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what to do with inactive S Corp which still makes money

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#1
What is the name of your state? Oklahoma

Hi everybody,

I’m looking for some advice regarding a business.

15 years ago I started an online affiliate marketing business. The business is set up as an Oklahoma S Corp.

I have 50% ownership and my wife at the time (we are now divorced) owns the other 50%.

When we divorced a few years ago we wanted to keep the company intact since it was a nice revenue stream. However, we both stopped actively working on acquiring new business. We still make money from old business. We receive commission from companies that we referred customers to years ago, somewhat like an indefinite royalty payment.

We have stopped doing any payroll. I feel that would not be appropriate since my ex does nothing and my work amounts to less than 1 hour per month for accounting and bookkeeping tasks. Instead we currently distribute the income 50:50 each month via shareholder distributions.

Our accountant has advised that we really should do paychecks and not only shareholder distribution as to comply with IRS guidelines.

I’d like to see this business eventually getting dissolved rather than continuing to own a business with my ex that nobody really wants to work in. But of course, nobody wants to miss out on those indefinite commission payments either.

What would be an appropriate way to deal with this situation? Continue the S Corp? Doing payroll even though nobody works? Or dissolve the business and maybe form some other type of legal structure to continue receiving the commission payments?



Thanks for any advice.
 
Last edited:


LdiJ

Senior Member
#2
What is the name of your state? Oklahoma

Hi everybody,

I’m looking for some advice regarding a business.

15 years ago I started an online affiliate marketing business. The business is set up as an Oklahoma S Corp.

I have 50% ownership and my wife at the time (we are now divorced) owns the other 50%.

When we divorced a few years ago we wanted to keep the company intact since it was a nice revenue stream. However, we both stopped actively working on acquiring new business. We still make money from old business. We receive commission from companies that we referred customers to years ago, somewhat like an indefinite royalty payment.

We have stopped doing any payroll. I feel that would not be appropriate since my ex does nothing and my work amounts to less than 1 hour per month for accounting and bookkeeping tasks. Instead we currently distribute the income 50:50 each month via shareholder distributions.

Our accountant has advised that we really should do paychecks and not only shareholder distribution as to comply with IRS guidelines.

I’d like to see this business eventually getting dissolved rather than continuing to own a business with my ex that nobody really wants to work in. But of course, nobody wants to miss out on those indefinite commission payments either.

What would be an appropriate way to deal with this situation? Continue the S Corp? Doing payroll even though nobody works? Or dissolve the business and maybe form some other type of legal structure to continue receiving the commission payments?

.
How much money are we talking about? I think that I disagree with your accountant but I would need to know how much money we are talking about.
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#3
The business currently receives around 4-5k monthly that we distribute 50/50. The income has been declining steadily since we don't acquire new business.
 

Taxing Matters

Overtaxed Member
#4
We have stopped doing any payroll. I feel that would not be appropriate since my ex does nothing and my work amounts to less than 1 hour per month for accounting and bookkeeping tasks. Instead we currently distribute the income 50:50 each month via shareholder distributions.

Our accountant has advised that we really should do paychecks and not only shareholder distribution as to comply with IRS guidelines.
What the tax law says is that for an employee/shareholder any distributions made to you from the corporation will be first treated as wages/salary for any uncompensated work you have done for the company. The tax law does not, as some erroneously believe, require that the corporation pay salary to the shareholder employees no matter what. All that is required is that when distributions are made that they first be treated as salary/wages to compensate for work that was done but for which the employee has not yet been paid. That salary/wage has to be at an amount that is reasonable for the type of work done. Moreover, there is an exception if the only work done is minor/insubstantial. The leading case from the Tax Court states the rule as follows:

Sections 3111 and 3301 impose FICA (Social Security) and FUTA (unemployment) taxes on employers for wages paid to their employees. For Federal employment tax purposes, section 3121(d) defines an employee in part as any officer of a corporation. However, there is an exception to employee status for an officer who does not perform any services (or performs only minor services) and who neither receives nor is entitled to receive remuneration. Sec. 31.3121(d)-(1)(b), Employment Tax Regs. For Federal employment tax purposes, the term “wages” is defined as “all remuneration for employment”.2 Secs. 3121(a), 3306(b). The form of payment is immaterial, the only relevant factor being whether the payments were actually received as compensation for employment. Secs. 31.3121(a)–1(b), 31. 3306(b)–1(b), Employment Tax Regs. Consequently, an officer who performs substantial services for a corporation and who receives remuneration in any form for those services is considered an employee, whose wages are subject to Federal employment taxes.​

Veterinary Surgical Consultants, P.C. v. Commissioner, 117 T.C. 141, 144–45 (2001), aff'd sub nom. Yeagle Drywall Co. v. Commissioner, 54 F. App'x 100 (3d Cir. 2002)(bolding added). If the corporation is essentially dormant except for receiving legacy payments and all you are doing is minor bookeeping of under an hour per month to process and record the payments, it would be my view that no salary need be paid to you for that. At worst, you'd need to be paid for the 45 min (or whatever it is) a month you spend doing this work. Your ex would not be paid at all since she is doing no work. Bear in mind that a corporation cannot deduct as wages or salary amounts paid for work not done as that payment does not meet the test of "ordinary and necessary" that is applied to business deductions. So you don't want to pay salary for nothing. Bottom line is that as I understand the facts, I think you probably do not need to pay out any salary/wages given the very little work that is actually being done here.

As for whether you should dissolve the corporation, that's something to discuss with a business attorney. You need to look at the contracts you have and ensure that those legacy payments you are receiving can be assigned to you and your wife (or perhaps a LLC you form together). You don't want to do something that might cut off your payments. I'm not sure that dissolving the corporation would provide a whole lot of benefit to you though.
 

LdiJ

Senior Member
#5
The business currently receives around 4-5k monthly that we distribute 50/50. The income has been declining steadily since we don't acquire new business.
I agree with everything that taxing matters says, however I will point out that your wife/ex-wife is not working in the corporation at all therefore she would not be required to have a wage or salary. She is not a working shareholder. You work only about an hour a month on bookkeeping. I would feel very comfortable taking the position that wages are not necessary. I disagree with your accountant specifically because the income is all passive and no one is doing any work to bring it in.
 

Taxing Matters

Overtaxed Member
#6
I disagree with your accountant specifically because the income is all passive and no one is doing any work to bring it in.
It's not the nature of the income (passive/active) that really makes the difference here so much as the fact that the OP does very minor book work and the ex does none at all. In any event, we both agree in this case the S-corp doesn't need to pay either one a salary. Unfortunately, some tax people have it so ingrained in their head that S-corps MUST pay a salary no matter what that they give out advice like the OP's accountant did.
 

LdiJ

Senior Member
#7
It's not the nature of the income (passive/active) that really makes the difference here so much as the fact that the OP does very minor book work and the ex does none at all. In any event, we both agree in this case the S-corp doesn't need to pay either one a salary. Unfortunately, some tax people have it so ingrained in their head that S-corps MUST pay a salary no matter what that they give out advice like the OP's accountant did.
I was using passive in the context of nobody has to do any work to make the income happen. Non-working shareholders do not have to be paid a wage. Bottom line though, we do agree on this issue.
 
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