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S Corporation & Dividend Growth Investing
#1
Hi!

I'm new to this forum, but I see a lot of familiar names from the dgi blogging world. I'm looking forward to continued participation and thanks in advance for any discussion on my situation:

I'm a freelance editor and producer in the television industry and one of my colleagues mentioned he started his own S Corporation. Now, instead of paychecks made out to him, they're made out to his corporation and he pays himself an annual salary and special dividends from the s corp, potentially saving a lot of money in taxes. He's not really a saver or investor, couldn't grasp my questions, and doesn't seem to use the S Corporation to its full abilities. But it got me thinking a lot about incorporating myself. I'm not certain, but I believe one can own individual stocks and bonds and treat the s corp basically as a holding company. My intention would be to build my dividend growth portfolio inside of the s corp from this point on for the rest of my life.

I'm not sure if this is a good idea or if other people do this. Does anyone have any experience or advice in this area? I've been searching a lot online, but haven't quite found the answers I'm looking for about using an S Corp as my main investment portfolio. I'll likely seek counsel from a financial advisor, but wanted to avoid paying them if I'm missing something obvious or if it's a bad idea. I'd love to hear any thoughts, and thanks for reading!
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#2
In my opinion, I would march right over to an Enrolled Agent or CPA's office and discuss this.

S-Corps are treated as non-taxable corporations with all profits/losses a passed through to the shareholder(s). So you have to pay yourself a salary and excess profits can be distributed as shareholder distributions on a K-1. If the IRS doesn't agree that the salary you pay yourself is reasonable for the work you do, then they can reclassify distributions as income subject to FICA & unemployement taxes in addition to the usual stuff.

I don't know what the status would be of sheltering your personal stock investments in an S-Corp. but I assume it would be the same as if you held them in a personal taxable account. If the main line of business of the S-Corp is investments, then I think you would fall under much more onerous regulation and reporting requirements to the SEC.

I can see the benefits of an S-Corp (or LLC) for the freelance production business just as a liability shield but to act as a tax dodge you're creeping into shaky ground. Pay for good professional advice.

P.S. Neither H&R Block nor Jackson-Hewitt is a good place to start searching for help on this.

P.S.S. Welcome to the forum! I was gonna invite you to introduce yourself in the Introductions section but I guess people could wander over to your blog and check out the advertising while they're at it.
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“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan


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#3
Once you decide what to do I would like to hear about your findings and if you conclude that this is a good approach with the benefits/obligations attached please Smile

PS
I love your blog, been a follower for a while now.
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#4
Back when I had my own business my accountant showed me the savings for taxes as an S corp and regular, the savings were large enough to get me to do the S corp.

Not sure how it would turn for the stocks but the S corp yearly fees were around $800 per year (at that time).

Even if you dont do the investment deal the S corp is a great savings.

As DW said, I would see someone right away about this, maybe I should have saved My S corp.

I believe 800peace is an (or was) a CPA, he should know these answers.

Jim
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#5
These were all great responses, thank you for taking the time Smile

@Dividend Watcher: Thanks for the info. It'd be interesting to see how long it'd take for the investment portion of the s-corp to earn more than my work income. An s-corp might be good for bloggers too, so I'm excited to learn more and share my results.

@daat99: It might take a some time, but I will definitely report my findings. Might be a great resource for certain people in the dgi community. Thank you for reading the blog, I'm honored!

@Jimbo: Your comment really reassured me about going to see someone. Sounds like a win with or without the investments. I appreciate you sharing!

Best,
Ryan
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#6
The benefit of the S-Corp is limited legal liability and should really only be seen as that. Of course, it is an advantage over a C-Corp taxwise... In a C-Corp, the company is taxed on the earnings, and the shareholders are taxed again when the dividend is paid. An S-Corp skips a layer of taxation and the owners are taxed the same as a sole proprietorship. The catch however, is that S-Corps have several regulations that effectively make them used only by small business, which is why everybody isn't doing it.

Back to the bottom line... You won't escape taxes by incorporating. If you need limited legal liability to protect yourself, you must incorporate, and should choose an S-Corp or LLC if you can. However incorporating ONLY for a perceived tax benefit will quickly end in pain.

My suggestion for lowering your investment taxes would be to use a tax preference account such as a 401k, Roth IRA, etc... Another way to lower your tax bill is to implement low turnover portfolio management strategy. Lastly, sell a losing position... Although in legal form you cannot offset dividends with capital losses, in economic substance, you can take your losses against your ordinary income and effectively reduce your bill. If I say anymore, I'll have to bill someone... LOL!

OK, here's the final nail in the coffin. The "S" election is terminated involuntarily if the corporation has passive income, (eg interest and dividends) in excess of 25% of gross receipts for a period of three consecutive years.
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#7
Also, if you have a S-Corp and you have significant profit you have to pay yourself a salary (W-2).
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#8
I usually see people incorporating when they are doing rental properties. Usually the idea is to limit your liability and have a larger range of expenses you can write off. I am not sure how this would apply to the dgi world?
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