Incorporation question: taxes, dividend distributions, etc.

[Orsorum]

Hypothetical, I do not know if any of this is legal or if I am very confused as to the structure of corporations.

Let's say that in four years, I graduate from law school, get my law degree and my CPA license, and decide I want to go into private practice. So, I decide to do something unconventional: I incorporate as a company providing financial services. I name myself as CEO, and take all other measures necessary to incorporate legally and properly.

I then treat any income as business income, but instead of paying myself wages I grant myself stock in the company; then, I pay out all of the business income as dividends every quarter - other than paying myself minimum wage, which I think I have to do if I'm an employee - or would this be different if I was the sole employee - can I be the CEO + employee?

Then I would be subject at most to the amount taxed to corporations on dividend distributions.

Is this legal, doable? It is a ton of extra paperwork, and very complex, but it might be worth it if I was able to generate income and only be taxed on 15, 20% of it, as opposed to 27 or 36%.

 

[dman]

Now taking applications for ENRON CEO position

 

[Orsorum]

Originally posted by: dman
Now taking applications for ENRON CEO position

The sad thing is, I actually clicked on the link expecting it to go somewhere.

 

[dman]

Originally posted by: Orsorum

Originally posted by: dman
Now taking applications for ENRON CEO position

The sad thing is, I actually clicked on the link expecting it to go somewhere.

After I posted I figured I'd better check to make sure it wasn't a real site. If I didn't, I figured it'd be a bannable site... fortunately it's not. Anyway, free bump, maybe a real CPA will step forward to teach you in the dark arts of legal tax evasion.

 

[Orsorum]

Well, I could always bill myself on an hourly basis, go through the required deductions, etc. Then just grant a certain number of shares of stock, then go from there.

This actually does not look that bad, other than being very complex. I don't see anything illegal with it.

 

[PlatinumGold]

Originally posted by: Orsorum
Hypothetical, I do not know if any of this is legal or if I am very confused as to the structure of corporations.

Let's say that in four years, I graduate from law school, get my law degree and my CPA license, and decide I want to go into private practice. So, I decide to do something unconventional: I incorporate as a company providing financial services. I name myself as CEO, and take all other measures necessary to incorporate legally and properly.

I then treat any income as business income, but instead of paying myself wages I grant myself stock in the company; then, I pay out all of the business income as dividends every quarter - other than paying myself minimum wage, which I think I have to do if I'm an employee - or would this be different if I was the sole employee - can I be the CEO + employee?

Then I would be subject at most to the amount taxed to corporations on dividend distributions.

Is this legal, doable? It is a ton of extra paperwork, and very complex, but it might be worth it if I was able to generate income and only be taxed on 15, 20% of it, as opposed to 27 or 36%.

My CPA specifically recommended to me to do that. Set up as a Chapter S corporation. give myself a minimum Income and then take the rest as dividend income as stockholder.

the main reason for doing so isn't even the tax bracket, it's to reduce the 15% fica.

 

[Orsorum]

Originally posted by: PlatinumGold

Originally posted by: Orsorum
Hypothetical, I do not know if any of this is legal or if I am very confused as to the structure of corporations.

Let's say that in four years, I graduate from law school, get my law degree and my CPA license, and decide I want to go into private practice. So, I decide to do something unconventional: I incorporate as a company providing financial services. I name myself as CEO, and take all other measures necessary to incorporate legally and properly.

I then treat any income as business income, but instead of paying myself wages I grant myself stock in the company; then, I pay out all of the business income as dividends every quarter - other than paying myself minimum wage, which I think I have to do if I'm an employee - or would this be different if I was the sole employee - can I be the CEO + employee?

Then I would be subject at most to the amount taxed to corporations on dividend distributions.

Is this legal, doable? It is a ton of extra paperwork, and very complex, but it might be worth it if I was able to generate income and only be taxed on 15, 20% of it, as opposed to 27 or 36%.

My CPA specifically recommended to me to do that. Set up as a Chapter S corporation. give myself a minimum Income and then take the rest as dividend income as stockholder.

the main reason for doing so isn't even the tax bracket, it's to reduce the 15% fica.

Ahh, that, too. Immediate pay increase.

 

[PlatinumGold]

Originally posted by: Orsorum

Originally posted by: PlatinumGold

Originally posted by: Orsorum
Hypothetical, I do not know if any of this is legal or if I am very confused as to the structure of corporations.

Let's say that in four years, I graduate from law school, get my law degree and my CPA license, and decide I want to go into private practice. So, I decide to do something unconventional: I incorporate as a company providing financial services. I name myself as CEO, and take all other measures necessary to incorporate legally and properly.

I then treat any income as business income, but instead of paying myself wages I grant myself stock in the company; then, I pay out all of the business income as dividends every quarter - other than paying myself minimum wage, which I think I have to do if I'm an employee - or would this be different if I was the sole employee - can I be the CEO + employee?

Then I would be subject at most to the amount taxed to corporations on dividend distributions.

Is this legal, doable? It is a ton of extra paperwork, and very complex, but it might be worth it if I was able to generate income and only be taxed on 15, 20% of it, as opposed to 27 or 36%.

My CPA specifically recommended to me to do that. Set up as a Chapter S corporation. give myself a minimum Income and then take the rest as dividend income as stockholder.

the main reason for doing so isn't even the tax bracket, it's to reduce the 15% fica.

Ahh, that, too. Immediate pay increase.

Ya, you gotta love it.

however, you should turn around and put most of that in a "SEP" account. IRS allows you to put up to 10% of you GROSS Income into a SEP account (401k for self employed), because you probably won't be getting social security.

 

[Orsorum]

Originally posted by: PlatinumGold
Ya, you gotta love it.

however, you should turn around and put most of that in a "SEP" account. IRS allows you to put up to 10% of you GROSS Income into a SEP account (401k for self employed), because you probably won't be getting social security.

That works with me. Does the gross income figure include passive income?

Could I have the SEPP and a Roth IRA, and contribute the max for the Roth in addition to what the SEPP allows? (I know I can look this up rather easily, I'm just lazy, )

 

[PlatinumGold]

Originally posted by: Orsorum

Originally posted by: PlatinumGold
Ya, you gotta love it.

however, you should turn around and put most of that in a "SEP" account. IRS allows you to put up to 10% of you GROSS Income into a SEP account (401k for self employed), because you probably won't be getting social security.

That works with me. Does the gross income figure include passive income?

Could I have the SEPP and a Roth IRA, and contribute the max for the Roth in addition to what the SEPP allows? (I know I can look this up rather easily, I'm just lazy, )

i'd look it up or consult a CPA. i believe that the SEPP allows you a lot higher amount. As i think of it, it might actually be a lot more than 10%. it might have been 25%. i have to ask my sepp guy again. i forgot.

 

[FeathersMcGraw]

Keep in mind that, sans new legislation, the current dividend tax cuts will expire in 2009 and will once again be taxed as regular income.

 

[Orsorum]

Originally posted by: FeathersMcGraw
Keep in mind that, sans new legislation, the current dividend tax cuts will expire in 2009 and will once again be taxed as regular income.

If that occurs, I will figure out a new tax situation. I could be done with my education by 2007, so I'd have at least two years to take advantage of it.

 

[PlatinumGold]

Originally posted by: FeathersMcGraw
Keep in mind that, sans new legislation, the current dividend tax cuts will expire in 2009 and will once again be taxed as regular income.

that's only the difference in tax rate. they still will not apply FICA to Dividend income.