Getting Paid at an S Corp.

Question: I have had an S corporation since 2003, and I am the only employee. I have never paid myself a salary or made any distributions as dividends. However, I recently bought a house and I need to take a salary. I signed up with a payroll processing service, but they said they couldn’t process my payroll because I am a single-shareholder S corporation.

Answer: Find another processing service. Structuring your business and paying yourself from the proceeds can be tricky, but most payroll companies should have no problem servicing your S corporation, said Tracie Rose, a sales representative in the Los Angeles office of Paychex.

An S corporation is a popular way to structure a business. An S corporation is often called a “flow-through” or “pass-through” entity because business income and deductions pass through the corporate structure directly to the shareholders, where they are reported on the shareholders’ individual tax returns.

The Internal Revenue Service requires that “reasonable compensation” be paid to shareholder-employees in exchange for their services to profitable S corporations. This compensation must be paid before non-wage distributions are made.

In July 2005, the IRS launched a study to find out whether income and deductions were accurately reported by shareholders of S corporations. The study is expected to help the IRS select S corporation returns to audit, so you want to make sure that your firm is complying with tax law.

“States are also concerned about compensation not being reported as paid, since unemployment insurance payments by employers are only incurred based on salary,” said Don Lucove, a certified public accountant at Lucove, Say & Co. in Calabasas.

The bottom line: If you are working in the corporation, and it is profitable, you need to pay yourself.

“National payroll companies like Paychex address these specific issues regularly and are equipped to satisfy S Corp. salary requirements,” Rose said. Also, using a payroll service can shield you “from liability or potential penalties caused by inaccurate or untimely payments.”

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Getting Started in the Pet Garment Industry

Q: I would like to design and sell pet clothing. Where can I buy fabric wholesale and how do I find a manufacturer locally?

A: Before you start looking for supplies and manufacturing, you need to make product samples and determine whether your designs will sell. You can either make samples yourself or hire a sewing contractor to make them for you.

“To have samples made, look through the classified advertisements for pattern makers, sample makers or sewing contractors,” said Ilse Metchek, executive director of the California Fashion Assn. Newspapers typically carry such ads, as does the weekly Apparel News.

Once you have product samples, take them to trade shows where you can meet manufacturers and suppliers and get some realistic feedback. “You want to get opinions on whether or not the products are worthy,” Metchek said. The California Fashion Assn. (www.californiafashionassociation.org) hosts several trade shows annually; contact the group for dates.

If you decide to pursue the business, you will want to hire a contractor or a product developer. A sewing contractor will manufacture your products on the timeline you establish. You’ll have to supply the textiles, patterns, notions and trim, Metchek said.

If you’re interested in simply designing garments and letting someone else do the rest, you’ll need to find a product developer who will source materials and supervise production and distribution for you. A product developer, Metchek said, will expect to become a partner in your business.

Check out Fashion Business Inc. (www.fashionbizinc.org), a nonprofit business incubator that provides education and resources to the apparel industry.

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Got a question about running or starting a small enterprise? E-mail it to karen.e.klein@latimes.com or mail it to In Box, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012