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Ask About Income for Services Paid Through C Corporation

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By Marcia Richards Suelzer, MA, JD | August 08, 2012

Dear Toolkit,

I've formed a C corporation to help make sure my personal assets are protected in case my business doesn't take off as I hope it will.  When I am hired to do work for another business, how can I make sure the income is income to my corporation, rather than to me personally.  Do I need to file any special forms to make this happen?

Prudent Planner

Dear Prudent,

Your question straddles two areas of law—asset protection and taxation. It is imperative for both tax and asset protection purposes that you and your corporation are separate and distinct persons. This is not so much a matter of “forms” as it is “formalities.”

In order to protect your assets, you need to ensure that you do not give your creditors grounds to disregard the corporation. This means that you must observe all the formalities involved with a corporation. Your corporation must be a viable independent entity, not a mere shell.  You must have properly incorporated, issued shares, filed your annual reports, maintained separate bank accounts and books and documented all interactions between yourself and your corporation. You must also have adequately capitalized your corporation. Details on these requirements can be found in our article: Piercing the Veil of Limited Liability Results in Personal Exposure.

However, simply observing these formalities does not guarantee that the corporation will be the responsible party under the contract. Too many business owners have found themselves to be personally liable to creditors as well as the IRS because they were sloppy when executing contracts. If you want to avoid personally receiving the income, then the corporation, and not you, must enter into the employment contract with the hiring company.

A fundamental rule of tax law is that income is taxed to the person who earned it. Therefore, the corporation must be the person who is earning the income—even if the actual performance of the work has been delegated by the corporation to you. The third-party will pay the corporation and you will receive compensation from the corporation based upon your performing those services.

There should be an employment agreement between your corporation and the third party who is contracting the work. It is imperative that you sign the employment agreement as a corporate officer who is acting as an agent of the corporation, not as yourself. More information on how to properly sign contracts so as to avoid personal liability can be found in our article: Take Steps to Limit Your Liability for Contracts 

Finally, you do not mention the type of work that you do, but it is important to note that in many cases merely having a corporation will not protect your personal assets if you commit malpractice or are grossly negligent.  For that reason, we would suggest that you read our articles: Beware of Tort Exceptions to Limited Liability and Liability Insurance Protects You from Yourself

We hope this information is helpful.

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