Need accounting help

[greenhm]

I am looking for options to my dilemma.

I am 17 months from FIRE and have the finances in order. However, almost half of my money (cash) is tied up in my business (corporation/Limited company).

My wife and I are the sole shareholders and the company is not public.

The company is fully invested in the market and is producing income from these investments in the form of dividends.

My idea (when FIRE'd) was to continue as an employee of this company and pay a salary to myself and wife, and add this to our personal finances.

My current questions to those in the know are:

1. Can the company be kept active and operate this way, or must the co be generating income from non-investments sources.

2. If no to #1, then how can I get the cash out of my company without incurring obscene personal tax liabilities.


Since I can 'see' only 2 options, I feel there must be others that I cannot see.

Any ideas?

Thanks

greeny

 

[Martha]

Talk to an accountant or lawyer. I see personal holding company issues here but if you are able to take out the entire income as it is earned, you might be able to keep the corporation/llc going. But why would you want to take a salary and pay FICA? It may make sense to dissolve the entities and take a distribution. Lots of issues are going to go into making the required analysis of what is best to do. That is why you need to go talk to an expert.

What you do is probably dependent on whether you are a C corp or S corp.

 

[retire@40]

If I understand the question correctly, you have a corporation that is only invested in the stock market. Why you would have a corp and not just own the investments personally, I don't know. Unless you are doing that for liability protection. If so, I would probably say a limited partnership may work better than a corp if you don't plan on owning the investments individually.

But I agree with Martha, you need some guidance from a CPA and a lawyer.

 

[greenhm]

If I understand the question correctly, you have a corporation that is only invested in the stock market. Why you would have a corp and not just own the investments personally, I don't know.

Sorry, I did not supply enough information...

This corporation is in operation presently generating income in software development. My wife and I are the owners and employees of this company. We are still working for the next 17 months for this company. The company presently has it's excess cash invested in the market.

We would love to get the money out of the company, but fear that it must be done ONLY as a salary.

I am aware that there are some here that had prior businesses before they FIRE'd and I wanted some of thier/your opinions on what you did with the company, and any cash reserves in the company.

I would like those reserves in the company to augment my FIRE.

 

[Martha]

C corp or S corp?

 

[greenhm]

C corp or S corp?

It is a canadian company, but would operate like a C corporation in US

I am canadian

 

[Martha]

Oops! If you are a Canadian, I wouldn't have a clue as to your options. Sorry.

 

[Craig]

Don't know Canadian law, but I'll go out on a limb ... consider this in theory:

In the U.S., you would be able to get the money into your hands on a tax deferred basis by setting up a qualified retirement plan.  I gather you and your wife are the only employees ... if so, in this country there would be no discrimination issue / restrictions, so the right, creative plan would allow rapid funding, and benefit just the two of you.

Check in Canada if:

• Your company can set up some kind of tax sheltered retirement plan for its employees, and you'll want a type that allows rapid funding (like a defined benefit plan)
• If so, check if the corporation can contribute the investments to the qualified plan without incurring taxes (not critical, but would be a nice touch)
• Can the corporation take a deduction for the contributions to your qualified plan?  Would assume so.
• If these are options, then you'll need to determine if 17 months is enough time to take effective action, the legal / planning fees are worth it, etc.
• If this plan is feasible, you may create a tax loss in the corporation that could be carried back against previously paid income taxes
• Tax law in your country may also allow some unqualified planning devices that can produce a similar, albeit less efficient result

You definitely need to speak with a sharp Chartered Accountant, specializing in taxation ... a sharp tax lawyer may be able to handle as well, but I'm biased ... try to have that conversation very soon, considering your time frame.  All of the above is conditioned on Canadian income tax law bearing some resemblance to U.S. ... I don't have a clue on that score.

Good luck.  Would be great if you'd post your findings after the consultation!

 

[greenhm]

Don't know Canadian law, but I'll go out on a limb ... consider this in theory:

Thanks Charles for the very insightful ideas. I will be speaking with my accountant at the end of the week and I'd like to be able to throw around some ideas that he may not have thought of. Your ideas are quite thought provoking.

Ideally, I would need to get the monies out of the business, then shut the darn company down. The company has done us well over the years, but I became too reliant on thinking that the business money is all mine (and not the tax mans.. at least partially)

I have run various senerios as to taking bonuses and such, just to get the money out, but at a high tax cost. If my wife and I can take the money out, say over a 4 year period when we are FIRED'd, then the tax burden would be much lower, but I am not sure if a company can stay active without making an income, but still paying employees...

Any other ideas out there to discuss with the accountant?

Thanks

 

[Martha]

In the US sometimes it is beneficial to take out money in dividends rather than salary because in some circumstances for closely held corporations, the corporate income tax plus the tax you pay on dividends will be less than the taxes (income, fica, etc) paid on salary.

 

[greenhm]

Good luck. Would be great if you'd post your findings after the consultation!

Finally got talking with my accountant and am posting my results.

His suggestion is

1. Corporate tax rate is 18% so keep most money made in corporation as long as it does not make > 300k / yr from now up until FIRE time.
2. Up until FIRE, pay shareholders (wife and I) enough to cover living expenses and stay in lowest tax bracket (income of 30-40k/yr)
3. After FIRE, obtain income from corporation in the form of dividends (as long as company is not generating income from us working)
3.1 The dividends can be low (so as to pay little to no tax) or higher (so as to depleat all monies in the co)
4. Do not pay into RRSP... the corporation is my RRSP and will collect dividends from this corporation, which collects dividends from other invested sources and dividends.

He tells me many of his clients FIRE this way. The benefits include:

1. Not having to take BONUS salary out at a very high tax rate.
2. Allowing assets to continue to depreciate until nothing left.
3. Company expenses (some) still allowable.
4. Able to work easily for a short duration if hell freezes over.

