<p>My mom is starting a small business, sort of a hybrid of small retail sales and mail-order to China. It will be legally incorporated. I am a rising junior, so we still have two years before submitting FA, and we are middle-class (<$100k). How much of an effect will the business have on FA at private schools, using both FAFSA and PROFILE? It probably won't be profitable in the beginning, so if profit would be outweighed by less FA, we would concentrate less on advertising and such until I get out of school (one sister, but she's 11 years younger so a looong way from college). Is there anything we should do or avoid--i.e. drawing salary vs. keeping money in the company--in order to minimize impacting potential FA?</p>
<p>A lot of your question depends on what kind of business your mother incorporates. With an S Corporation, for example, money can’t be “kept in the company” as all earnings flow through to the owners and get added into the owners’ AGIs via schedule E. C corporations don’t need to distribute earnings, but dividends are subject to double taxation and C corps are more expensive to form. If the number of employees is < 100 then the value of a business that is greater than 50% family-owned doesn’t need to be included as an asset on FAFSA, which is a significant advantage for small corporations. </p>
<p>The main way the corporation will affect your FA is on how much it will add to (or subtract from) your mother’s adjusted gross income. Using various scenarios of profitability, you can estimate the income’s effect on your financial aid by plugging these assumptions into FAFSA and Profile calculators.</p>
<p>Thank you! Another question: with an S Corporation where no money is kept in the company, how is the value of the business calculated?</p>
<p>Vball was referring to the value of assets that the business owns (real estate or equipment) If your mother’s business will be home-based there will be no assets to report anyway. </p>
<p>The FASFA will only look at your family’s AGI which would include your mother’s salary paid to herself plus any net profits after expenses. THe profile asks that you break down the expenses that were deductions. Your school may examine the expenses to determine what they feel is appropriate. For example, I travel for my business, but based on the package my son received, I’m pretty sure the college considered my car depreciation expense as money that would be available for tuition. (I am an S Corp)</p>
<p>So, just because an S corp has a legitimate tax deduction does not necessarily mean that the school won’t consider that money as available income when using the profile. You should also be aware that financial aid offices are somewhat suspicious of small businesses. Some small businesses have cash transactions and are able to hide money, and I think the schools think we all do that. I know there have been threads about financial aid and small businesses. Try doing a search. You may be able to read some of the problems/issues with small businesses.</p>