits (cash) above what you would consider a "reasonable salary" for the work that you are doing for the corporation (as officer), an S-Corporation may be more beneficial because once a reasonable wage is paid, excess profits can be taken out of the corporation as a distribution free from self-employment taxes.  If you did this in a C-Corporation the money taken out would be considered a dividend and be doubled taxed.


• C-Corporations often pay high wages rendering the corporation to have no profits and thus pay no taxes. This is perfectly fine as long as the wages paid are considered "reasonable".  The IRS can challenge the wages if they believe they are in excess of a reasonable salary and reclassify them as dividends.  Having said this, the IRS can also challenge a S-Corporation's officer's salary if they believe the wage was too low and then they will want to reclassify the distributions taken as salary.


• Many retirement plan maximum contributions are based upon your salary.  This usually negates the negative of paying payroll taxes on more wages.


• If you plan to retain profits in the corporation remember that in an S-Corporation you still have to pay taxes on that money - some shareholders may need a distribution in order to pay these taxes.


• There are many restrictions placed on S-Corporations that have not been discussed such as who is allowed to be a shareholder of a S-Corporation, how many shareholders, only one class of stock is allowed, etc.

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

Advantages of S-Corporations

Note:  All references to corporations in this blog post are referring to S-Corporations.

Corporations are formed under state law so you will need to refer to your state for specific, but in general the following are some of the advantages of establishing a S-Corporation:

• A S- corporation is a separate legal entity, which generally means that the shareholders are not liable for the corporation's debts; however many banks have the owners of S-Corporation's personally guarantee the loans of the corporation.  When you do this then you become personally liable for the corporation's debts.


• A shareholder can generally take losses up to their tax basis in the corporation.


• All profits and losses are passed through the corporation to the shareholders and taxed on the shareholder's individual return thus avoiding the potential of double taxation (please note shareholders are taxed on any profit whether or not the profits are distributed)


• Distributions from S-Corporations are not subject to self-employment taxes.  {Officers are required to take a reasonable salary and pay self-employment taxes on that salary.}

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

Advantages of C-Corporations

Note:  All references to corporations in this blog post are referring to C-Corporations.

Corporations are formed under state law so you will need to refer to your state for specific, but in general the following are some of the advantages of establishing a C-Corporation:

• A corporation is a separate legal entity, which generally means that the shareholders are not liable for the corporation's debts.


• A shareholder can generally only lose the amount of money they invested in the corporation's stock.


• Hobby loss rules do not apply to corporations


• The corporation can loan you money


• You can loan money to the corporation and receive principal and interest payments from the corporation.


• C-Corporations can generally deduct a percentage of dividends received during the year.


• Small corporations are exempt from alternative minimum tax (AMT)


• Dividends to shareholders are reported on Form 1099 and taxable up to the amount of the corporation's "earnings and profits" after that the dividends are nontaxable up to the shareholder's basis.


• Shareholders who sell their corporation stock at a loss are potentially eligible to deduct up $100,000 of that loss (this applies to small business corporations only)


• Shareholders who sell their corporate stock at a gain can potentially either postpone the gain if they use the proceeds to purchase another small business stock or exclude up to 75% of the gain if certain restrictions have been met.

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

Profit Sharing Plan

A profit sharing plan is a defined contribution retirement plan that businesses should consider when they're ready to offer a retirement plan to their employees.  A profit sharing plan allows the employer to share the business profits with their employees.





Generally businesses come up with a definite formula for figuring the amount of profits to share with their employees.  Employers are free to change this formula each year.





A definite formula is required for the following:

• determining how to allocate the contributions among all the participants


• determining how to distribute the funds accumulated after a fixed number of years, the attainment of a certain age, or upon the prior occurrence of some event such as a layoff, illness, disability, retirement death, or severance of employment.

Forfeitures can be allocated to the accounts of remaining participants in a nondiscriminatory way or they can be used to reduce employer contributions.

