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Dear Prashant,
Congratulations on your new business. Let's put the ownership of your
company in proper perspective. The term "partner" usually refers to a
co-owner in a partnership. But you indicated that you set up your business
as an S corp. An S corp by any other name is still a corporation, and the
owners of a corporation are called shareholders.
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A shareholder of an S corp receives payment in the form of a distribution
of profits in proportion to the shareholder's percentage of ownership in the
company. Shareholders generally do not receive salaries, unless they are
also employees of the corporation. So if, by "partner", you mean that your
wife is simply a shareholder in the corporation and not an employee, she
would take a distribution of profits but not a salary.
It is important to note that an officer of a corporation who performs
services on behalf of the corporation is automatically considered by the
Internal Revenue Service to be an employee. Therefore, if you are an officer
of the corporation and perform services, you are an employee and must be
paid a "reasonable" salary as discussed below.
Profits taken out of an S corp in the form of a salary are subject to
employment taxes, but shareholder distributions are not. This presents an
opportunity to save potentially thousands of dollars in employment taxes
with an S corp. With this in mind, one might be tempted to take a
ridiculously small salary and withdraw the remaining profits as a large
distribution purely to maximize the employment tax savings--resist this
temptation! This is a red flag for the IRS. With the small salary/large
distribution approach, you run the risk of being audited, having your
distributions reclassified as salary by the IRS and being subject to back
employment taxes, penalties and late fees.
Instead, the IRS expects you to take a "reasonable" salary for the work
that you do. "Reasonable" is a rather subjective term, but generally you can
research the going salaries in your area for similar positions in your field
to come up with an appropriate salary for yourself.
Best of luck!
Chrissie Mould
About the PowerHomeBiz.com Guide:
 Chrissie
Mould has over a decade of experience in business administration and
startup business consulting. She has helped launch companies in multiple
industries and has managed corporate administration and governance for
public and private companies. She is an incorporation specialist with
MyNewVenture.com LLC. The company provides low-cost incorporation services
to entrepreneurs and small businesses. Visit
www.MyNewVenture.com to form
a corporation or LLC.
The opinions expressed in this column are those of the
author, not of PowerHomeBiz.com. Users should not treat the Guide's response as
legal, accounting, or professional advice as all answers are intended to be
general in nature. Such advice can only be properly given by qualified
professionals who are fully aware of a user's specific geographical areas or
circumstances, such as an attorney or accountant.
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