Is there anything written or does anyone know what accounting steps need to be taken to change from a proprietorship to an S-CORP. Also, how does one record a distribution to one of the stockholders rather than a paycheck with employment taxes.
Here's a blurb I snagged from an earlier post. Hope it helps some:
Create different equity accounts for a corporation, and you need to know whether they have filed a Form 2553 Election to Be Taxed as an S Corporation.
In the Sole Proprietorship, you have Owner's Equity and Owner's Contributions, or Owner's Distributions or Draws. These accounts have different names in a corporation, so you need to Delete these accounts, and create one for Capital Stock. You need one for Additional Paid In Capital, and, if they are an S corporation, you need to create one for Shareholder Distributions, or Dividend Draws (different accountant's use different names, but it's the same account).
If the Shareholder has paid for a lot of expenses personally for the company, and wants to be repaid later on, create a Credit Card TYPE account called Loan From Shareholder, and use the Enter Credit Card Charges screen to enter these amounts into the books.
The previous post was correct; also, you should be creating a new QB file for the S-Corp. Use opening balance equity to offset all of the beginning balances. The assets, liabilities, and capital stock should balance and there should be no opening balance equity left.
Hope this helps.
Kassie InmanFirst you need an attorney to incorporate. Then you must file elections with the irs and the state to be taxed as an s corp. They will tell you when you can start the s corp. You need to also get an EIN from the irs for the s corp. Some states have their own numbers which you will need.
Set up a whole new set of books. The Shareholder MUST be on PAYROLL. All tax accounts must be open as required by fed and state law. You CAN'T take a distribution without payroll! The irs will be down on you in no time!
Remember that tax AVOIDANCE is legal. Tax EVASION is not! If your purpose is to set up an s corp and take distributions without paying p/r tax, that's evasion.
If the shareholder contributes more than the value of the common stock, I would suggest that you open a L/T liability called Shareholder Loan Account. This is more flexible than Add Pd In Cap. as was suggested and is counted as part of the shareholder's basis. Just keep a credit balance in the acct at all times.This acct does not get set up with the credit cards.
You would also set up an account called Shareholder Distributions as a contra account of Accumulated Earnings Acct, which is a subdivision of R/E.
Distributions are NOT dividends. Dividends are taxable. Distributions from an s corp are not taxable. Names count especially if you have an irs audit!
I got this from the IRS website
Why Tax Evasion Matters
Tax evasion undermines the tax system in numerous ways. It is unfair. It costs revenues that could be used to make the tax system better, pay down the debt, or provide additional government services. It wastes resources?€”i.e., hampers economic growth. And it feeds on itself, reducing respect for the integrity of the tax system and leading to more cheating.
Thank you. That's very good.
From the original post, I got the impression the writer wanted to go from a sole prop to an s corp for the wrong reasons. He wanted distributions without p/r taxes.
Good replies. One addition - you can make distributions to the shareholder(s), however, this will be considered a shareholder distribution and will reduce that shareholder's basis in the corporation. If they anticipate any losses, this may cause those losses to be limited at tax time.
The safest route is the one mentioned earlier - to pay themselves as an employee - unless their looking to reduce their investment in the company.
Cheers!