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

Company Provided Qualified Retirement Plans

Your company may decide to offer it's employees a qualified retirement plan. Sole proprietors, partnerships and corporations can set up qualified retirement plans.  A qualified retirement plan is one that meets certain IRS provisions and either:

• provides retirement income to employees or


• provides a deferral of income to employees.

Qualified Retirement Plans are either:

• Defined Contribution Plans (like profit-sharing plans or 401(k) plans) or


• Defined Benefit Plans

Defined Contribution Plans provides benefits to the participant in the plan based largely on the amount contributed to that participant's account.

Defined Benefit Plans are any plans that are not defined contribution plans.  The employer would make contributions in the amount needed to provide certain future benefits to participants.

Qualified Plans have the following things in common:

• Employers can deduct the contributions they make and employee elective deferrals, subject to limitations.


• An employee must be vested in benefits under a minimum vesting schedule.


• The plan is for the exclusive benefit of employees or their beneficiaries.


• Participants pay no current income tax on amounts contributed.


• Earnings from contributions accumulate tax free until they are withdrawn.


• Some withdrawals may qualify for tax-free rollover treatment into another qualified plan or IRA

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

Employer Provided IRA Plans

As I stated in my previous post employers should consider offering a retirement plan to their employees.  In this post I'm going to provide an overview of the following IRA plans:

• Simplified Employee Pension (SEP-IRA)


• Savings Incentive match Plan for Employee (SIMPLE-IRA)


• Payroll Deduction IRA (Traditional IRA)

	SEP	SIMPLE	Payroll Deduction IRA
Eligible Employer	Any employer	·       100 or fewer employees with $5,000 or more in compensation ·       No other qualified retirement plan is maintained	Any employer
Employee Eligibility	·       At least 21 years old ·       Employee for at least 3 of the last 5 years ·       Has received at least $550 in compensation in 2009	Any employee who received at least $5,000 in compensation during any two years preceding the current year and is expected to receive at least $5,000 in the current year	All employees
How to Set Up	1.     Prepare IRS Form 5305-SEP 2.     Provide each eligible employee with information about the plan 3.     Establish a SEP-IRA for each eligible employee	1.     Prepare IRS Form 5305-S 2.     Prepare IRS Form 5305-SA 3.     Establish a SIMPLE IRA for each eligible employee	The employer arranges for the payroll deductions and transmits the employee’s contributions to their IRA.
When to Set Up	Anytime up to the due date of the employer’s return including extensions	Effective on any date from January 1 through October 1 of a year for which contributions will be made	Employee decides
Contributions	·       Employers must contribute a uniform percentage of pay for each employee ·       Employers do not have to contribute each year ·       Contributions must be based on a written allocation formula that does not discriminate in favor of highly compensated employees	Employer is generally required to match each employee’s elective deferrals on a dollar-for-dollar basis up to 3% of the employee’s compensation	Employee decides whether to contribute and when to contribute
How much to Contribute	For 2009, contributions cannot exceed the lesser or 25% of the employee’s compensation for $49,000	·       Employee may defer up to $11,500 in 2009 and 2010 ·       Employers generally match the employee deferral up to 3% of the employee’s compensation	Employee decides

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

Retirement Plans for Small Businesses

If you own a small business you should consider setting up a retirement plan for yourself and your employees.  If you're an employee of a small business you should ask your employer about the possibility of setting up a retirement plan.





In short the benefits to the owners of the small business include:

• Any contributions employers make to retirement plans are deductible from their business income.


• Contributions made into the plan grow tax free.


• Their business may be able to get a tax credit or other incentive for starting the plan


• Having a retirement plan may make it easier to retain their employees

Benefits to the employees include:

• You don't have to pay taxes on the monies you put into the plan until you take the money back out


• You don't have to pay taxes on any earnings inside the plan until you take it out


• Once vested the money is yours, even if you leave this employer


• Contributions can be made through payroll deductions

In my next article I'll provide overviews of IRA based retirement plans.

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.