"S" Corporations
If your goal is to take large amounts of cash from the business in a tax-advantaged manner and receive some liability protection, then the S-corporation status is your answer. Be sure to set up the "S" election correctly by filling out every single detail on Form 2553 and signing twice (both as a shareholder in the middle of the form and as an officer at the bottom of the form). The form must be sent within 75 days of when you form the corporation or the year you want the election to start. Since the IRS loses a significant number of these elections, you should send the Form 2553 by registered mail with return receipt requested to prove that you filed timely.

The "S" election makes the corporation exempt from all income taxes (except in some rare instances). In exchange for the corporation receiving exemption from taxation (although you still have to file a corporate tax return on Form 1120S), the shareholders agree to have the company's profits added to their personal returns so they can pay the income tax for the corporation. Be careful though to check with your state tax department. While most states follow the federal approach and many do not require a separate state election, some states will not automatically grant the "S" corporate exemption, or may impose a corporate level tax anyway.

Because the profits are taxed to the shareholders, profit distributions can be made with no tax consequences as long as the Accumulated Adjustments Account (schedule M-2 on the tax return, which usually is the same as your retained earnings) is a positive number. Some state laws also impose a legal prohibition against dividend distributions if the net worth is negative. The big benefit of these profit or dividend distributions is that they are free of all payroll taxes.

You should be careful to declare some wages, since the IRS will not believe that you as employee worked for free all year (or could hire someone for free all year) so that you as shareholder can receive a massive amount of dividends on your stock investment. Generally if your profit distributions are no more than double the amount of wages you declared for yourself, then you should not have a problem.

You can also give your spouse a modest wage. Then the company can deduct the cost of both officers attending the annual board of directors meeting at the beach or in the mountains. If an "S" corporation suffers a loss, the loss can also be used to offset personal income.