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What Is Medicaid Estate Recovery?

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medicaid-approval

If you have a loved one that receives Medicaid or if you have a loved one who needs special care, how you structure their finances is critical to ensuring that your loved one receives of the resources available to them. In some cases, the state may try to recoup the cost of Medicaid benefits from a beneficiary’s estate. Fortunately, how you structure your loved one’s finances can protect them and protect your entire family. Here’s what you need to know about Medicaid Estate Recovery: 

What is Medicaid Estate Recovery?

Medicaid estate recovery is a process that the state can use in order to seize assets from the estate of a Medicaid recipient. When a person receives Medicaid, the state may try to recoup the costs of their care from the person’s estate. When a qualifying Medicaid recipient passes away, the state may look to the items in their estate in order to provide reimbursement for Medicaid payments made during the person’s lifetime. 

Why does Medicaid Estate Recovery matter if a loved one receives Medicaid?

If you have a loved one who receives Medicaid benefits, Medicaid Estate Recovery matters because it may impact your loved one’s estate distribution. When the Medicaid recipient has an estate, the process of Medicaid Estate Recovery may prevent them from leaving the estate to their heirs. Estate planning is critically important for all Medicaid recipients in order to structure the estate both to receive Medicaid benefits and leave their estate to their heirs. 

How does Medicaid Estate Recovery work?

Medicaid Estate Recovery works by looking at the Medicaid recipient’s estate after they pass away. If a person has items in their estate like real property, bank accounts or even personal property, state agents may try to seize those assets from the person’s estate. The process may stop heirs of the Medicaid recipient from receiving a distribution from the recipient’s estate. 

What types of assets are subject to seizure in Medicaid Estate Recovery?

Medicaid Estate Recovery may apply to any items in a person’s estate including: 

  • Real property, including the recipient’s home
  • Vehicles, including primary vehicles, motorcycles or recreational vehicles
  • Home furnishings like furniture and electronics
  • Personal items of value
  • Annuities
  • Bank accounts
  • Cash
  • Investments

Any asset may be subject to seizure. However, there may be exceptions and ways to structure resources in order to prevent Medicaid agents from attempting to seize the assets. 

When does Medicaid Estate Recovery apply?

There are two circumstances where Medicaid Estate Recovery applies. First, when a Medicaid recipient is over age 55, the estate recovery process applies.

Second, anyone who is permanently institutionalized who gets Medicaid at any age is subject to the recovery program. Because Medicaid is a program for lower-income and disabled people, there are many people who do not leave assets that are subject to seizure. However, special needs Medicaid recipients may structure their resources in a way that both allows them to receive Medicaid and protect their resources.

Protecting the family home from Medicaid Estate Recovery

For surviving family members, Medicaid Estate Recovery may create doubt surrounding the family home. If there is a spouse or child living in the home, it’s important to protect the home from seizure. You can work with your Medicaid planning attorney in order to structure your finances in a way that prevents seizure. For example, it may make sense for a trust to hold title to the home, or it may make more sense to have a family member hold title to the home. 

There are some exceptions in the home seizure laws for family members. Although a home falls under estate recovery laws if it is owned as tenants by the entirety, you may be able to secure an exception if you are the surviving spouse and still living in the home. Children under 21 may also qualify for an exception. There is also a generic exception that covers situations creating an undue hardship. 

The best option is to carefully plan the estate of the loved one as soon as you realize that they need may special care. Estate planning is not just for the wealthy. In fact, it is especially important if you need to carefully manage limited resources. By carefully structuring your loved one’s assets, you can ensure that they qualify for Medicaid benefits and that their resources survive their estate for distribution to their heirs. The goal of estate planning is to restructure the Medicaid recipient’s assets so that they qualify for Medicaid and so that their assets are exempt from the seizure process. 

Where do Medicaid Estate Recovery laws come from?

Medicaid Estate Recovery laws come from both state and federal sources. The U.S. federal government requires each state to have a program for Medicaid Estate Recovery. However, the federal government leaves it up to each state to decide how to implement its program. The rules may vary by state, and a state may change its procedures for recovery over time. For example, North Carolina’s program is administered by the North Carolina Division of Medical Assistance. It’s critical to work with an experienced Medicaid planning attorney in your state in order to ensure that they apply the appropriate law when creating the best estate plan for your loved one.

