As S corporation may be the best legal form for your RV business. An attorney explains why you might choose an entity over a sole proprietorship and discusses some tax consequences for doing so.
by Martin M. Shenkman, CPA, MBA, JD
Why Run Your Business Using an Entity
Most businesses are set up using an entity: a corporation or limited liability company (LLC) as their form or legal structure. Why bother setting up an entity? For the same reasons millions of American business are operated as an entity, to limit liability exposure. The size of your business or the seeming simplicity or safety of what you do is no bar to someone suing. American society remains dangerously litigious. If you operate your business as an entity, and do it properly, you can safeguard your personal assets from risk. Many RV workers are semi-retirees who have savings but supplement it with a business they operate from their home and RV. If you're sued because of a business matter, your home, RV, and life savings could all be at risk. If you run your business as an entity and the business is sued and looses, your home, RV, and savings should remain safe.
If you simply run your business out of your RV using your name, if there is a problem, especially a lawsuit, you could face some ruinous costs. The advantage of a sole proprietorship is you just run your business. No lawyers, no legal documents, simple. You'd report your income and expenses on your personal income tax return, Form 1040, Schedule C.
A common entity used to run a home/RV business is a corporation. It is formed under the laws of a particular state. It is owned by "shareholders." You could be the sole shareholder. Your spouse or other business associates might also be shareholders (owners). The corporation is formed by filing a document with the appropriate department in the state where you form it. The document is typically called a "Certificate of Incorporation."
Once you form a corporation you can then choose (in tax jargon, "elect") to have that corporation treated as a flow through. This means income and expenses of the corporation flow through and are taxed on your personal return instead of on the corporate return. The theory is that this is a big advantage over corporations that don't get this special tax treatment (called "C" corporations or "regular" corporations). Well, the theory is theoretically correct because a corporation generally pays tax on its income and then, if it has profits left over and distributes those profits to its shareholders (perhaps just you), you have to pay tax on those profit distributions (dividends). That could mean that the same income is taxed twice. First, the corporation pays income tax on its earnings, and then you pay tax on what is left after taxes that the corporation distributes to you.
S corporations are a great deal since income and deductions flow to you as shareholder and you report them on your personal tax return. There is no tax generally at the corporation level if the corporation is set up to be an "S" corporation.
If you distribute property out of your corporation or the corporation sells property, you only have one level of tax if the corporation is an "S" corporation. If your corporation is a regular or "C" corporation, you might face two levels of tax.
The idea that an S corporation can make distributions to its owners, which are taxed to its owners, provides a great tax planning opportunity, but also a trap you should understand.
S Corporations and Compensation
Here's a big issue for many home/RV based businesses. If you set up as a sole proprietorship or a limited liability company (LLC) many accountants believe that the IRS will argue that all your income is subject to employment taxes. That is quite costly. For RV workers it may raise costs and complexity when states you've worked in seek to tax your wages earned in that state. Can't you avoid the whole mess by setting up your business as an S corporation? Some accountants think so. If you're an S corporation, all your profits are distributed to you as dividends from your corporation. No salary, no payroll tax, and less administrative costs and hassles.
If it were really only so easy.
The IRS recently issued a study it conducted called "Report to the Committee on Finance, U.S. Senate TAX GAP Actions Needed to Address Noncompliance with S Corporation Tax Rules." If you're struggling to fall asleep one night and boondocking too far to go to your local drug store for some sleeping pills, check this out: http://www.gao.gov/new.items/d10195.pdf. Exciting reading.
But, the bottom line of this report is that the IRS is hip to taxpayer and CPA compensation tricks using S corporations. It is really risky to simply claim that all the money from your S corporation business avoids payroll taxes. The report states, "Some S corporations also failed to pay adequate wages to shareholders for their labor for the corporation, which led to underpaying employment taxes."
The IRS knows about the issues. The IRS estimated that 72% of CPAs handle this wrong.
What does all this mean to you?
• Expect more and tougher audits of your RV business if set up as an S corporation and you take money out as profits without paying payroll taxes.
• Talk to a CPA about helping you come up with a figure that is a reasonable amount to treat as a distribution, and an amount that is reasonable to have to treat as salary since you are working in the business. Pay payroll taxes on that portion.
• Don't try to use an S corporation to avoid payroll taxes.
There are creative ways you can plan around this issue, but they become pretty complicated. If visitors to this site are interested, let us know and we'll write about them in a future column.
Protecting Your Business Name
If you want to operate your business using a name other than yours, you need to file documentation with a county clerk's office (the name will vary by state) or elsewhere, to secure the use of that name. This could be referred to as a "fictitious name" certificate or a d/b/a, which stands for "doing business as."
Be careful if you file a certificate for a sole proprietorship or set up a corporation or entity using a particular name. Getting the name for the entity won't protect or assure that you have the right to use that name however you want. More on this important topic in future articles.
If you run a business, weigh whether the potential risk of lawsuits is great enough to justify having an entity own your business (the cost is not that great). Don't disregard this because your business is small, or operated out of an RV, etc. There is no shortage of lawyers who can and will sue you. The size of your business is not the issue in your assessing the risks you face. So just because your business is small doesn't mean you don't have to worry.
Martin M. Shenkman, CPA, Esq. sponsors a free legal website LawEasy.com.
Martin is an RVer with a special cause. He is an avid fundraiser for the National Multiple Sclerosis Society and The Michael J. Fox Foundation For Parkinson's Research. See his RV4TheCure.com website for how you can help him fight MS. Besides RV business tax and legal information, he will share some of his RVing and fundraising experiences with us.
Caution: This article and other columns can never substitute for professional legal, tax, and accounting guidance. These columns can provide only broad general advice, which may not apply to your situation. The rules differ substantially from state to state. Tax, business, and other laws change rapidly over time so there can be no assurance that the information in this column is current. The best approach is to review the ideas in this article with your own CPA and attorney. The application of general tax and legal principles to some of the unique facts presented by RV working is particularly complex and there is little specific law providing guidance to rely upon.