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S Corporation Taxes

Tax Strategy for S and C Corporations

Many intelligent people who form S corporations eventually ask the question, "Can I pay out all my earnings as dividends and avoid paying myself a wage to avoid employment taxes?" The answer is "No." The IRS expects you to pay yourself a reasonable wage. However, once you've paid yourself a reasonable wage, paying out any extra profits as S corporation dividends tends to save tax dollars. Many start-up companies aren't profitable right away. Just as income from an S corp flows through to the individual shareholders, so do any business losses. Such loses can offset other sources of income to reduce your personal income taxes.

For many small businesses with limited profitability, having a C corporation isn't a big disadvantage. If all you can pay yourself is a reasonable wage, the wage is deductible as a business expense to the C corporation and the C corp will not need to pay dividends. The wage will be taxed to you as personal income once (and, employment taxes apply in both the C corp and S corp case). However, just as the IRS frowns upon those who pay skimpy wages from an S corporation while paying huge dividends, the IRS doesn't like seeing extremely large wages paid from a C corporation as a way of withdrawing money. The IRS feels excessive wages are dividends in disguise.

Fictitious Business Name Certificates

If you do business under any name other than your full legal name, as a sole proprietor, you're usually required by state government to file a certificate of assumed (or fictitious) business name. The rule is similar for corporations, who are their own separate legal entity. Whenever a corporation does business under any name other than its full legal name of the corporation, it's usually required to file the assumed name certificate.

So, if you do business as (D.B.A. is another name for fictitious or assumed business name) "The Teaching Store, Inc." (your full corporate name, I assume), you probably won't need to file a D.B.A. certificate. If, however, you do business as "The Educational Place," you'll need to file a D.B.A. certificate. If the corporation is using its full legal name to do business, patrons and the government can identify the true business owner without the D.B.A. filing. But once you're doing business under any other name, it's important to publicly identify which person or corporation is the true owner. In any case, filing a D.B.A. doesn't hurt and is relatively inexpensive. And, I feel, it helps lay claim to your assumed name in the event that someone else starts trying to do business under the name, "The Teaching Store." (Incidentally, I love the name, "The Teaching Store." That's a good example of an effective business name.)

You can learn more about the filing procedure and related requirements from your own state government. Usually, the Secretary of State Office's Corporation Divisions (or its equivalent) handles all business name registrations and filings.

Small Business Resources

For more information on these issues, you might find these resources useful

Finally, please realize I'm not an accountant, an attorney, nor a tax expert, and I'm not rendering legal or tax advice. These are important issues to your S corp business. So when in doubt, contact a competent tax attorney; however, I hope this helped you with your questions.

Peter Hupalo, author of Thinking Like An Entrepreneur

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About the Expert

Peter Hupalo
Owner of HCM Publishing, Inc.
Peter investigates the latest computer-programming technologies and researches companies for investment. He also writes a column about entrepreneurship and small business for and reviews biz books. Peter wrote Thinking Like An Entrepreneur, about how to make savvy business decisions and take real control of your financial destiny. more