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Of Business Formats and Tax Consequences

By Victoria Rosendahl

www.3chix.com

www.rosendahlwrites.com

Hi All:

Well, at this writing we're 2 months into the New Year and things are already moving and shaking. Projects that were on hold are moving along again, new opportunities come forward, and even new methods sometimes die hard.

And that's the subject of this month's missive: the experience I've had in forming and dissolving a corporation and how it impacts my writing business. Now, many of you know I'm a retired attorney, BUT…

The "but" is that I was never a tax attorney and hearing about taxation is like speaking Mandarin Chinese to me. Hearing about my own tax problems, well, just put a gun to my head.There are those out there who don't mind messing with the IRS. I'm not one of them. There are those who would laugh in the face of this current crisis and never lose a second of sleep.I'm the one who gets caught if I fail to report a dime. It just happens that way. So, sit back and relax and listen to the story of a sole proprietor who started a corporation and then folded it.

The Decision

Back in late 2005 I was investigating the possibility of putting all of my husband's -- as well as mine -- pursuits under one umbrella. He's a musician who teaches, sells organs to churches, and composes sacred music. Forming a company seemed like the right thing to do. I talked with several folks who had formed Subchapter S corporations and it seemed to work well for them. Tax advantages were, I thought, not having to pay the employer's portion of the self-employment tax as well as having a liability shield in case I got sued as a writer for anything.

I spoke with my then-accountant (let's call this one Accountant #1) who agreed it would be a good vehicle. She offered to set it up and that seemed reasonable to me. We set it up and the corporation was born.

A year and a half later it puked and died and nasty death.

The Discovery

Many in my small town have used Accountant #1. For reasons that are probably way too New Age to explain -- karma, intuition, that sort of thing -- I decided to consult Accountant #2. I found out that a Subchapter S is NOT a good vehicle for me and that I had failed to do some pretty important things along the way last year. When I had asked Accountant #1 what I needed to do differently in terms of paying estimated taxes and setting up Social Security accounts for the corporation, Accountant #1 said, "Just handle it the way you've done it in the past."

Ok. Boo-boo number 1. As a sole proprietor, I made my quarterly estimate filings on time. I have a dedicated account that has nothing but tax money in it from various projects so I know I have the money when the tax bill is due. I take it right off the top and segregate it from my personal money. That's Tip#1 if you don't already do it that way.

It isn't that I distrust myself when it comes to spending -- quite the opposite is true. It has been said about me that I can be so tight with money that if you put a lump of coal up my butt, in two weeks you'd have a diamond. :-)

The problem is that I often feel klutzy with money. I'm from a financial family -- my Dad was head of the Trust Department at a bank, my older brother John is an investment advisor and my next older brother Ross is a financial whiz. The guy watches the CNN stock market report for grins and giggles.

Me? Next to them I'm a financial dud.

As corporation President, I should have been paying myself a salary, should have set up Social Security accounts, should've paid the 12.5% employer's portion of the self-employment tax. It was much more paperwork than I realized and, yes, I bear some burden in this mess. Error #2. Which is why I'm telling you about it. I don't want you to step in the same landmines I have.

The Hemorrhage

Yes, as you can probably tell from the subhead, it doesn't get better. Accountant #2 told me and my husband that we'll likely owe anywhere from $6,000-$7,000 in tax, penalty and interest for last year. I was nauseous.

Course we could also turn a blind eye and hope we don't get caught. And if we do, that'll be $50,000 smackers Mrs. Rosendahl. How would you like to pay for that? Debit or credit card? There's no way we would ignore this. You don't mess with the Feds and come out unscathed. At least I don't.

The Advice

Accountant #2 advised that we dissolve the corporation, I go back to being a sole proprietor, and we close the checking account. I have done that. Now I get to change all the little things I had flowing into and out of that account -- auto debits, affiliate checks, paychecks -- crap, it's like losing your wallet.

Now I find out that Accountant #1 tucked my state corporate return in under some documents and I never saw it -- you got it! Another late penalty. See, Accountant #1 e-filed everything ... including the Federal corporate return ... but the Virginia state return had to be mailed.

This will all be fixed, I promise you. It's just going to take some time but it'll all work out and will turn into a snidely funny story at the next Thanksgiving table. "Remember the time Vic formed a corporation and got burned? Wah-ha-ha!"

The moral, boys and girls, is sometimes it's better to stay the course as a lone sole proprietor than try to be a company. If you decide to go the Subchapter S route, keep my experience in the back of your head and ask TONS of questions.

There are other forms you can use like an LLC or a partnership. Investigate thoroughly. And I promise to update you to let you know how it all comes out. Accountant #2 said he'd give me good news.

On April 1.