How can an estate planning attorney help me?

An estate planning attorney can help you manage every aspect of your finances or a loved one’s finances. Estate planning can help you qualify for government programs for you or for your loved one without penalizing you for dutifully saving for the future. Structuring your finances through estate planning helps you keep the money that you save while allowing you to tap the government resources that you depend on for your loved one’s care. If you or a loved one receives Medicaid or has special needs, contact Wilson Ratledge today to talk about your case.

Why You Need A Business Succession Plan

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If you’re a small business owner, you may have had a conversation with a loved one about business succession planning. Your loved one asks you if you’ve thought about your plan for the business and business succession. You make a joke that you don’t plan on going anywhere any time soon. If you’re one of the many small business owners who has had this conversation, you’re not alone. 

There are lots of reasons that small business and family-owned business owners don’t like to talk about business succession planning. Maybe you think it’s too far off in the future. Maybe you’ve put your life’s work into your business and talking about succession is just too painful. There are lots of great reasons that you should have a business succession plan. Here are our top eight: 

1. Unexpected life events can happen at any age

Major life events can happen to you or a loved one at any age. No matter how much you plan for the future, you just never know what might happen tomorrow.

Creating a business succession plan can protect you if you or a loved one has a life event that leaves you unable to tend to your business. Succession planning before you need it puts you in the driver’s seat. You don’t have to worry about an event that leaves you unable to control your business’ destiny. Instead, you’re prepared for any possibility. 

2. Your business can continue smooth operation

When you have a business succession plan, you’re able to ensure that your business doesn’t have any hiccups during the transition. As part of your planning, you gather financial records, valuation data, inventory and even client lists. Even information for day-to-day operations can be critical to gather in order to keep your business running smoothly in the future.

For example, passwords, bank account information and even IT information can all be critical to prevent business disruptions in the future. Succession planning helps you think of all of these details as part of the planning process. 

3. Business succession planning ensures a fair transition on your terms

You can get a better deal as you exit your business if you have time to plan. With business succession planning, you can use buy-sell agreements to establish prices, purchase terms, the value of each share and even who can purchase an ownership interest in the business. It can take time to find a buyer willing to pay. Planning ahead gives you time to consider how much retirement income you need and what your goals are in retirement. 

4. You ensure the right people inherit your business

Your business is personal. It may be your life’s work. Pre-planning for business succession gives you time to step back and think about who you want to inherit your business. 

If you expect family members to take over, it’s important to start having those conversations now. You should speak with family members in depth about their commitment and their goals for the business. Your loved ones may have different interests and priorities. They may need the training to run the business successfully.

The sooner you have these tough conversations, the more time you have to ensure that the right person takes over and continues to make your business thrive. 

5. There’s time to make a deal

A successful business deal takes time to negotiate. Even if an option looks great, when you start to iron out the details, the deal can fall through. It may take several tries to get the right deal in place.

Business succession planning gives you time to try again if the first plan doesn’t work out. It gives you time to explore contingencies and make sure that you’re getting a fair deal and fair terms for your business. 

6. Due diligence can help you get a better deal

When you start to look at the details of your business, there may be things that potential buyers don’t find flattering. There might be changes to make, issues to address and things to put in order in order to make your business more attractive to potential buyers.

Starting your business succession plan now gives you time to make adjustments to ensure that you get every dollar that you need and deserve when it’s time for retirement. 

7. Planning can minimize tax burdens

Planning for business succession now can help you avoid surprising and burdensome taxes on down the road. A professional business and estate planning attorney can help you look at business succession planning as part of an overall estate planning strategy.

There are things that you can do now that can reduce your tax burden later on, as well as things that you can do that make the transition logistically easier when it’s time to transfer ownership of the business.

Thoughtful planning can make things so much easier on down the road. Qualified legal advice can help ensure that you look at all the important considerations in your planning. 

