Can You Have a Corporation Without Paying Salaries?

By Stephanie Kurose, J.D.

Can You Have a Corporation Without Paying Salaries?

By Stephanie Kurose, J.D.

When a corporation is formed, there is no requirement that it hire an employee or pay a salary. The corporation will legally exist once it files articles of organization with the Secretary of State in the state where it intends to have its home base, or headquarters, and remains in good standing.

Curly haired woman smiling in front of computer while holding papers

Although there is not a requirement that a corporation pay salaries, if the company is conducting any type of business transactions, the Internal Revenue Service (IRS) will presume that somebody (i.e., an employee) is acting on the corporation's behalf. In this situation, the IRS will likely classify any money that person receives from the corporation as a salary, regardless of how the corporation views it.

What legal authority does the corporation have?

Corporations are regulated under state law. The incorporation statute of the state where the corporation is domiciled (i.e., the state where its articles of organization were filed) will govern its activities, as well as every state where the corporation registered to do business.

The typical incorporation statute establishes the corporation and its owners as two separate entities. A corporation has many of the same rights as an individual and has the authority to act on its own behalf. One of these authorities is the ability to hire employees. As stated above, this is not a mandatory duty: the corporation has the discretion to hire as many employees as it wishes or none at all.

Articles of Organization and a Corporation's Existence

A corporation will not be formally recognized by a state until it files its articles of organization. This means that without filed articles of organization with the state, the law does not recognize the corporation as a valid, even if it is outwardly presenting itself as a valid corporation and is doing the exact same thing a corporation would do.

Once the articles of organization are processed by the Secretary of State, the corporation will formally exist. However, there is no requirement that it must conduct business transactions in order to maintain its existence. As long as the corporation has filed articles of organization and remains in good standing with the state, it will exist in perpetuity, regardless of whether or not it is actually engaged in business activities.

Can an owner withdraw money as profit?

Toward the beginning of a corporation's life, it is fairly common for its owners to work for free—until the corporation can afford to pay more employees. As stated above, corporations are not required to pay a salary, so it is perfectly legal for the owner to work for free.

If the owner of a corporation starts to withdraw money from the business as profits, also known as dividends, while it does not have any employees, the IRS may become suspicious because this is a typical way to avoid paying payroll taxes. Even though it is technically legal, the IRS frowns upon this practice.

Thus, the IRS has instated a rule, known as the "60/40 rule," which states that if the corporation is paying its owners in profits and the owners are the only people working for the company, 60 percent of the payments are treated as salary and 40 percent are treated as dividends.

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