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PostPosted: Mon Jan 17, 2011 7:56 pm 
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I originally started my business as a General Partnership and that didn't last long so I switched to a sole proprietor and now, in 2011, I'm switching to an S-Corp. I have been operating all my personal expenses out of my sole proprietor bank account which is know is not correct, but regardless, I have been doing it. Here are the basics of my CURRENT accounting structure:

Bank Account
Accounts Receivable
Fixed Assets
Accounts Payable
Income Account
Cost of Goods Sold
Expense Accounts
Paid In Capital (PIC) plus sub-equity accounts of PIC which was where I attribute all my personal expenses. The reason why I had a PIC account was because it was originally set up with a Partner so I just kept it like that.

So, now I am switching this to an S-Corp and I'm unsure how to go about the new setup of Quickbooks. The basics are simple but there are a couple of areas I'm not 100% on like:

I will be setting up a new corporate bank account, when I pull all the money out of my sole proprietor account and deposit it into my corporate account, how do I book that entry? Paid in Capital? Opening Balance Equity?

Now, when I pay personal expenses, I will be using my personal account, how do I book the entry when I transfer money from the corporate account to my personal account? A dividend disbursement of some sort? Draw account?

Concerning expenses like my auto expense, I currently have an auto expense for my business and then when I do my taxes I only write off a portion of that to take into account the fact that I use my car for business and personal. For example, if my car cost me 10k last year, I would let the tax preparer deal with splitting it up properly. Now that I'm an S-Corp, how do I deal with that? How do I take a portion of the expense for personal and a portion for business?

The same question above applies towards other types of expenses too like Meals and Entertainment and others. Any advice regarding these questions and ANY more information would be very helpful. Thank you.


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PostPosted: Tue Jan 18, 2011 10:42 am 
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You need to find a competent person to help you set up the S Corp properly. The books on the sole proprietor will be closed out so that all that will remain will be a balance sheet for the Sole prop. If you stop operating as a sole prop. on a date other than December 31, I think you'll file a schedule C for the Sole Prop. for the portion of the year it was operated, and file an 1120S for the portion of the year you operated as an S Corp.

Whether liabilities transfer to the S Corp., I would think they would not. I would think you would simply exchange the lower of adjusted basis or fair market value of your assets, including the checking account, for Corp. stock. Someone more knowledgeable may be able to help you on this forum, but I would strongly advise that you consult with a competent person to get the S Corp. set up right. I believe you will have to file articles of incorporation with your state, and there will probably be other record keeping requirements to be met on a periodic basis. You'll also have to file for a new employer identification number (EIN). And paying yourself a reasonable salary is a biggy with an S Corp from the IRS point of view. See link below for what is involved with assets being donated or transferred to the S Corp.

http://taxes.about.com/od/taxplanning/a ... assets.htm

In regards to claiming mileage, travel, meals, and entertainment, one way to do it is to fill out an expense report with appropriate information to be submitted to the corp. for reimbursement. Provided you set up an accountable reimbursement plan, and meet its requirements, none of the reimbursement is income to you and the expenses are fully deductible by the corp. Whether there's an easier way to do it, I don't know.

I wish you the best of luck with the new business entity.


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PostPosted: Mon Jan 24, 2011 3:45 pm 
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Thank you for the response. I've read the link you sent me and I read additional links within that link and other places. The more I read, the more scared I am regarding doing this properly. I read this link which discusses Reasonable Compensation:

http://www.qbalance.com/reasonable_compensation.htm

My business is not a high-earning business, I don't make steady amounts of money every month. To give you some details, my gross earnings as a sole-proprietor has been:

GROSS
$250,000 2006
$350,000 2007
$84,000 2008
$74,000 2009
$55,000 2010

NET
2006 - 28k loss
2007 - 42k gain
2008 - 42k LOSS
2009 - 19k LOSS
2010 - 15k gain

In 2009, I cut my expenses by moving into a new office building, but bottom line, I don't have a lot of money to play with and regarding the REASONABLE COMPENSATION issue, I don't know exactly the best way to do that without causing a red flag, especially with the big shifts in gross and net income I've experienced over the years. Everything I read strongly tells me to hire someone to help with that, but I don't have the time or money to be able to do that. I'm struggling to do this on my own and it seems like the more I read, the more scary it is regarding doing it the right way. I feel I need more tailored help, but don't have the ability to hire someone.


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PostPosted: Mon Jan 24, 2011 4:37 pm 
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Location: Wichita Falls, Texas
An S Corp. may not be the best business entity structure for you. It's a good structure when you are consistently earning a profit. Payroll taxes are deductible by the corp. whereas self employment taxes are not deductible by a sole proprietorship or LLC, and if you make enough, a portion of the net income may not be taxed for payroll tax purposes, saving you even more money in payroll taxes vs self employment taxes under a sole prop. or LLC. Monthly draws could be characterized as salary, but payroll taxes would have to be withheld on the salary and deposited periodically. I would think characterizing all draws as distributions rather than some portion as salary might raise red flags with the IRS.

