Legal Question in Tax Law in Texas

Re: Internet business as an S Corporation

The short answer is: it depends. First, you are probably aware that Texas corporations are subject to the Texas franchise tax (4%) if the business generates a lot of revenues; whereas, other entities are not.

Second, as far as federal income taxes are concerned, the answer depends on what you expect the business to bring in and what you want to take out of the business.

One benefit of S corps is that you can pay yourself a reasonable salary and then pull the excess income out as a dividend, which either a non-taxable return of basis or taxable income that is taxed the lower capital (not ordinary) tax rates. This also allows you to pull the funds out without having to pay the 15.3% FICA and other taxes. So if you want to take a lot out of the business then you might want to consider an S corp. You can also do this with a C corp but not a partnership; however, the other items of income will not flow through to your tax return (as discussed below).

On the other hand, if the business will not generate that much income or if you do not plan on taking that much out (i.e., you are trying to grow the business) then the S corp might not be the best choice.

Another consideration is employee benefits. This topic is way too complex to list here, but suffice it to say that S corps offer several advantages and disadvantages with regard to employee benefits.

In addition, you will want to consider your personal situation. Do you want the items of income flowing through to your (and the other owners�) tax return? Would they be taxed a lower rates given your personal circumstances or would they end up being taxed at higher rates (what if you made special allocations under a partnership agreement)?

Another consideration is having a trademark subsidiary to avoid Texas property taxes, if you carry intangibles on your books.

Yet another issue is whether the S corp fits in with your estate plans.

I am a licensed attorney in Texas and I help individuals and business address these questions. I suggest you call my office to schedule a time to talk about your personal situation.

The typical disclaimer: nothing in this post is to be construed to be legal or tax advice. It is imperative that you speak to your tax and legal advisors about your personal facts and circumstances.

Sincerely,

Kreig Mitchell, Esq.

Ph. 800-719-6088

Re: Internet business as an S Corporation

Mr. Mitchell has already provided an excellent response to your question. As he has indicated, there is no "one size fits all" answer.

One of the first questions you need to ask is whether you need the legal protection of an entity such as a corporation or limited liability company (LLC) at this stage of your business. For example, a business that produces and sells cosmetics could be vulnerable to lawsuits by people who claim to have been harmed by the product; whereas a business that sells email birthday greetings would be less vulnerable. Doing business as a separate legal entity always complicates things -- you need a separate bank account for the business, for example, and for any entity other than a single-member LLC, you'll have to file a separate tax return for the entity.

If you are in the San Antonio or Austin area, I would be happy to meet with you and discuss your alternatives. There is no charge for an initial 30 minute consultation.

You can reach me by phone at 210-223-9389 (San Antonio) or 512-470-8225 (Austin)

Legal stuff: The above comments are general in nature and may not apply to your specific circumstances. I have no way of knowing your specific circumstances and have not been retained by you as your attorney or CPA until you and I have entered into a written agreement for me to provide legal or accounting services to you.

Barbara Lamar MBA, CPA, Attorney

2600 McCullough Avenue

San Antonio, TX 78212

210.223.9389

9600 Great Hills Trail Suite 150W

Austin, TX 78759

512.470.8225

866-202-6409 (Toll Free)