8. You have peace of mind that you’re leaving a legacy

Your business is your life’s work. You want to leave it in the right hands and look back on it with pride. Business succession planning at any stage gives you the peace of mind to know that your business is in good hands. In addition, succession planning helps the ones that depend on you also have the confidence to know that their future is in good hands. 

Business succession planning

Business succession planning doesn’t mean announcing a retirement date. Instead, it means taking steps to protect you and your loved ones as well as establishing an exit strategy that’s on your terms and for a fair price when the day comes.

Taking steps for business succession planning now can keep you in control and protect your family. Our experienced team can make business succession planning a key part of your overall retirement and estate planning strategy.

2019 Changes To Retirement Plan Contributions

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There are some key retirement plan contribution changes going into effect in 2019. While major tax reform went into effect last year, there are some changes that hit retirement contributions in 2019. Looking at the changes and making adjustments now can help you make the most of the coming year – most workers can save more across all income levels. Here’s what’s changing for 2019 401k contribution limits and other 2019 retirement contribution changes: 

How much can you put in a 401k in 2019?

You can put up to $19,000 in a 401k in 2019. That’s up from $500 from last year’s limits. While it’s only a slight increase, for workers who want to make the most of their retirement savings or get caught up, every little bit makes a difference. In addition, lower-income earners can claim a savings tax credit in addition to the tax deduction that everyone gets for contributing to a 401k. 

The contribution changes apply not only to 401ks, but also to 403b plans, many 457 plans and the Thrift Savings Plan for government workers. You can adjust your monthly contributions to add another $500, or you can make the additional contribution all at once. If you make the contributions monthly, it’s an extra $42 per month. 

401k catch-up contributions for older workers

While the contribution limits for general 401k contributions have gone up a little bit, the 401k catch-up limit has not changed. Employees 50 and older can contribute more to their 401k than the annual limit. The extra contribution is called a catch-up contribution, but it’s really just a higher limit for older workers. 

The 401k catch-up contribution in 2019 is $6,000. That means if you’re 50 or older, you can contribute an extra $6,000 to your 401k account. If you’re 50 or older, you can contribute a total of $25,000 to your 401k in 2019. 

What is the IRA contribution limit in 2019?

In addition to 401k contribution limit changes in 2019, there are also changes to IRA contribution limits. An IRA allows you to save for retirement on a tax-free or tax-deferred basis. Like the 401k contribution limit, the IRA limit is also inching up by $500 in 2019. It’s the first time the IRA contribution limit has gone up since 2013. There’s also an IRA catch-up contribution limit, but it’s unchanged for 2019 at $1,000. 

Income limits for retirement savings in 2019

In 2019, there are limits to IRA contributions based on your income. There are a few things to keep in mind when you’re sorting out whether the income limits apply to you. First, if you don’t get a 401k through your employer, you can contribute to the IRA no matter how much you earn. Even if you earn over the income limits, the limits don’t apply to you because you can’t do an employer-sponsored plan. Your filing status matters, too, so if you’re filing joint, you may have a higher income limit than if you file single. 

Even if you can’t deduct your IRA contributions from your income, there may be benefits to you of contributing to an IRA. Your contributions may still grow with tax-deferred status. You can still come out ahead even if you can’t take the tax deduction on your 2019 taxes. 

There are a lot of moving parts when it comes to determining whether you qualify to contribute to an IRA and whether you can take a 2019 tax deduction for your contribution. Your income and whether you have an employer-sponsored 401k are both factors that might change your IRA tax deductions. If you have an employer-sponsored 401k, you can still take tax deductions in 2019 for an IRA if you earn $74,000 or less as an individual. The joint income cut-off for IRA contributions in 2019 is $123,000. These limits represent a $1,000 and $2,000 increase from 2018. There are also phase-outs which start at $64,000 for a single and $103,000 for a couple. There are different phase-out limits that apply if one spouse can do a 401k through work and the other spouse can’t. 

2019 Roth IRA contribution income limits

In 2019, the income limits are going up for Roth IRA contributions. A Roth IRA is a special kind of IRA where you pay the taxes up front when you make the deposits. Later on, you get to withdraw your contributions tax-free. The income limit for Roth contributions goes up $2,000 for singles in 2019 and $4,000 for couples. 

