Benefits of an S Corporation
An S corporation allows small business owners to save on taxes and protect assets. Consider an S corporation when self-employment tax is greater than the taxes paid if operating as an S corporation. Extra paperwork and hassle may offset S corporation tax savings.
Tax Advantages and Considerations
- An S corporation does not pay taxes itself.
- Profits and losses pass through to shareholders, who pay individual income taxes.
- S corporations provide liability protection like an LLC without corporate taxes.
- S corporations allow people to save on self-employment tax by paying tax only on a reasonable salary.
Factors to Consider for Converting to S Corporation
- The general rule is that an S corporation makes sense when self-employment tax exceeds the S corporation’s additional burden.
- If your business makes over $100,000 in profits per year, an S corporation could save money by avoiding double taxation.
- Consider an S corporation when your net business income approaches a reasonable salary for your work.
Conversion Process to S Corporation
- Newly formed LLCs can file an election for the LLC to be taxed as an S corp. within two months and 15 days of the date the business begins its first tax year.
- To begin the process of converting an LLC to an S corp, submit Form 2553 (Election by a Small Business Corporation) to the IRS.
Decision Making and Tax Savings
- At what income level is S corp worth it?
- There are several instances when it would be beneficial for you to convert your LLC to an S corp, including when self-employment tax is greater than the amount of tax that would be paid if operating as an S corp.
Criteria for Conversion
- While there is no specific income threshold that universally determines when an S corp becomes worth it, certain factors can guide the evaluation process: Anticipated Net Income and Reasonable Compensation.
Additional Considerations
- An LLC is a limited liability company, which offers protection to the owner(s) from personal liability for debts and other obligations that a business might incur.
Conclusion
The decision to convert to an S corporation should be based on factors like tax savings, compliance costs, and the level of net business income.