My partner and I own an S corp... we are the only owners and have no
employees. Up 'til now we've been able to pay ourselves by reimbursing
expenses, but now we don't have any more expenses to run through the
company. Do we have to sign up for a payroll service to pay ourselves,
or can we just draw on the company account, as owners? I'd like some
links to further information/reference, and any information on tax
ramifications. Thanks.

I want to begin with a disclaimer that I am not a lawyer, and this
should not be construed as legal advice.

However, if you look at the web page “Running a Corporation”,
http://www.nolo.com/lawcenter/ency/article.cfm/objectID/050332F8-1BDB-4BC6-AEDB4481FD43C18E
you will see that there are strict guidelines to be followed.  As a
shareholder you don’t get a salary.  You do, however, get to appoint
the directors.  The director appoints officers and set salary levels. 
And officers can hire empolyees.

It seems that you and your partner act all of the above.  So, you can
receive a salary as a director, officer or employee of the company.

It is, however, very important that the corporation have separate bank
accounts from the shareholders.  You must maintain the integrity of
the corporation and not use its assets as your personal assets.  If
you do, you can pierce the corporate veil and lose your status as a
corporation.

Therefore, it would be safest for you and your partner to set up a
payroll for yourselves as official employees.

The following web sites can help you find out the details that you
need.

I hope this helps.
PbA

S Corp Facts
http://www.nolo.com/lawcenter/ency/article.cfm/objectID/A30CE890-BBAA-4B8A-AD66A33FA038988B/catID/B491956E-A152-424B-A2342A5861B5EACF

Corporation Basics
http://www.nolo.com/lawcenter/ency/article.cfm/objectID/78FC3C83-30C0-4E57-9F6C7E7F8B45E726

Forming a corporation
http://www.uslaw.com/problem.tcl?problem_id=120

S Corporation
http://ww2.northwesternmutual.com/tn/netserv--business--s_corporation_pg

Setting Up Your Own Business:  The "S" Corporation
http://www.ianr.unl.edu/pubs/consumered/nf255.htm


KEYWORDS USED:
forming s corporation
://www.google.com/search?hl=en&lr=&ie=UTF-8&oe=UTF-8&q=forming+s+corporation+&btnG=Google+Search

---

Request for Answer Clarification by pnoeric-ga on 18 Nov 2002 17:36 PST

It seems like the essence of my question wasn't addressed in this
answer. Yes, as shareholders we've appointed ourselves officers-- now
what I'm trying to figure out is a mechanism to remove money from the
company to compensate ourselves, without the (huge) hassle and expense
of signing up for a payroll service, being forced to do payroll taxes,
etc.

So far my partner and I have been able to simply reimburse our
expenses (for example, I charge my corporate rent for my home office;
it pays me directly and that's a business expense) to move money out
of the corporate bank account. Is there priviledge we have, as
shareholders or officers, to 'draw' on the corporation's account? (Am
I making sense here?)

thank you---
Eric

---

Request for Answer Clarification by pnoeric-ga on 19 Nov 2002 07:40 PST

By the way, I realize now that the title of my question is a bit off--
it probably should be "how does an S corp pay owners?" :-)

---

Clarification of Answer by peggy_bill-ga on 19 Nov 2002 13:38 PST

I put this in comments.  Instead I should have put it under "clarification."

Dear pnoeric, 
 
Did the comment by snapanswer answer your question? 
 
Upon reading what you wrote, I was concerned that if you aren't
careful you could harm your status as a corporation.  The article
referenced by snapanswer, "Is a One-Person Corporation Required to
have an Employee?" <http://www.nvinc.com/oneperson.htm>, mentions that
the IRS doesn't like corporations that have no employees.  This is
something you should be careful about.
 
Given that, I looked in my Copy of BUSINESS LAW, 4th edition by Henry
R. Cheeseman (2001, Prentice Hall, New Jersey, USA).  As a director
you can be compensated for attendance for each meeting attended,
annual and special.  I don't know if that helps.  But, as a director
you can also distribute the profits of the corporations to all
shareholders through dividends.  This may be what you are looking for.
 
There are some restrictions on the payment of dividends.  The law
states that you cannot pay dividends if  1.the corporation would not
be able to pay its debts, or  2.it would cause the corporation's total
liabilities to exceed its total assets.
 
