Corporation investing in mutual funds?

Let me also clarify, that one of the reasons for keepiong money inside the corp, may be that I would want to make an investment later. For example, buying a warehouse or a rental apartment, etc. This might save me some on taxes. The question is, would having extra money attract more unwanted IRS attention.

i

Are you able to shelter any of the profits? If you let it build up in the corporate name, then take the distributions, you end up paying taxes on the profits. If you take the distribution and put it into a retirement plan, you may be able to avoid paying taxes on some or all of it, and also let it grow tax free or tax deferred.

-john-

No, I already am maxed out in my work 401k and personal IRA, so is my spouse, and I do not believe that I can shelter anything. This is an S corp though, so I would own any taxes on any income or gains from the investment, the same way as I would if I owned the money in a personal account.

I used to the practice of not leaving too much money in the corp accounts, but perhaps it is a wrong practice.

i

Look into a SEP IRA.

-- Doug

Doug, I do not want to open another retirement vehicle, I wanted to save money to use for business purposes, like an acquisition of something.

i

If your corporation has money that it doesn't intend to use immediately, it has to do something with it. If it can put it in a bank account, I don't see any reason it can't put it in a mutual fund account. Presumably the choice of fund or funds would be based on the corporation's strategic needs.

on 6/6/09 2:16 PM John A. Weeks III said the following:

And if the S-Corp gets sued, the lawyers go after those funds. If you want to play funny, convert to an LLC and web them together.

I researched this question, and I think that I would be unlikely to be able to shelter myself from personal liability in any case, due to the corporation being my pocket corporation. So, liability protection is not an issue.

i

Your S corp can buy any investment that you could own personally. There are few things that you should be aware of though:

1 - if your investment income inside the S Corp exceeds a certain percentage of your total income you may have a problem maintaining S Corp status. You should check with your tax pro on this. I seem to recall this as an issue, but I don't have the details in front of me, I could be mistaken about this; 2 - generally, anything you hold inside the corporation is subject to legal claims against the corporation. It is usually better to move the money out of the corporation to protect it. You can always loan it or contribute it back in later if necessary; 3 - I my opinion, holding appreciating property in the name of a corporation is a BAD IDEA - it is impossible to remove such assets without generating phantom income. If you really want to purchase a warehouse you'd be better off doing so inside an LLC; 4 - I read one of your responses to another reply and you mention that you are not likely to get any additional liability protection because you'd likely be sued personally. You don't say what you do and this is not a legal forum, but you really should check with a qualified small business attorney. While IANAL, it is my understanding that if an LLC is sued the best the plaintiff can hope for is a charging order, which really puts them behind the 8-ball - this is why so few LLCs are sued. It is also my understanding that regardless of the type of entity you are, if you are acting in good faith as a corporate officer it can be very difficult to get sued personally except for a personally committed wrong (tort?). To get sued as a corporate officer I think your conduct would have to rise to grossly negligent, but I'm not sure; 5 - you also talk about maxing out your "work 401k" and your IRA, but you don't say whether your work 401K is from your S Corp or from another job. If its from your S Corp, trust me, there are way to shelter WAY more money than with a straight 401K. It requires more money that most small businesses are willing to commit to, but if you have the funds you could set up a 412i Defined Benefit Plan and put aside something like $145K annually. 6 - depending on exactly what you do and how you do it, it may be time to bifurcate your business into 2 corps, an S and a C Corp. This would allow you to set multiple plans including a nonqualified deferred comp arrangement similar to a Rabbi Trust.

Hope this helps - Good luck, Gene E. Utterback, EA, RFC, ABA