Question About C-Corp, Shareholder, and Officer


0

Person A wants to start a C-Corp in California operating a news website. He is wondering if the following form is legal?

  • A is the only Shareholder and the only Director owning 100% equity.
  • A will only be a passive investor who does not participate in the operations of the business at all.
  • A invites Person B to be the Officer (same person as president and secretary specified in the ByLaw) to do all the work running the business.
  • The officer, B, works only a few hours a week for this company (sufficient time since the website is small).
  • B does not receive any compensation until a revenue threshold is reached (meaning likely no salary in the first year or two).

Is this legal (from both labor and structure aspects)?

Also a related question:
I read somewhere online saying "Officers, unless they are Owners of the c-corp, need to receive minimum wages". Is this true? If it's true then what's the minimum % equity A needs to give B to qualify him as an Owner?

Thanks.

Co-Founder Incorporation Legal Tax Business

asked May 21 '13 at 11:29
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User26315
6 points
Top digital marketing agency for SEO, content marketing, and PR: Demand Roll
  • Also, keep in mind that if you cannot be employed by your corporation (missing an EAD, perhaps?) you cannot serve as a director. – Littleadv 7 years ago

2 Answers


1

I'm not a lawyer and not a tax professional, do verify everything with a licensed attorney and a CPA in California.

1 - A is the only Shareholder and the only Director owning 100% equity.

Fine,

2 - A will only be a passive investor who does not participate in the operations of the business at all.

Fine (as long as its a C corp).

3 - A invites Person B to be the Officer (same person as president and
secretary specified in the ByLaw) to do all the work running the
business

Fine.

4 - The officer, B, works only a few hours a week for this company
(sufficient time since the website is small).

Fine. Although people (IRS, for example) might ask how do you manage a news site - a few hours a week?

5 - B does not receive any compensation until a revenue threshold is
reached (meaning likely no salary in the first year or two).

Not fine. You have to pay salaries to officers (and any other employee for that matter, check the California laws for exemptions).

I read somewhere online saying "Officers, unless they are Owners of
the c-corp, need to receive minimum wages". Is this true?

Yes. And owners who are officers must also draw salary. In fact, you have to pay reasonable salaries, i.e.: minimum wage might not be enough for a CEO, however small the company is.

If it's true then what's the minimum % equity A needs to give B to
qualify him as an Owner?

Becoming an owner won't make B any less of an officer.
answered May 21 '13 at 15:22
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Littleadv
5,090 points

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So, first of all, if A is a director, recognize that he will be involved in the business -- the board can delegate day-to-day decision making to the officers, but the board is ultimately responsible for the company's actions.

Secondly, you're mixing up some C- corp and S- corp ideas. In an S-corp, the IRS does not want owners coming along and saying "I made $1000 from this company as a salary, and $1M as a dividend" because the $1M wouldn't be subject to payroll taxes. So, S-corp owners have to pay themselves a reasonable salary. The situation is reversed in C-corps: the IRS wants to make sure that you're not over-paying yourself salary to avoid double-taxation.

Thirdly, as to whether officers can defer payment, that's usually a question answered under the local state's Wage and Hour Law. Many states exclude executives from their laws. You'd have to check California's law.

answered May 22 '13 at 01:12
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Chris Fulmer
2,849 points
  • California law excludes executives but that's based on the actual responsibilities, not the title. I doubt in this scheme you can avoid paying salary to anyone. Re the mixup between S and C - no mixup here, officers must be paid reasonable salary regardless of the chapter. Its that people tend to make "reasonable" higher for C and lower for S, for the reasons you mentioned, and that IRS doesn't like. – Littleadv 7 years ago
  • Have a cite for the 'reasonable salary' -- I've only ever seen the IRS come after people for paying an unreasonably high salary (for C-corps) or failing to pay a reasonable salary (for S-corps). Or is it something in California that you're referring to? – Chris Fulmer 7 years ago
  • no, that's exactly what I'm talking about - either unreasonably high for C or unreasonably low for S, but either way you have to pay a **reasonable** salary. California law sets a minimum wage, and I don't know if IRS will actually go after someone who pays lower than "reasonable" for C, but the requirement still stands, and stems from exactly the same code section for both types of corps. – Littleadv 7 years ago

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