Charles,
B/c when you get audited by the IRS (which for any small business, is just
a
matter of time), you will FINED for tax evasion...
There is no basis for your reply. Our company has outsourced our Tax
Accounting to a well respected professional accounting firms since day one
(1994), and
there is nothing illegal or inappropriate in our TAX planning practices.
1. There is no obligation for any business owner to take a salary, if there
is not income/profits to justify giving a salary. (If there was, many
startups would never be able to start up, and the term "sweat equity" would
not exist).
2. There is no restriction on how much money someone can loan or invest in a
business. And anyone who gives a loan to someone, is legally allowed to
define the terms in which they will get paid back for that loan. (if people
could not get paid back for loans, they would not give them. As a matter of
fact the biggest thing a lender looks at before giving a loan is what
guarantees that they will get paid back.)
The only thing I can think of is that you misinterpreted my comments for
cases that do not match our company's profile and circumstance, and/or not
insightful enough to realize that I am aware of the additional steps and
planning that are needed to meet the IRS's requirements of accountabilty.
The IRS does not like to see money randomly and inconsistently change hands
between, corporations, stock holders, lendors, employees, owners, etc.
There is a proceedure for giving and documenting a loan, and there is a
proceedure for giving and documenting salaries, and a proceedure for
transferring and documenting any money that changes hands. It can get even
more complicated if there are multiple executives and stock holders that
need answering to, who's annual tax records will document the TAX history
and financial profile of the company. What some don't realize is that
registering to be a corporate entity of some type, and or taking a title of
some sort, is not enough on its own to legal make it so, from the IRS's
perspective. The IRS wants to see that the company or entity conducts
business appropriate for its entity type or title type. If a corporate acts
like a sole proprietor, the IRS can reclassify the corporation as a Sole
proprietor for tax purposes. (For example if you don't follow the mandatory
requirements of being a corporation such as doing minutes and bpard meetings
and such, and/or officers don't take salaries when salaries are appropriate
to be taken). The same applies when lending money. If one day you call
something a loan and the next day you call it equity, and the next day call
it salary, it would infer that the business owner is just making it up as he
goes along, and maybe the IRS will decide to have a different opinion of how
the situation should be accounted for. But that is not what I advised or
inferred in my original post.
But my opinion stands... If a business owner is personally loaning money to
his own company, in most cases, it would be wise for that business owner to
document/negotiate upfront terms of the loan (to himself), setting a payback
plan of that loan before taking a salary. It would just be plain stupid to
pay income tax on your own money that you were already once taxed on before
lending it to the company. One of the ways to make it legal is to define
the terms of payback in the original loan Note that represents the
transaction of the loan. What many business owners do not realize is that,
not all corporate activity needs to be defined in the corporate documents.
it is also legal to include specific terms in the "NOTE" of a loan. For
example, an S-CORP only has one class of stock, but many small S-CORPs will
immulate the equivelent of priority stock, by including special terms in the
"NOTE", to intice investors and/or reduce investor's risk, without actually
giving up "STOCK" controlling ownership of the their company.
The benefit of paying back loans first, when one is an S-CORP, is that
losses can still go on your personal return. That means that once your
company is making a profit, and/or the loan is paid in full, and it is
appropriate that you take a salary (such as when you have a need to convert
to C-Corp and need to avoid double taxation), you can still deduct the
previous losses that transfered to your personal returns (as an S-CORP), and
still take the deductions from your salary at that time.
In my comments above, I am making the assumption that significant after tax
personal money had been invested, and that no profit was being made yet.
Many startup or companies that are very top heavy for build outs show losses
in the early stages.
As this is a public list, It is not appropriate to discuss my personal tax
situation in more detail. But the important part of this post is that
business owners should be having conversations with their accountants on
what the best way is for them to invest money and take out money from their
company. If they do not plan accordingly ahead of time, you'll get screwed
at tax time. Its hard to plan though as its hard to predict whether goals
will be met or not. In my case, the outcome after 5 years was much
different than I expected at day 1 business plan. One of the advantages of
using a professional third party accountant is that there is a recorded
record of what financial/tax decissions were made and when, to conform to
the needs of the IRS.
Lastly, I'll add. A big decission to make intially is whether to put money
into your company as a loan or equity investment. If in doubt, put it in as
a loan. The reason is that you can write into the note, the terms of what
happens to the loan if loan is the loan is defaulted on, for example
converting to equity. It is also feasible to secure the note with a
"warrant", allowing the lender to convert their loan to equity at the stock
value at the time the loan was given, so that there is no legal problem with
changing your mind years after the fact.
Tom DeReggi
RapidDSL & Wireless, Inc
IntAirNet- Fixed Wireless Broadband
----- Original Message -----
From: "Charles Wu" <[EMAIL PROTECTED]>
To: "'WISPA General List'" <[email protected]>
Sent: Friday, December 15, 2006 10:19 AM
Subject: RE: [WISPA] salary
<snip>
Zero. When the CEO is also the primary investor, and the company is an
S-corp or LLC, why pay payroll tax, when you can just take a repayment of
loan?
The salary of the CEO can be meaningless unless also disclosed wether they
have an equity position or not, and of what caliber.
</snip>
B/c when you get audited by the IRS (which for any small business, is just a
matter of time), you will FINED for tax evasion...
-Charles
-------------------------------------------
WiNOG Wireless Roadshows
Coming to a City Near You
http://www.winog.com
-----Original Message-----
From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED] On
Behalf Of Tom DeReggi
Sent: Friday, December 15, 2006 1:51 AM
To: WISPA General List
Subject: Re: [WISPA] salary
Tom DeReggi
RapidDSL & Wireless, Inc
IntAirNet- Fixed Wireless Broadband
----- Original Message -----
From: "Travis Johnson" <[EMAIL PROTECTED]>
To: "WISPA General List" <[email protected]>
Sent: Thursday, December 14, 2006 8:55 PM
Subject: [WISPA] salary
Hi,
Just taking a quick survey... answer if you can, but be honest... ;)
What is the salary of the CEO of your ISP? Even if you can share the
percentage of that salary compared to annual gross revenue...
Travis
Microserv
--
WISPA Wireless List: [email protected]
Subscribe/Unsubscribe:
http://lists.wispa.org/mailman/listinfo/wireless
Archives: http://lists.wispa.org/pipermail/wireless/
--
WISPA Wireless List: [email protected]
Subscribe/Unsubscribe: http://lists.wispa.org/mailman/listinfo/wireless
Archives: http://lists.wispa.org/pipermail/wireless/
--
WISPA Wireless List: [email protected]
Subscribe/Unsubscribe:
http://lists.wispa.org/mailman/listinfo/wireless
Archives: http://lists.wispa.org/pipermail/wireless/
--
WISPA Wireless List: [email protected]
Subscribe/Unsubscribe:
http://lists.wispa.org/mailman/listinfo/wireless
Archives: http://lists.wispa.org/pipermail/wireless/
