Getting Started - Legal Structure
Ask Bob

Ask Bob About Legal Structure

?Can my corporation buy stock in other corporations?

A corporation can buy stock in other companies. It can borrow money from banks or conduct any type of financial transaction permitted an individual. Note, however, that an S corporation may not own more than 80 percent of another corporation.

?Can I loan money to a corporation that I own?

Yes. One of the advantages of formally loaning money to a corporation that you wholly own is that you will have a greater chance of recouping your money as a debtor than as a shareholder, should the company experience difficulties.

Another advantage is that you can pay yourself interest that is tax deductible for the corporation. Remember, though, that you have to pay taxes on the interest. The interest you charge should be at market rate at the time of the loan.

If your loan balance is too high and your equity investment is too low, the IRS can reclassify part of the loan as equity, and your interest payments will become nondeductible dividends.You can pay yourself a salary as well. Make sure that it is within reason. If the tax authorities consider it to be excessive, they will restate the “excess” salary as a dividend and tax it as both corporate and personal income.

If you think that either your loan to or salary from your company is tipping the scales, check with a qualified tax advisor.

?Can I buy assets in my own name and then lease them to my corporation?

Yes. This is usually done for two reasons. One is for tax purposes. If you own assets such as machinery, buildings, or vehicles, they may be depreciated. Depreciation, under most circumstances, allows you to reduce your tax bill. Check with your accountant to see if your current salary and nonsalaried income levels allow you to qualify for income offsetting depreciation under the latest tax laws.

Another reason to personally own assets is to protect them from seizure should the corporation get into trouble. Also, if the personally owned asset is real estate, for instance, you will personally realize the profits from any appreciation in value. Remember, though, if you own the assets, you are in a personally liable position.

Leasing assets to your own corporation is one way to get money, other than salary, out of the corporation. There are special tax rules, however, that prevent you from using leasing as a method to avoid the “passive loss rules” in the tax code.

?Is it easier to dissolve a partnership or a corporation?

Legally, it is easier to dissolve a partnership. Remember, a partnership is merely an agreement between two or more people. A corporation, however, is a distinct legal entity. Dissolving it will take a fair amount of time and expense.

The biggest hurdle in dissolving a partnership is arriving at an agreement with the other partner or partners regarding distribution of assets and liabilities and who, if anyone, will continue to run the business.

If you see your business as having a limited life with low risk you should run it as a sole proprietorship. If you are short on funds, try borrowing from friends before forming a partnership.