Corporate Talk

This web site operates from the prospective that the user already has a business entity and the entity of choice is the S-corporation. While good business practices may apply to every business, the user must decide whether to use and how to apply the content found here. The authors cannot. As always, read all closely and think before you act.

Structuring the S-Corporation

Structuring Process

Structuring. Structuring an S-corporation allows owners to harness the power of the S-corporation to improve their company’s value. With increased value, there is an associated growth in general wealth. To put it another way, the rich understand and use corporate structure to leverage their financial health. The not so rich should too.

Structure is frequently confused with business organization. Both are essential. Structuring is not, the officers report to the directors, the directors report to the shareholders, the shareholders tell… etc. When entrepreneurs talk about structure they mean more than who answers to whom.

What is structuring? Structuring can take place on many levels:

one can structure for outcome, i.e., the business goes to the kids (outside of probate) when the owners pass;

one can structure for liability containment, i.e., all real property shall be held in an LLC;

one can structure for taxes, i.e., money paid as rent is not subject to payroll taxes to the recipients(s) of that rent;

one can structure for deductions, i.e., to get the largest, fastest possible deduction for worthless stock.

These are only examples. The list goes on.

A Familiar Example. Choosing an S-corporation is a form of structuring. A C-corporation is a similar entity. When an C-corporation pays out its profits, it is taxed on those profits as are the recipients of the payments. When a similarly situated S-corporation pays out profit to its shareholders, the income is flow through. The S-corporation is not taxed on the profit. Disbursement is not taxable event. The shareholder recipients still have to pay income tax but the income is a single line entry on their annual tax filing (1040). By choosing the S-corporation, the owners structured one taxable event, not two. Depending on the dollars involved, the savings can be large.

What, where and when to structure is not a mindless exercise in following a checklist. Facts matter. Having a goal, a plan to get there and an understanding of the pitfalls to sidestep are fundamental in structuring decisions.

No one person is likely to have all the answers. Management accountants understand structuring from a corporate tax vantage point. Corporate attorneys understand structuring from a liability/fiduciary perspective. An experience corporate secretary is familiar with structuring from a functional level, “Get ‘er done!”.

A competent corporate secretary has no problem referring the board to appropriate outside professionals. The best case scenario is to use each one as the particular situation demands. If structuring has you confused, JACS is available to point you in the right direction. Call us.