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Tax Question -- Joint Tenants in Common
- Thread starter catmango
- Start date
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What disadvantages do you know of? I have been under an S-Corp for some time now and I see no disadvantage yet. I prefer it over and LLC because its tax status is pretty well defined and clear cut. People think that it doesn't make a difference between trading as an individual or corp, but those who go this route know that it does.
In CA, there is a minimum State Franchise tax of $800 for incorporating an S-Corp. Hopefully, you would owe more than that in state taxes ($800 is tax on about $14.5K in pre-tax net), but, if the business sits around idle, you would still owe the minimum tax for the year, unless you dissolve the S-Corp. (which also costs money).
And, of course, there's the additional cost of doing the corp tax returns and keeping separate books, and all those pesky annual corp board resolutions and so on and so forth.
Didn't know it was that expensive in CA. Mine are in IL and FL. Franchise tax is $100 per year paid in December. The bookkeeping is simple if you talk to a good accountant and, yes, you file two separate returns. There are no board resolutions, meeting minutes or any other documentation required. You just simply keep the corp alive by paying your franchise fee. The tax savings far exceed the accountant's fees, fees, etc.
In CA, the corp resolutions, minutes, etc. aren't required by the govt., but the original poster indicates that he intends to trade other people's money. Failure to keep up the appearances of a separate corporate entity is no big deal if you're a "one man show" and not dealing with the public. But, if you're doing business with others, and exposing yourself to potential liability, then failure to act like a corporation, by having at least one annual board meeting, could subject the corp's owner(s) to direct liability via the "piercing the corporate veil," legal theory.
Which is why I brought it up.
So, you want free legal advice, eh? LOL! Alrighty then, I'm in a benevolent mood:
Disclaimer: this is general conversational opinion, not legal advice, and no attorney-client relationship nor any warranty is either expressed or implied -- furthermore you should consult with an attorney licensed to practice in your jurisdiction regarding any legal issues that you may have.
There is no such thing as "joint tenants in common." There are "tenants in common," and there are "joint tenants," each of which has a distinctly different legal meaning:
1. Joint tenancy is a relationship wherein the tenants have an undivided interest in the whole of the subject property, with rights of survivorship, which means that any one tenant can legally control/take/use the entire asset at his/her unfettered discretion. It also means that if a tenant dies, then the remaining tenant(s) immediately become the joint owners of the remainder. So, if you die, then your relatives get the pot.
2. Tenants in common is a relationship where each tenant has a separate interest in the whole subject property, and their portion can be devised or inherited by whomever each tenant directs, or by the intestacy statutes, if the tenant dies without a will (intestate). However, each tenant in common has a right to possession/control of the whole subject property, and that includes the profits. So, for example, you and your relatives can all trade all of the assets in the account, without the permission of the other parties.
3. There is also the Trust account model, which may be a better one, if you are the only person doing the trading, because it basically puts you in charge as trustee and makes your relatives the beneficiaries. The downside, is that a trustee cannot generally be a beneficiary, and absolutely not the sole beneficiary (varies by jurisdiction), so your income from the account would have to be based on something other than a portion of the profits (i.e., a management fee, or a fixed hourly rate, each of which must be objectively reasonable).
4. You could also operate as a general partnership (opening the account as tenants in common) and then send your relatives a K-1 form at the end of the tax year, thereby distributing the profits according to whatever agreement you may have made with each other (an agreement which I STRONGLY suggest that you do in writing, no matter how much you and your relatives trust each other), and so eliminate those profits from your taxable income.
As background, a general partnership is one that requires no state filings, but which creates joint liability between the partners for losses up to the entire amount of partnership assets, and potentially unlimited personal liability for losses beyond that, depending upon the character of the injury (e.g., if one of you negligently hits and kills a child in your car while driving to the bank on partnership business, then conceivably, you could all be sued for wrongful death and your liability could extend far beyond the assets that you have in your investment account (and your automobile liability insurance)).
Not saying that something like this is probable -- only that it's legally possible.
If you want more protection, then an LP, LLP, LLC, S-Corp is the way to go (I won't discuss the virtues/defects of the various entities, here because I've reached the limit of my charitable nature), and if you really believe that you're gonna make $150-$250K pre-tax net, then I think that you should seriously consider either doing that, or at a minimum, obtaining a million dollar liability insurance policy to cover you and your partners for any possible actions against your general partnership.
There may be the additional possibility for some sort of "investment club" under California law that provides additional statutory protections for its members, of which I'm not presently aware, but in order to give you a definitive answer, I'd have to research it, and that means I'd have to bill you for my time -- and, you may be better served by consulting a local attorney for that so as to thereby establish a business relationship.
Free non-legal general legal advice for you: a person who republishes false and defamatory statements is jointly liable to the injured party for the defamation.
So, unless you are willing to stand by the above statements as fact, i strongly suggest that you consider deleting this post.
What tax savings are you getting from your S corp.?
I used to have a construction business S Corp. and didn't find much tax help.
I'll be incorp a new business this year but I'll keep it a C corp this time.
A good site for information on taxes and bookkeeping, and corporations is http://www.taxguru.org/