The cut-off in 2019 is $203,000 for a married couple and $137,000 for a single. If you make over these amounts, you can’t contribute to a Roth at all. If you make $122,000 as a single or $193,000 as a couple, you can still contribute some to a Roth account, but there are phase-outs that apply to what you can contribute. Because withdraws in retirement aren’t taxed from a Roth account, a Roth can be a fantastic savings vehicle for people who qualify. 

Saver’s credits in 2019

In addition to other 2019 retirement contribution changes, there are also increases to saving tax credits for lower-income workers. Workers who earn $32,000 or less as individuals and $64,000 as married couples get an additional 10-50 percent deduction from their 2019 taxes for 401k and IRA contributions. The limit is up to a $2,000 credit for singles and $4,000 for couples. 

Retirement savers with the lowest incomes are eligible for the biggest tax credit which can be worth as much as $1,000 for individuals and $2,000 for couples. The saver’s credit can be claimed in addition to the tax deferral for saving in a traditional retirement account. The workers with the lowest incomes get to claim the highest percent deductions. 

Retirement contributions and estate planning in 2019

Addressing retirement contributions should be part of your estate planning in 2019. Estate planning is so much more than just drafting a will. As you plan for your future and for your loved ones, maximizing tax benefits and determining optimum retirement contributions is an important consideration. One of our experienced estate planning attorneys can help people of all income levels maximize their retirement benefits and overall estate planning strategy in 2019.

Preparing To Sell Your Business In 2019

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selling your business

A new year often brings change. If you’re a business owner, 2019 might mean selling your business. If you want to sell your business in 2019, there are things that you should do in order to protect your interests and go about it in the best possible way. Doing the right things can help you get top dollar for your business and make the sale as smooth as possible. Here are 10 things that you should know about preparing to sell your business in 2019:

1. Prepare the paperwork for your business sale

Smart buyers want to see the paperwork for your business. They rely on the paperwork when they first make the decision to explore buying the business. They also rely on your documents when they make the final decision to close the sale.

One of the first things that you should do when you decide to sell your business in 2019 is put your business paperwork in order. The sooner you get started, the more time you have to address any questions that might arise. Having your paperwork prepared and orderly is the first step to finding enthusiastic buyers and getting a great sale price.

This generally includes several years of statements for all your bank accounts, credit cards, copies of customer contracts, and more.

2. Learn how to value your business for the sale

To get a fair price, you need to know what your business is worth. Different types of businesses use different valuation methods. You need to learn about the various business valuation methods like profit, assets and cashflow. The more that you know about how to value your business, the better you can justify your asking price.

Also, research the different types of business sale (asset vs stock), know the differences and how they affect your valuation.

3. Perfect your sales pitch

You need to be prepared to market your business. It’s important to think through how you’re going to communicate to potential buyers that your business is a great investment. Even if your business is sound and a great opportunity, you still need to convince buyers that they should jump in with both feet. Use the start of 2019 to think through how you’re going to market your business to potential buyers and convince them to buy your company.

4. Pick your team

At least some of your employees are going to know about the possible sale of the business. You’re going to rely on them to help you prepare documents at the least. Think through who you want to know about the sale of the business and why.

Think through who’s best suited to help you work on selling the business. Remember that your employees may have strong opinions about you selling the business, and they may have lots of reasons to want a particular outcome. Decide who’s best to help you prepare documents and work towards your goals.

5. Prepare employees for your business sale

There are some important considerations for employees when you sell your business. The buyer may want them to have non-compete and non-disclosure agreements so that they can’t jump ship as soon as you sell. Your attorney can help you prepare the agreements that you need to make sure that your team can continue to help your business now and into the future.

6. Think through answers to tough questions

Your potential buyers are going to ask you difficult questions. Now is your chance to think through your answers. Preparing to sell your business in 2019 means thinking through how you’ll address unflattering points and weaknesses in your business.