Disadvantages may include:

1. Having to pay accountant yearly to file corporate tax return (though the method he prescribes will save me enough in taxes (by not taking bonuses) to pay his fees for 35 years)
2. It's not KISS. (I really wanted to downsize and keep it really simple)

Anyhow, I am quite elated as this seems to be a very favorable reply to my concerns.

But, I still have 16 months and 4 weeks until FIRE day. So, any concerns anyone has would be quite helpful. Could I be missing something? Though one cannot cross all 'T's and dot all "i"s, I'd like to ensure I am not missing something..

Anyone else here done a similar route?

 

[justin]

Unless you are doing that for liability protection. If so, I would probably say a limited partnership may work better than a corp if you don't plan on owning the investments individually.

What liability protection? If you as an individual are hit with a judgment, your ownership interest in the corp (and, as a result, everything it owns) is at stake. It sounds like the corp will only own stocks/bonds, etc. Short of piercing the corporate veil (if you have that in Canada to reach you as a shareholder, I don't know how a corp would limit your liability (other than tax structure benefits).

 

[greenhm]

What liability protection? If you as an individual are hit with a judgment, your ownership interest in the corp (and, as a result, everything it owns) is at stake. It sounds like the corp will only own stocks/bonds, etc. Short of piercing the corporate veil (if you have that in Canada Wink to reach you as a shareholder, I don't know how a corp would limit your liability (other than tax structure benefits).

The corporation is a limited company, with full protection. It is a seperate entity, and therefore can be hit with a judgement, just like you and I.... but... If I am hit with a judgement, they cannot go after the company funds, and likewise, if the company is hit, they cannot come after my private funds.

 

[greenhm]

I have also just learned that Canadian tax law allows the payment of up to 30K TAX FREE per year to each director (wife and I).

This is how we will be slowly getting the funds out of the company.

Also... since the dividends are NOT considered income, we will be considered low income and will not have to pay health care premiums ($88/mth). (a side benefit).

 

[retire@40]

The corporation is a limited company, with full protection. It is a seperate entity, and therefore can be hit with a judgement, just like you and I.... but... If I am hit with a judgement, they cannot go after the company funds, and likewise, if the company is hit, they cannot come after my private funds.

No such thing as "full protection."  There is something called "piercing the corporate veil" that could allow a judgement against the stockholders of the corporation if they caused the liability.  For example, you own a flower shop (corporation), you are a stockholder and an employee who happens to be driving the corporate van delivering flowers.  You mow down 10 people and kill them.  You don't think your "private funds" will be at risk?

 

[greenhm]

No such thing as "full protection." There is something called "piercing the corporate veil"

Thanks retire@40... you are probably correct in this assumption as I have not investigated all angles and am not a lawyer.

The 'limited liability' issue however, is not important to me at this juncture, but thanks for bringing it to my attention.

 

[Martha]

I have also just learned that Canadian tax law allows the payment of up to 30K TAX FREE per year to each director (wife and I).

This is how we will be slowly getting the funds out of the company.

Also... since the dividends are NOT considered income, we will be considered low income and will not have to pay health care premiums ($88/mth). (a side benefit).

Cool. Makes Canada look better to me every day.

 

[justin]

You mow down 10 people and kill them. You don't think your "private funds" will be at risk?

retire@40,
You will be held personally liable in this case because you, as the van driver, have personal tort liability for negligence (assuming you didn't do it on purpose). Your employer (in this case, the corp you own) would also be liable for your actions (respondeat superior), assuming you were acting as an agent of the corporation within the scope of employment (ie - not intentionally mowing down innocent people). No corporate veil piercing required.

greenhm,

you said "If I am hit with a judgement, they cannot go after the company funds, and likewise, if the company is hit, they cannot come after my private funds." This statement is accurate as far as it goes. However, you must realize that your personal funds include your ownership interest in the corporation itself. A judgment creditor of yours will find your shares/ownership interest in your corporation, then take it. Ordinarily a judgment creditor can't actually touch the assets of your corporation, but they can take part or all of the corporation itself. Then once your judgment creditor owns your company, they can do what they want with the assets.

A lot of people have seen infomercials and read pretty books about the magic of personal corporations and limited partnerships/limited liability companies. Don't believe everything you read. There are ways to limit your liability, and often insurance is cheapest if you aren't conducting an active business.

In the case of the original poster, I believe he has acknowledged that there won't be much liability from operating a company that owns stock/bond investments. If you were operating a mining operation or building houses, etc., you may benefit from some sort of limited liability shell (corp, LLC, LP).

 

[Martha]

I love these guys who just finished law school. You explained that nicely Justin. Want a job?

 

[justin]

I love these guys who just finished law school. You explained that nicely Justin. Want a job?

Depends. I'll need a relocation payment, $10k signing bonus, annual performance bonus, $75k/yr salary, full benefits, and overtime for anything beyond 42.5 hrs/wk, and a buyout of my current unvested pension. Seriously though, I might consider it if one would offer me these terms. I'm currently an engineer, and I like my employer and the job. It would be hard to give up.

 

[justin]

42.5 hours? What happened to 40? In fact, why not go all out and ask to work only 35 like the French!

It is a personal choice. I'm willing to work 42.5 hrs/wk for the stated amount of money. I would never aspire to "work" like the French. I heard Canada has the same 35 hr work week. I wouldn't mind working like the Canadians though...

 

[greenhm]

I heard Canada has the same 35 hr work week. I wouldn't mind working like the Canadians though...

I know of no 35 hr work week in Canada.. and I've worked all across this great land and have never seen any standard except the 40 hour work week. If your self employed, cannot complete your work in that amount of time, or just plain brown-nosing, then the week gets longer....

Not much different than the U.S. I assume...