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Unemployment - Failing with a profit.
Don and Nelda got smart. They decided to form an S-Corporation with the idea of selling
organic foods baked at home by Nelda, who was at that time a homemaker. Keep in mind that
Nelda was already at home, taking care of the children and home schooling, while running the
household. Don had a good job. He was hard working and ambitious.
Don was an entrepreneur. He was always willing and determined to find new ways to create
revenue for his family. The organic foods was a good idea. They started their small business.
They kept books and paid her Federal Social Security (FICA), state unemployment insurance
and state workman's accident compensation insurance.
Don claimed enough dependents so that NO income tax withholding was necessary. They had
little money to start with. So how did the Corporation get enough money to pay Nelda?
Don took all of his paycheck each week and bought stock in the corporation. The money that
Don put into the corporation is to the corporation paid-in capital. The total contributions made
by shareholders to a corporation, whether in exchange for stock or otherwise, is paid-in capital.
These contributions are not taxable income to the corporation. The corporation took the
same money that Don purchased stock with and paid Nelda, and of course the various
employer/employee insurance contributions required. Nelda in turn, used her earnings to
support the household expenses.
Nelda could have been paid all or in part by an accrual method, stock, promissory notes or other
instruments from the corporation so long as the employer/employee requirements were paid in
cash. The effect of this can be to
1) Decrease the investment capital required
2) Conserve cash flow
3) Increase her protection and the amount of benefits payable to her under the various
coverages in the event should be eligible for any benefits. (Consider the protection and cash
benefits Nelda could have from the State Industrial Insurance Workman's Compensation if she
were temporarily or permanently disabled on the job.
At the end of the year the corporation had sold only a few items and had no profit. The
corporation had spent all of the money Don had invested The corporation loss predominately
amounted to all of the money the corporation had spent in wages paid to Nelda. The
corporation laid Nelda off due to the lack of work. She filed for and collected unemployment
benefits to which she was legally entitled and for which the corporation had paid during the
period of employment. The end result was the family gained several thousand dollars in legal
employment benefits as a result of conducting this activity within the proper corporate structure.
Don and Nelda were also able to deduct the corporate loss (to the extent of their investment)
from their other individual earnings and they legally saved on income taxes. Don received a
refund check.
The corporation became dormant for a year. They kept the company in good standing with the
state. The corporation rehired Nelda, but regretfully, the same results occurred. But once again
the family came out many thousand dollars ahead by the same set of circumstances. Don and
Nelda prospered.
