Q:

Subject: C corporations

 

Kelly

 

I read your artical on the tax benefits of having a C corporation Versus an corporation. My son set up an S corp. about three years ago herein California. He paid a lot of money to set it up with a lawyer. We knew nothing about the difference between the two and less about the tax ramifications. I would like to know if we can still change to a C corporation? what would need to do? 

 

He set up the business as an entertainment business ( record label and other types of entertainment), can he change this to some other type of business? Thank you

A:

The attorney should have explained the tax implications to the S corp election before it was done, or at least advised your son to seek advice from a tax pro if s/he wasn't knowledgeable on the points I cover in my article, as is the case for many attorneys.

Your son should consult with a professional tax advisor ASAP as to the best setup for his unique situation.  The S corp may be a fine arrangement, or a C corp may be better.  As I mentioned in my article, converting an S corp to C doesn't give you as much flexibility as starting up a new C corp, especially in the area of the fiscal year.  A new C corp can select any month end; while a converted S corp is required to stick with the December 31 year end. 

There may also be a good case for leaving the S corp as is and also having a C corp.  Too many people think everything has to be operated through one entity, when there are in fact many benefits to having multiple different kinds of entities.  There is obviously more bookkeeping involved, but the benefits often outweigh those extra costs.  An experienced tax pro can help decide which structure or structures makes the most sense.

Once a corp is established, it is not required to limit itself to its original type of business.  It can operate any kind of legal business enterprise.  That is another common misconception, that each type of business has to have its own separate corp.  The reporting for each type of business may be handled a little differently; but they can all be run through one corporation, if that makes the most sense.  Using QuickBooks with a Class for each type of business makes keeping track of these an easy task.  An experienced tax pro can assist with this.

I hope this helps.  Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/30/2006 08:45:00 PM Send this post: