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Law Educator, Esq.
Law Educator, Esq., Attorney
Category: Business Law
Satisfied Customers: 111669
Experience:  All corporate law, including non-profits and charitable fraternal organizations.
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We've been an S Corp since 1991. (Machine Shop) The business

Customer Question

We've been an S Corp since 1991. (Machine Shop) The business was downsized in 2006, and currently has only the two owners/officers as employees (a husband and wife)with one part time person who comes in only when needed. We are no longer operating like a legal S Corp in ways such as maintaining annual meeting minutes, the wife (VP/Secretary), who has another outside part time job but still maintains the S Corp's books, does not take a salary, the Pres/Treasurer (husband) takes very little salary and not on a regular payroll schedule. Basically, we are 60 yrs old, just wanting to maintain the business for 5-6 yrs until full retirement. We have enough personal savings to retire but need the business to pay for itself and our health insurance costs until we can draw full retirement benefits. In 2014, we sold our business property, which was much more than we currently need, for a smaller commercial property. The sale was structured as a Reverse 1031 Exchange, which required us to set up an LLC to hold title of acquired property until the existing property was sold. The LLC is still in existence, treated as a subsidiary of the S Corp, and the property (building and lot) is still titled to that LLC. All other business operations are run as and business property (such as manufacturing & office equipment, etc) is owned by the S Corp. While we'd prefer to change the business to a sole proprietorship, the liability to personal assets probably makes that a bad idea. That's unfortunate since that most closely resembles our current operation. However, we are wondering if it would be a better idea, at this point in our career, considering the reality of our current operating practices and in light of the fact that an LLC already exists, to dissolve the S Corp and operate as the existing LLC (changing the current name of the LLC to the current name of the S Corp) (Would the LLC be less complicated with fewer legal requirements, record keeping requirements and easier taxation issues?). Any advice would be much appreciated.
Submitted: 9 months ago.
Category: Business Law
Expert:  Law Educator, Esq. replied 9 months ago.
Thank you for your question. I look forward to working with you to provide you the information you are seeking for educational purposes only.
In a closely held S-corporation, meetings and minutes from meetings are very informal. They can be done sitting at a dinner table and written on a piece of loose leaf paper, it does not have to be formal. I would suggest you keep a notebook, the meetings do not have to be elaborate or even long, it can simply be a note saying nothing was done at the meeting and officers continue in their current roles. One line. So that is not really a huge burden and most closely held S-corps never keep meeting notes and go back if needed and recreate them.
The LLC and S-corp have nearly identical operating procedures. The LLC is actually the modern version of the S-corp. So dissolving the S-corp and keeping the LLC would not really benefit you much at all. The LLC and S-corp tax requirements and record keeping are also pretty much identical, so that does not save you either.
At this point, especially with the 1031 exchange still in play and the fact you only have a few years left before you wind up and retire, I would suggest it is much less trouble to keep everything the way it is than trying to restructure your whole business operation.
Customer: replied 9 months ago.
Thank you for your response. I'd appreciate just a bit more insight. First, the 1031 Exchange is not still in play. The Exchange was completed at the end of August 2014 when the sale of our old/relinquished property was finalized. We just have not dissolved the LLC and have left property title in the LLC's name. For us, the LLC does nothing once the 1031 Exchange was completed and we intended to dissolve it but just haven't. (Both the LLC and S Corp are registered yearly with the MN Secretary of State.) I understand what you're saying about the annual meeting minutes, and I've got a lot of years to recreate, but that's doable, I guess. What about the fact that I, the wife and an officer of the S Corp, work for the Corp but take no salary, my husband takes very little and not regularly. I was under the impression that laws that govern S Corp (such as having a spouse work in the business with no pay, not having a regular pay schedule/Pay Periods, etc) and weren't followed could spell serious trouble and fines for the business owners. If that's not the case, then, I agree, there's no point in changing the business structure. I just need assurance that continuing to operate as a Mom and Pop Shop, which is basically what we're doing, while still structured as an S Corp isn't going to put us at risk for legal trouble.
Expert:  Law Educator, Esq. replied 9 months ago.
Thank you for your reply and clarification.
So, dissolving one of the two entities would not really be much of an issue and you can pick which one, so since the LLC does not serve any purpose, winding it up and filing articles with dissolution with the secretary of state makes most sense.
Even though you are not taking pay from the S-corp, immediate family in a closely held S-corp frequently do not take pay and they are exempt from minimum wage and fair labor standard rules, so that is not going to be a real issue for you. If you operate your business as an S corporation or a sole proprietorship, you do not have to worry about corporate taxes. The income from your business is reported on your personal return, whether or not you or your spouse is paid a salary. So income to you and your spouse as owners/officers of the S-corp is not really an issue as it would be to not pay a non-owner/officer.