I am forming an S Corporation. There are two shareholders (me and a partner). We dont plan to have any earnings or distributions this year. Do we have to pay salary to ourselves? Company doesnt have much money in its account.
Can we just be owners and not employees or contractors?
You are not owners. You are shareholders.
You are not contractors. If you work for the corporation and it is paying anyone at all, you are employees and get payroll.
If the company makes no money, then it can't pay payroll. But that also means, you take no funds any other way; no distributions.
The first rule is, you formed a corporation to separate Self from Business. Don't violate that rule.
Got it. We are shareholders.
We did put some money out of our pocket in this corporation.
(1) Is it possible we are not employees but just shareholders. This way no salary nothing but at the same time work to make the company successful. Hope this doesnt violate the rule of separating ourselves from the business. I believe that is the point that thingsa re done in the name of business and not us.
(2) just reimburse and spend the money from the money we contributed to the company for company expense. This hopefuly is not considered a distribution.
Thanks
"We did put some money out of our pocket in this corporation."
Of course you did; that is your Investment, or your purchase (value) of the shares of stock issued, or one of you put in more than the other when it is supposed to be 50/50, so this difference would be Shareholder Loan (an Other Liability of some sort for the corporation) to be repaid.
"(1) Is it possible we are not employees but just shareholders."
Sure, as long as you are not doing any work. Keep in mind a corporation is its own entity. It can't "work" and needs people to do the work. Those people are hired as employees. Employee = worker.
"This way no salary nothing but at the same time work to make the company successful."
Oops.
"Hope this doesnt violate the rule of separating ourselves from the business."
No, this doesn't violate the rule of separation. This violates the employment rules.
You can work for the corporation that doesn't make money, which means it has no ability to pay for anything else but the basics (rent, utilities, etc) during ramp up.
But you can't for instance, decide at the end of the year that you actually made enough money to each take $5,000, if you didn't get payroll. This is considered by the IRS as attempting to avoid payroll taxes.
Shareholders who take "distributions in lieu of payroll" run the risk that the IRS will reclassify ALL OF IT as payroll. Now you are late paying taxes, you incur penalties and interest. You have violated the law.
"I believe that is the point that thingsa re done in the name of business and not us."
Wrong. People do the work. People do the work in the name of the business, to avoid being personally liable. You don't sign your name; you sign your name and title.
"(2) just reimburse and spend the money from the money we contributed to the company for company expense. This hopefuly is not considered a distribution. "
Whether or not the taking of money represents payback of liability, equity, or distribution, or net profit, or would be considered bypassing payroll, is not something easily reviewed via text on this forum. There are issues such as, the timing of the movement of the funds, that matter, too.
I found this resource for you: http://www.qbalance.com/reasonable_compensation.htm
You really need to work with a CPA, to learn how to manage a corporation's financial activities.
