Entrepreneurs who decide to start a corporation as opposed to a looser structure such as a sole proprietorship, need to carefully follow all of the practices and mandates that come along with it in order to avoid trouble with the IRS.
In Entrepreneur magazine, Bonnie Lee notes that corporations come with the responsibility to hold a board of directors meeting at least once a year, file separate tax incomes and pay corporate income taxes to the federal and state governments. In order to withdraw corporate funds, the principals can either take out dividends, wages, rents and loans. If these regulations and rules are not strictly followed, the IRS can force a company to revert back to a sole proprietorship, resulting in the loss of all of the protections that incorporation provides.
Owners of corporations must pay wages to employees and receive wages for their own work as well. It is not an option to refuse to take wages only to deduct expenses at the end of the year in order to work around paying income taxes, warns Lee.
“The IRS is a savvy group,” Lee writes. “They are aware of the methods business owners use to legitimately and illegitimately take money from corporate coffers without inflicting payroll tax liabilities. And they are poised, ready to pounce on anyone who bends the rules to the point of breaking.”
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