7. Be prepared to open up about lawsuits

One of the things your potential buyers want to know about is outstanding litigation. They want to know if you’re suing anyone and if you’re being sued. A lawsuit isn’t necessarily a bad thing, but you’re going to need to explain what’s going on and what your position is in each matter.

8. Gather specifics about top clients and vendors

If your business depends on one client or a few top clients, you can expect extra scrutiny from potential buyers about the business relationship. They want to know that your relationship with your top client is solid. They want to know that your top client is still going to be there after you sell the business.

Be prepared to open up about the nature of your relationship with your top clients. Potential buyers are going to ask a lot of questions about the business you do with major clients and how secure your business relationships are with clients that are make-or-break for your business. Having this information ready to go for potential buyers can show that you’re knowledgeable about your client base and confident in your business relationships.

9. Be patient and wait for the right opportunity

The right buyer likely won’t come along in the first week of the new year. To do it right, it might take the entire all of 2019 to sell your business. Remember that selling your business is a marathon. Gathering the financials, finding the right buyer and preparing the perfect pitch all take time. If you’re in too much of a hurry to sell, you’re not going to get the sale price and terms that you deserve. While you wait, you can get your paperwork and other affairs in order.

Usually, the best time to sell your business is during the busy season. You should sell your business while you’re at a high point. Selling at a low point can mean not getting a fair price for your business. Be ready to wait for the right time to sell so that you’re in a good position to negotiate the right price.

10. Seek expert advice for your business sale

As you prepare to sell your business in 2019, expert advice from an experienced mergers & acquisitions attorney can be crucial to help you arrive at the right agreement. Wilson Ratledge can help you understand what you need to do in order to structure your paperwork in order to make a great showing. In addition, there are important legal agreements that should go into place even as you begin to negotiate the sale.

We can help you identify areas that you can work on in order to make your sale go smoothly, and can help you think through how you’re going to respond to points that might be unflattering. When it’s time to prepare preliminary documents, final documents or employee agreements, we’re ready to provide you with the expert advice that you deserve.

Selling your business in 2019

Selling your business can make 2019 an exciting year. Making sure that you’re prepared can help you command top dollar for the sale. It can help you avoid road bumps that may make the sale difficult. Ultimately, the right preparation can make your business sale the highlight of 2019.

8 Ways To Avoid Tax Surprises In 2019

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2018 tax changes

The U.S. government quietly overhauled the tax code with the Tax Cuts and Job Act. They passed the law in 2017, and big changes apply to taxes for the 2018 tax year, the 2019 tax year and beyond. The tax changes are big, and most taxpayers are going to notice when they begin to prepare their 2018 taxes.

What are the U.S. tax changes in 2018?

The 2018 U.S. tax changes increase the standard deduction. At the same time, the changes reduce the things that people can claim as itemized deductions. The net effect is going to be that fewer people itemize their deductions and just take the standardized deduction instead. There are changes to withholdings and changes to the percentage rates of certain tax brackets.

How do I prepare for the 2018 tax changes?

With a little bit of advance planning, you can be ready for the 2018 tax changes. You may not realize how big the tax changes are until you begin to work on your 2018 taxes. If you don’t make adjustments, you might be in for a good – or bad – surprise come tax time. Of course, with some planning, you can avoid tax surprises in 2019. Here are 8 ways to avoid tax surprises in 2019:

1. Review your withholdings for 2018

The best way to avoid a surprise tax bill in 2018 is to review your withholdings. Your withholdings are the amount that your employer keeps from your pay and sends directly to the IRS. If your taxes are going up with the proposed changes, you want to make sure that you adjust your tax withholdings so that you’re taking out enough from each paycheck.

Of course, whether you need to increase your withholdings or you can rest easy depends on an estimate of your overall tax liability. Even with changes that drastically reduce things that you can deduct, many people are going to pay less in taxes overall than they did before. On the other hand, if you’re on the losing end of the changes, you might have to write Uncle Sam a check. A mid-year review of your withholdings can prevent you from having April 15, 2019 come with financial setbacks.

2. Stay on top of standardized deductions

The old tax code had both standardized deductions and personalized exemptions. Standardized deductions are the amount that taxpayers can deduct from their income. Exemptions are an amount of income for each person that’s exempt from taxes.