Does that help? 
pba

I am not a lawyer and this is not financial planning nor legal advice.
 We can wait for the legal experts for that.  However, there are some
things you may wish to investigate.

My understanding is that it is actually to your advantage to have
employees, in order to avoid having the IRS rule that the corporation
is without substance.  Of course, this does not mean that all of the
expenditures of the corporation to you are employment related. 
Depending upon how you originally financed your corporation, you may
find that the start-up funds were loaned to the corporation, and need
to be repaid to you with a reasonable amount of interest.

You may find the latter half of this article interesting:
Nevada Corporate Planners:  Are Employees Required?
http://www.nvinc.com/employee.htm

And you may find this short piece interesting:
Is a One-Person Corporation Required to have an Employee?
http://www.nvinc.com/oneperson.htm

Dear pnoeric,

Did the comment by snapanswer answer your question?

Upon reading what you wrote, I was concerned that if you aren't
careful you could harm your status as a corporation.  The article
referenced by snapanswer, "Is a One-Person Corporation Required to
have an Employee?" <http://www.nvinc.com/oneperson.htm>, mentions that
the IRS doesn't like corporations that have no employees.  This is
something you should be careful about.

Given that, I looked in my Copy of BUSINESS LAW, 4th edition by Henry
R. Cheeseman (2001, Prentice Hall, New Jersey, USA).  As a director
you can be compensated for attendance for each meeting attended,
annual and special.  I don't know if that helps.  But, as a director
you can also distribute the profits of the corporations to all
shareholders through dividends.  This may be what you are looking for.

There are some restrictions on the payment of dividends.  The law
states that you cannot pay dividends if  1.the corporation would not
be able to pay its debts, or  2.it would cause the corporation's total
liabilities to exceed its total assets.

Does that help?
pba

Folks, get thee to an accountant quickly!

Here's my take on it, having been in a similar situation.

1) You don't need a payroll service.  But you need a payroll.
I used QuickPay software(an addon to QuickBooks) to help manage
the payroll, taxes, withholding, etc.   As a 2-person S-corp,
we did payroll taxes, reporting, etc. manually for a while, but
it killed about a day every quarter.  Using QuickBooks/QuickPay
sped things up a bit.  Talking to an accountant about the required
filings, at least once is highly advisable.... using one to do the
dirty work probably is well worth the cost as well!!!!

1a) Setting up a payroll doesn't mean you have to pay yourself on
any given schedule -- you can have 'miscellaneous' payroll periods
whenever you want -- you just need to make sure that you withhold
report, and deposit all of the taxes correctly when you do so. The
IRS publications describe how to do this.


2) The IRS doesn't mess around about payroll taxes.  Screwing
them up can cause more than just penalties -- it can cause jail time.

3) If you really don't want the hassle of a payroll, you probably shouldn't
be an S-Corp.  Partnerships, single-props, etc., have more leeway about
how you can get money out of the company.

4) Compensating yourselves via dividend payments -might- work, but I
bet it'd raise a few eyebrows if you did it more than once per quarter.
You'd also be trading off corporate paperwork for personal paperwork with
estimated taxes withholdings, etc., and as others have mentioned, I think
the whole corporate entity might be questioned if it actively tried to avoid
payroll taxes in such a way.  Ask an accountant or lawyer.


5) All that said, you can write a check to yourself if you really need to.
Call a b-o-d meeting (you & partner), and vote to loan yourself some money
at 0% interest while you figure all of this out.  Make sure you keep meeting
notes and have a loan document to support all of this -- cover your ass by
saying it's a loan for directors until a corporate payroll/compenstation 
strategy can be worked out.  Then make sure you work it out.  Or, just provide
an advance against expenses, and make sure to account for it.   But, get
a real payroll going ... otherwise, your state and the Feds can get very
unhappy with you, and your 'corporate veil' won't be worth squat.

Accountants that work for small businesses can help you out a lot, without
the expense of lawyers or big-time accounting firms.  Since you're an S-corp,
there's going to a  bunch of paperwork/reporting requirements that they'll
know about.   Otherwise, be prepared to spend a bunch of time figuring out
the rules and filling out forms, instead of running your business.