I'm not that knowledgeable about the different advantages, disadvantages of each business entity type. But, an LLC would give you the advantage of limited liability, like an S Corp. and you wouldn't be concerned with a "reasonable salary", nor would you be concerned with "minutes" and other requirements of an S Corp. An LLC is a less formal way of doing business. However, generally all net income earned from the business would be subject to self-employment taxes which can not be deducted as business expenses. If you had a passive partner or partners in the business who were considered limited partners and were issued a different type of member's ownership interest than the managing partner, then the managing partner's share of profits might be bifurcated. In that case, the managing partner would own two different classes of ownership interests, one class of the managing partner whose entire share of profit from the LLC would be subject to self-employment taxes, and one class of a limited partner whose share of profit was not subject to self-employment taxes. But this would require the expertise of a CPA to set up for you if that were the case.

I honestly don't think you have a choice as to seeking the advice and expertise of someone competent. You are choosing a business structure that's too complex to be setup correctly without such expertise, in my opinion. The S Corp. may be the way to go, but my opinion is that you do need someone competent to help you set up the books and get everything recorded properly at the start. For sure, two business entities are involved, one ending and another beginning, the one beginning requiring some expertise in how to transfer assets from the sole prop and how to legally establish the new entity in the eyes of your state. Sorry, that's the best I can do.


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PostPosted: Mon Jan 24, 2011 4:57 pm 
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The default tax status of a single member LLC (SMLLC) is sole proprietorship and you complete a schedule C with your personal form 1040, like a sole prop., but you still have limited liability for company liabilities like an S or C Corp. But, the liabilities of the sold prop. may not transfer and become liabilities of the LLC or the S Corp. I don't really know. An exception might be equipment used in the business which was purchased through a business loan or trade accounts payable. That's beyond my expertise.


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PostPosted: Sat Jan 29, 2011 8:12 am 
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One question I have is, how do you have $250k in gross revenue and still have a $28K loss? This doesn't add up to me. It sounds like you may be improperly accounting for Cost of Goods Sold, such as expensing inventory when you buy it and then expensing it again when you sell it. In such a case, that is expensing the same inventory twice. And this can be easily done using QuickBooks. In any case, having so much revenue but still being in the red just doesn't make sense.


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PostPosted: Sat Jan 29, 2011 11:51 am 
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First off, I appreciate any and all assistance, sincerely.

dp1903 - after serious research, I think you may be right concerning the s-corp, there are negative aspects like the annual charge to the state of California of $700. I'm already invested and want to handle this right. The main reason was when I did my taxes for 2007 was my tax liability. I'm not 100% on this process, but I could've called my gains for 2007 passive and wouldn't have had a fairly large tax liability. Like I said, I am invested in this process, money paid.

Regarding the 250k gross revenue and 28k loss. That was the year I set up so there was lots of startup costs that were deducted and a big chunk ended up going to contractor's which I paid with 1099 misc. So I still have to figure out a few more things.


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PostPosted: Tue Feb 01, 2011 5:52 am 
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hi guys,,,
I agree with you the sole proprietorship is not the best form of the business.you have to pay Payroll are deduct-able expenses where as self employment are not deduct-able.Assets and expenses accounts are not affected as such but the paid up capital is the one that changes the most.(partners capital a/c plus current a/c of partners).


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PostPosted: Thu Mar 10, 2011 7:42 am 
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I have a few questions. One: Am I correct in assuming that this business is your primary means of income? I assume so if you have been expensing out of your sole proprietorship accounts. As has already been mentioned: this is not good for an S-Corp, as payroll is accounted and deducted as a seperate expense. As was mentioned, you can set up a system for claiming the business use out of your own money, such as tracking miles spent going on business.

The second question I had was: your pay is not steady, but do you generally get at least some each month? enough to make some kind of payroll?

The third and most important question is: Are you or do you plan on taking out a large loan or other form of liability to continue operating? Revenues are in decline but business could always pick up with the economy (it's hard to say as you have not specified what business your in). If you feel you might be in need of a cash infusion in the near future, then becoming an S-Corp makes sense simply for the liability issues, but only if it includes enough to make payroll above.

honestly, I can't see too much benefit in becoming an S-Corp. They're more expensive to run and the liability concerns are not much of a concern if you are not planning on taking liabilities.


The best advice I have if you do go though with it, is be frugal in your personal accounts, and put yourself on a base+bonus payment schedule. Set up a small monthly payroll for yourself that you can afford, then year-end bonus's to make up the bulk of your income. This is less than ideal, but the ideal is already out due to unsteady income.


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