Under the new tax code, standardized deductions are up, and personal exemptions are out. The new tax code increases the standardized deduction to $12,000 for one person and $24,000 for a couple filing jointly. That’s a big increase over the prior standardized deductions. At the same time, personal exemptions are completely eliminated for everyone.

Fewer people qualify to itemize their deductions under the new tax code. If you’re going to make the jump from itemized deductions to standardized deductions, it’s helpful to know ahead of time so that you can go about your business accordingly. It’s also important to know what expenses are no longer deductible from income.

3. Cap on state and local taxes

If you don’t look twice, you may get a big surprise when you find out that the new tax code caps state and local taxes at $10,000. For families who pay property taxes, they may quickly reach the ceiling. Before, property taxes may have just been seen as par for the course, but now, there’s even more incentive to fight your property tax assessment and lower that local tax bill.

4. Elimination of unreimbursed employee expenses

Most people put at least some of their own money into their work even if they’re an employee. If you’re a teacher, you buy supplies. If you’re an office manager, you might pick up a ream of paper in an emergency. Under the old tax code, employees could deduct unreimbursed business expenses. In the new code, that’s no longer the case. If you pay significant amounts of your own income towards your job, now is the time to renegotiate reimbursements or a pay raise to cover the cost.

You may have a rough time paying the tax bill when you find that the new code doesn’t allow for employee expenses. Teachers may still deduct a limited amount for classroom expenses. In addition, business expenses are still deductible.

5. Make charitable changes

Americans are among the most generous people on earth. With the new tax changes, you may get more bang for your charitable buck by grouping your charitable donations into the same year. For example, you can make twice the deductions in 2019 and then give nothing in 2020. That way, you can take itemized deductions in one year instead of falling into the standardized deduction category two years in a row. The amount of income that you can deduct for charitable contributions increases under the new tax code.

6. Make charity pay with IRA giving

One way to avoid the sting of the new tax code is to give to charity from your IRA. Giving contributions directly from the IRA to the charity lets you avoid counting the IRA withdrawal as income only to take a standardized deduction that doesn’t account for your charitable gift.

7. Your home is no longer an office

People work at home these days more than ever before. Unfortunately, if you’re an employee, you can no longer claim a deduction for your home office. If you’re self-employed, the home office is still a deduction. For everyone else, home is only home from now on.

8. Child tax credits are going to increase

The child tax credits are better for everyone under the new plan. The credits are higher, the maximum income to qualify is higher and even the definition of who is a qualifying child has expanded. The good thing about the child tax credit is that it’s a direct deduction from your tax liability and not a deduction from your taxable income. It’s a straight credit of the dollars you owe in taxes. Under the new tax code, $1,400 of the child tax credit is refundable, so it can even put dollars in your pocket.

Planning to avoid tax surprises in 2018

Paying taxes is never fun. There are a lot of changes in 2018 and again in 2019. The right planning can help you avoid surprises and use the new tax code to your advantage. The professionals at Wilson Ratledge can help examine your case in order to structure your personal and business taxes in the best way possible.

What Is A S Corporation And How Can It Help My Business?

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business entity choice

If you’re a business owner or you’re thinking of starting a business, the type of business entity that you choose has a big impact on what you do. Choosing a legal entity for your business can impact everything from who can own the business to how you pay taxes. The success of your business can ride on choosing the right structure. Make the right choice, and you can maximize your profits and grow your company.

Whether your business is large or small, the type of structure you choose matters. There’s no right answer based on size, either. Even small businesses have a number of structure options that might be right for them based on the circumstances.

One of the types of business entities that you might choose is an S corporation. An S corporation is a type of corporation that has some special tax considerations that may be beneficial in some circumstances. But what is an S corporation?

What is a S corporation?

An S corporation is a type of business entity. An S corporation is a unique business structure that operates a lot like other corporations only with some special tax advantages. The most distinguishing trait of an S corporation is that profits pass directly to owners before taxes. Owners might choose to have an S corporation in order to enjoy the corporate structure of a traditional corporation along with the tax benefits that come with S-corporation status.

