
Notes on Shutting Down an S-Corp - zrail
https://www.petekeen.net/shutting-down-an-scorp
======
ChuckMcM
This is a good checklist, but I have observed that corporations with a
"history" have value on their own. It is perhaps less well known than other
parts of the equation, but when I created my first LLC it was a pain because
as a "new" entity it had no credit history, no existence history, and every
time it raised a bunch of flags with every new vendor. Once it had been around
for a few years it was fine. When it came time to dissolve it I had a choice
of just dissolving it, or selling it to a agent (typically a lawyer) after
detaching myself from it. In the latter case that is the standard public
notice of sale and disclaimer of association past the sale date between me and
the company.

When starting an LLC it can be advantageous to start with one that is 'on the
shelf' as it were because it avoids the this is all new company
unpleasantness. Most agents have a number of ambiguously named LLCs available
for people who want to assign a holding company for trusts etc.

Given that California charges you $850/year just to exist as an LLC it isn't
profitable to create and hold such companies just to sell, but when it is time
to sell there is some value there sometimes.

~~~
mseebach
I've heard of this in the context of shortcutting regulatory stuff - if you
want a banking license, find a small bank in some backwater and "merge" with
them, if you want to list on a stock exchange, find a small, cheap listed
company and do the same. You obviously need to maintain the regulatory
compliance framework, but in many cases, this is cheaper and simpler than
getting a license or listing on an exchange from scratch.

Anyway, it surprises me that someone who cares enough to be suspicious of a
newly formed LLC doesn't care enough to check that a given LLC is an empty
shell that changed ownership very recently. If anything, you'd think that to
be _more_ suspicious, wouldn't you?

~~~
godzillabrennus
In Wyoming you can pay a nominee manager to open a company for you in their
name. They let you pay on crypto.

It’s a crazy world.

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amingilani
Thank you for this. I'd also _love_ to see something similar for a DE C-corp
since that's the preferred incorporation method for startups... then again,
that might be very case specific if you have investors.

~~~
zrail
Very case specific, yeah. The general process is the same after you get to the
resolution part, I imagine, but distributing assets might end up being
trickier

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gk1
Appreciate you sharing this, and glad to see it's for a good reason.

For anyone considering forming an LLC S-Corp for their consulting/freelance
business, don't let this scare or deter you.

I've been running mine for over five years (I'm a consultant) and it's been
mostly painless. I use Freshbooks for accounting and Gusto for payroll, so
there's actually very little overhead day-to-day.

The key thing for me was to find a great accountant. I went through two
accountants before finding someone who's right for me. That has made a huge
difference in how much I worry (or don't) about that part of the business.

~~~
mseebach
Can you possibly share a bit about what makes an accountant right or wrong for
you, please?

~~~
patio11
Some experiences with this in my personal capacity:

You want someone who has a working style which is compatible with your working
style. There are a surprising number of accountants who cannot reliably
receive a folder that has been Dropboxed to them. Some of them are good
accountants... for other people. If you are e.g. an email person, you do not
want a phone person accountant. You want an accountant where neither of you
are annoyed with the other's expectations with regards to timeliness of
replies to emails.

You want someone who is capable of understanding the fundamental nature of
your business. They don't have to be able to _operate_ the business, but they
need to _deeply_ grok the mechanics of the business, because accounting is a
facts-intensive profession and they need to understand your facts to apply
GAAP and IRS procedure (etc) to them. You can be a great small business
accountant without knowing what the difference between SaaS, Github
Enterprise, and Microsoft Word is; you cannot be a great accountant for a
software company without being able to understand the differences in those
three products.

You want someone who is generally good at accounting. Like any other
profession, there is a competence curve. Don't hire the people at the left end
of the competence curve. You want someone who is good at _being a
professional_ , partly because that will make interfacing with them easier and
partially because a portion of the services of an accountant is to suit up
occasionally and say "I am _an accountant_." to third parties. You want
someone who can cause the appropriate reaction there. (Most commonly tax
agencies, but there are a _variety_ of potential counterparties, for example
e.g. mortgage lenders, prospective landlords, immigration agencies if that is
relevant to you, business counterparties, etc.)

Some of y'all might have interesting situations, and very interesting
situations often counsel having a specialist. A particular interesting
situation which I have in my life is that I'm an American who lives in Japan;
that fact _substantially complicates_ accounting for my businesses or personal
life, both with regards to tax preparation and with regards to just giving
good financial advice, and I get _far_ better results working with people who
specialize in international clients than I get with (presumably) skilled
accountants who are willing to work with international clients but don't wake
up and breathe the US Japan Social Security Totalization Agreement.

More relevantly to HNers, I think that you probably have special circumstances
if: you do a material amount of investing in things that your average dentist
does not, you own a material amount of equity, the character of your life is
intrinsically international, etc. (Running a business is its own flavor of
complication.)

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sheeshkebab
Isn’t an s corp a passthrough? Why all the complexity with w2 (if he is
alone)...

~~~
zrail
(Author here) S corps have to pay the owners a reasonable salary on W-2. The
benefit is being able to determine how much SE tax you pay.

~~~
tptacek
It's pretty fucked up that people do this, and if running this particular tax
dodge complicates people's lives, God bless the bureaucracy. You should not
get to underpay payroll taxes, roping off a big chunk of your income as
"profit sharing", simply because you happen to own an S-Corp. I've heard this
is a big audit flag, but even if it wasn't, I think doing it is pretty close
to immoral.

~~~
zrail
First, there are no morals involved in taxes. I don’t make the tax laws and I
have no responsibility to pay more tax than I owe. If Congress wanted to close
this then they would. I believe it was a plank of Hillary’s campaign.

Second, there’s a very narrow window where it actually makes sense. Above
$128k of salary you don’t pay Social Security tax at all, just Medicare.
“Underpaying” social security reduces your future annuity, so it’s not like
this is a panacea.

Third, paying yourself zero salary and taking profit sharing distributions is
indeed a massive audit risk. I’ve never done that and don’t ever plan on it
(see: article title).

~~~
tptacek
Right: that narrow window is what makes it so crazy-making. Virtually
everybody who employs this dodge is comparatively privileged. Most people
don't get to opt a big chunk of their income out of Medicare/Social Security
taxes; why should tech company operators?

We're an LLC filing as S-Corp, for what it's worth. I just don't play this
particular game.

~~~
zrail
I am all for Congress removing this as a benefit of S corps and simultaneously
removing or significantly lifting the Social Security wage cap. That’s a thing
I would vote for. Until it happens, though, people are going to continue doing
this. Congress removed a similar dodge for C corps almost 80 years ago, so it
can certainly be done.

S corps aren’t just used by consultants, FWIW. The structure makes a lot of
sense for companies with lots of profit and more than owner employees, where
the owners can justifiably claim they don’t generate all the profit from their
personal services.

~~~
tptacek
The whole idea of "profit not generated from personal services" that are
exempt from Medicare taxes is what's problematic. If you own a company and
make six figures in income from it, you should be paying taxes on it as
regular income. Medicare and Social Security _already have_ a break for high-
income earners --- the income limit you previously mentioned.

I don't know that we really disagree about any of this; I'm just ranting. It
upsets me that people think this is legitimate and exploit it, or that "Mr.
Money Mustache" would promote it.

~~~
zrail
Medicare doesn’t have the same income limit. In fact, Medicare has an
additional bracket above $250k earned income.

We agree that it’s not a great legal outcome. I just don’t see it as something
worth getting outraged about. The number of people truly exploiting this
system is very small, and the ones that are egregious get caught.

