Response to a discussion post with references:
Amy, Bob, and Carol want to discuss forming an S corporation instead of a partnership to operate a marina in Florida. They wish to have equal ownership in the business entity. Amy can contribute $400,000, and she is a boat mechanic. Bob has management expertise in running a marina, and he has five acres on the Intracoastal Waterway that he can contribute. Carol has experience running an office, and she has $300,000 in cash and office furniture and equipment worth $50,000. The three partners in this endeavor are interested in providing health insurance, life insurance, and dental insurance for each owner.
In your report, explain whether there are any tax advantages of having the business provide employee benefits for owners as well as other employees. What are some options that should be considered to fairly compensate each of the owners for what they are contributing and for the work they will do running the business.
Because Amy, Bob, and Carol have all indicated a desire for equal ownership in the company, it has been decided that each of them would possess a stake that is equal to 33 percent. If a shareholder’s ownership stake in a S corporation is larger than 2%, then the business is eligible to receive a tax deduction for the benefits paid to each shareholder-employee.
In exchange for the services that a shareholder-employee contributes to the S corporation, the S corporation is obligated to give the shareholder-employee with a reasonable amount of compensation (Clingan,2020). A reasonable salary should be determined based on an evaluation of the contributions made by each stakeholder in terms of both their time and their financial backing of the company’s infrastructure. In addition to this, they will have to take into account aspects such as the individual’s education, work experience, responsibilities, amount of time spent on the job, level of loyalty to the organization, etc. Carol is skilled in office work, while Bob is knowledgeable in administration and Amy is a boat mechanic. Amy also knows her way around an office. There are pros and downsides to operating as either a S corporation or a partnership. The taxation, liability, and running of the marina will all be affected by the company structure chosen. With a S corporation, business revenue is passed through to the owners’ individual tax returns, where it may be eligible for certain deductions and avoid double taxation. Partnerships, on the other hand, allow for more leeway in terms of management and profit/loss distribution, but offer no limited liability protection.
Consider the legal, financial, and practical ramifications before deciding between a S company and a partnership structure. There are tax benefits associated with both strategies for rewarding employees. Partners can be fairly compensated for their efforts and investments through a mix of capital contributions, profit sharing, role-based compensation, and long-term incentives. Amy, Bob, and Carol should seek the advice of legal and financial experts to help them establish an acceptable business structure and devise a pay plan that fits in with their objectives.
References:
Clingan, D. (2020, January 6). S Corporation Shareholder Salaries and Benefits | (360) 695-0515. Clingan Accounting & Tax Services. https://deeclingancpa.com/business-taxes/s-corporation-shareholder-salaries-and-benefits
Providing fringe benefits to S corporation employees. (2011b, December 1). The Tax Adviser. https://www.thetaxadviser.com/issues/2011/dec/case-study-dec11.html
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