Person A wants to start a C-Corp in California operating a news website. He is wondering if the following form is legal?
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?
Co-Founder Incorporation Legal Tax Business
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 andFine.
secretary specified in the ByLaw) to do all the work running the
4 - The officer, B, works only a few hours a week for this companyFine. Although people (IRS, for example) might ask how do you manage a news site - a few hours a week?
(sufficient time since the website is small).
5 - B does not receive any compensation until a revenue threshold isNot fine. You have to pay salaries to officers (and any other employee for that matter, check the California laws for exemptions).
reached (meaning likely no salary in the first year or two).
I read somewhere online saying "Officers, unless they are Owners ofYes. 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.
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 toBecoming an owner won't make B any less of an officer.
qualify him as an Owner?
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.