S corporations have been law since 1958. They’re legally considered a corporation with federal income tax that’s a lot like a partnership. There’s only one class of stock in a S corporation. All outstanding shares of stock have equal ownership interests and rights, and shares of stock may be voting or non-voting shares. Profits and losses are distributed in proportion to shares.

Is a S corporation a corporation?

Yes, an S corporation is a corporation. It’s just a special subtype of a corporation that gets some special considerations. An S corporation comes with all of the corporate structure that you expect from a corporation like articles of incorporation. Not all corporations are S corporations, but all S corporations are corporations.

How do I start a S corporation?

To start an S corporation, you must file paperwork with the Corporations Division of the North Carolina Department of the Secretary of State. You must pay the state filing fee and file Form 2553 with the Internal Revenue Service. All corporations need Articles of Incorporation that explain how the company is going to be structured.

What makes a S corporation unique?

An S corporation gives you the benefits of a corporation in terms of corporate structure, but it gives you the benefits of a limited liability partnership or a partnership when it comes to taxes. Unlike other corporations, an S corporation doesn’t have double taxation. That is, the corporation itself doesn’t pay taxes. Instead, the owners of an S corporation pay taxes on the profits the business makes.

An S corporation is beneficial in that owners can take advantage of the things that help corporations succeed while they also maximize profits to owners by avoiding the double taxation that happens with traditional corporations. Shareholders must report income on their individualized tax returns through a Schedule K-1. The income is taxed at each shareholder’s personal tax rate.

You might be thinking that S corporations sound great and that everyone should incorporate as an S corporation in order to save on taxes. It’s not always that easy. In order to incorporate as an S corporation, the business must qualify.

An S corporation is governed by the laws of the state where it’s organized. Generally, an S corporation may have only a limited number of shareholders. The number can be quite high, with as many as 100 shareholders allowed in an S corporation. No non-resident aliens may be shareholders, and other corporations and partnerships are ineligible to be shareholders.

An s corporation may own a subsidiary s corporation. Trust and estates may also own shares of a S corporation. Non-profit organizations organized under IRS code 501(C)(3) qualify to own shares in a S corporation. Spouses are treated as a single shareholder.

What are the benefits of a S corporation?

The primary benefit of an S corporation is that unlike general corporations, business profit isn’t taxed before it’s passed onto shareholders. In that respect, an S corporation is a lot like a partnership. However, S corporations also have the added benefit of a corporate structure.

Corporate structure allows the corporation to continue to operate without much interruption when owners come and go. In addition, articles of incorporation provide structure or how the business operates. A S corporation continues in perpetuity until the corporation’s representatives actively take steps to end it.

Where do laws for S corporations come from?

Laws for S corporations come from both state and federal law. IRS laws determine how an S corporation pays federal income taxes or how they’re exempt from income taxes. Federal law also decides what form you have to file and in what time frame to file in order to have special status. Federal S corporation regulations come from Internal Revenue Code sections 1361-1379. The state the corporation is in also makes the laws for how to file the corporate entity and how to comply with periodic reporting requirements.

A S corporation shareholder must pay themselves a reasonable salary

At first glance, it might seem like the best plan to keep taxes low is to avoid paying salaries to any shareholders who work for the S corporation. North Carolina law requires the corporation to pay the shareholders who work for the company a salary that’s reasonable. States and the IRS may even put extra scrutiny on S corporations in order to ensure that they don’t try to skirt employee taxation laws by avoiding salary payments to working shareholders.

Should I file as a S corporation?

A S corporation may be the right legal entity whether your business is large or small. It’s not the right entity in all situations, but the tax benefits can be lucrative if you qualify to operate as an S corporation. If you’re considering choosing the S corporation status, other business entities that are worth considering may be a general corporation or “C corporation,” a limited liability company and a partnership.

Because the business structure that you choose may ultimately have a big impact on your profits, your business operations and what you must do to operate lawfully, it’s important to weigh your options carefully when you begin a business venture. Wilson Ratledge can help you explore your options and decide which business entity is right for you.