I am purchasing an existing business in PA and will set it up as an S Corp to save on my salary’s payroll taxes. There are 2 silent investors besides myself and we are investing a total of 340k: I (shareholder 1) am investing 90k for 87.5% equity, shareholder 2 investing 200k for 10% equity, shareholder 3 investing 50k for 2.5% equity. I need help on a few things: - What is the accounting entry on the books? (Considering my equity is higher as a percentage of capital contributed) - Do we need to issue shares, or can we just have K1s issued with the appropriate equity percentages? - We can’t distribute to shareholders disproportionately, has to be pro rata, which we are going to do. So is there anything besides thay to be sure we do or don’t do so we don’t ever accidentally trigger a change in equity or basis or C Corp?
S Corp setup
Answers
I think you should review with somebody who has professional competency in corporate matters whether the S-corp is the ideal legal entity for you.
Silent Investors:
S-Corp allows you to issue shares that have voting rights and shares that have none or clearly restricted voting rights.
The % of the common stock versus ownership must be identical to the % of the $ value of the nominal shares.
Why legal entity:
Payroll tax is actually a secondary concern. Gained legal protection under the umbrella of a legal entity reduces your liability risk to the amount of money you have invested in the S-Corp, provided that you are running the company in line with the legal requirements. Intermingling your personal cash with the cash of the company could lead to a loss of this protection. (piercing the corporate veil)
If you are actively involved in the S-Corp, you will need to draw a "reasonable salary" W2 and the company will pay the employer contribution to Social Security deductions.
Paid-in capital
There is a difference between the nominal share price and paid- in the share price. This gives you the option to allocate the differences between the % of the ownership versus the money invested. Or you can use the alternative to pay in the funds as shareholder loans.
As said before, legal advice would be recommended.