No revenue first year of corporation

Discussion in 'Growing and Managing a Business' started by ClotheMySoul, Sep 9, 2010.

  1. ClotheMySoul

    ClotheMySoul
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    I have developed a company brand and product over the past 2 years since I was laid off.
    I formed an S-corp but last year but it took longer than I expected to get all of the elements designed and ready...so there was no sales for the first year. I 'heard' that this could be a problem as far as the gov is concerned..something about 'false intentions in forming the corporation'. Does anyone know about this and what should I do? My site will be up sometime this week.
     
  2. Aquarezz

    Aquarezz
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    I've never heard about problems with that, where exactly do you live?
     
  3. Fergal

    Fergal
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    Welcome to Business Advice Forum ClotheMySoul, thanks for joining.

    Is your business based in the US? Which state?
     
  4. ArcSine

    ArcSine
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    CMS, your reference to an "S Corp" sounds like you're in the US, and so I'll answer on that assumption. If "the gov" to which you refer is the IRS--hence you're asking about US federal tax law--then rest assured that there are a boatload of S Corp returns filed with nonexistant revenues in the first year (or two, or...).

    Many types of businesses have a revenue lag at startup--that is, expenses are incurred right out of the gate, but sales don't begin until sometime later. So depending on the situation and the timing, a zero-revenue first-year return isn't unusual, and IRS won't have a problem with that.

    Where they DO get a bit cranky is when someone, year after year after year, keeps reporting no (or minimal) revenues, but substantial expenses, to the point where it becomes clear that they're just conducting a hobby, with no real intention of turning a profit, and simply trying to turn their hobby costs into deductible expenses.

    OTOH, your specific phrase about "false intentions in forming..." might have something to do with a non-tax, state-specific issue. Corporations are creatures of the statutes of the individual states, and so the definitive answer on that one would come from spending a little time on your state's Secretary of State website. Whether it's actually called that or something similar, every state has an agency that administers the corporation laws of the state, and the websites are usually pretty good with basic, accessible information for the public.

    That said, I'd be very surprised if any state statutes have some kind of "immediate revenues" requirement for maintaining the incorporated status.

    Best of luck with your new venture!
     
  5. MichaelSullivan

    MichaelSullivan
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    That's very well said, Arcsine. Another great information that is added on my mind (?). Thanks for that valuable note.
     
  6. hcted

    hcted
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    I agree,

    I read a book that I now live by for running a business. They say NEVER expect any real income from your business for the first three years.
     
  7. Fergal

    Fergal
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    Would you mind telling us what the title of the book is hcted?
     
  8. ClotheMySoul

    ClotheMySoul
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    thank you all/no sales first year

    I thank you all for the education. The more I thought about it, the stranger it seemed that
    a new business could be penalized for no sales the first few years..I can't be the only one who set up a corp as on e of the first steps and then went on to work on the product and biz plan...my accountant was the one who mentioned it in a way that alarmed me. I am in New York state/city and I will look into the states S-corp laws tomorrow. Thanks again and when I get the info I will post it....CMS
     
  9. Fergal

    Fergal
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    Thanks for posting back ClotheMySoul and good luck with getting everything sorted out. Yes, please do post back when you have an update.
     
  10. ArcSine

    ArcSine
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    Many thanks for ringing back in, CMS...your update was helpful. And you're correct--plenty of new ventures incorporate early in the process (R & D; prototype testing, e.g.), before they're ready to "market launch".

    One thing re your last post, though...don't spin your wheels looking for S-Corp laws among NY's corporate statutes. What you'll find at the state level (NY, in this case) are the statutes which govern the creation, formation, and administration of a corporation.

    An "S Corporation", OTOH, (as with a "C Corporation") is a tax concept. Federal tax law allows certain corporations to elect to be treated as "S Corps" for tax purposes.

    Thus the "S Corp" rules are part of federal tax law, rather than part of the corporate statutes of an individual state. Just didn't want you to spend too much time on a wild goose chase.

    Still, the most efficient approach might be to simply have your accountant explain exactly what he/she meant in the first place. ;)
     

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