Is this legal?

overmaars

overmaars

1,000+ Posts
Let's say you have two business entities, a "C" corp and DBA under C-corp. Both businesses have the same BOD/Ownership and they operate under the same physical roof.

C-corp reports it's P/L on its balance sheet. Naturally. However, also appearing on C-corps balance sheet....the majority of L for the DBA, but none of the P. On its own balance sheet, DBA reports a fraction of its P and the leftover L that didn't go on C-corps balance sheet. So it appears that DBA is essentially breaking even. Except that DBA is wildly successful and clearing ridiculous P - (why wouldn't it, its operating costs are virtually zero thanks to C-corp)..The ridiculous profit generated by the DBA is paid to the BODs', structured as dividends or royalties (taxed at 15%) rather than salary (taxed at 28-33%). This clearly helps the BOD's avoid additional income taxes. It also appears to help struggling C-corp avoid accumulated earnings tax.

I wasn't a business major so pardon my ignorance. Does this have a name and is it legal/ethical?
 
A DBA is not capable of being a business. It's not a form of business, but rather a notice filed with the county that xyz corporation or partnership or sole proprietorship is Doing Business As (insert name like Toys-R-Us or Jim's Moving Services). With that in mind, what you described (I only skimmed) smelled like good old fashioned income tax evasion and fraud.
 
Nick - I answered this on his other thread, but I think you just have to take the dba out of the picture to see what they're doing. They want to pay out some of the c-corp income as qualified dividends rather than distribution of profit. The fact that they call it "dba income" is, as you said, meaningless.

The only question still open is whether they are paying the corporate taxes on those dividends before paying them out. It's possible that the tax savings on their personal returns (where they get a chunk to pay at the 15% qualified dividend rate rather than getting bumped into a higher bracket via more "income") outweigh the additional tax costs on the c-corp side (paying tax on the dividends rather than distributing it straight to the owners to pay their own ordinary rates on).
 
Like I said, I just skimmed it. Mainly because the question sought an answerfrom someone with better knowledge. I can't tell you how many times I told clients that I wouldn't even venture off the record guesses when it came to tax and economic issues.
 
Nick, you're my kind of lawyer. Nothing worse than paying a shitload to a lawyer to "research" a topic that he knows nothing about.
 
I'm not a tax lawyer anymore, but, depending on where you are, I can refer you to a CPA and a tax lawyer who can try to help you fix your books. There is a name for what you're trying to do: tax fraud. It sounds like you're trying to run the DBA as a wholly-owned sub de facto Corp without properly allocating expenses according to GAAP. There are a few things you'll need to do if you want to keep that structure and make everything lawful--including how you allocate revenue and expenses for proper accounting and tax purposes.
 
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