We get it, Glennon, it’s confusing for a lot of people 🙂
Let me start by first defining what the heck I mean by the corporate structure of your business – it’s just the kind of company that you have. This is a registration process that you go through with the state where you live/operate your business.
If you haven’t done anything with this yet, you are considered a Sole Proprietor, which is where we all usually start. You can totally get your business started here, and stay here as long as you need to for your business.
There’s no rule of time, but you will want to think about the legal protection you might be missing and some possible tax advantages, so speak with your professionals about this so they can give you advice about your specific business situation.
The next step that business owners usually take is to form an LLC. This gives you legal protection (as long as you are doing things properly) but it’s treated exactly the same at the Sole Proprietor (expensive) from a tax perspective. (In some states it makes more sense to create a C-Corp instead of an LLC, so you will want to get individualized advice around this.)
Creating the LLC essentially puts a ‘brick wall’ between your business and your personal assets, so that if there is ever a situation where you are personally sued, or your business is sued, the assets of the other can’t be included in the lawsuit.
This is formed with the state where you live/operate your business and costs about $500 to get set up (Work with CorpNet for this, please – see below for how to do that – please DON’T do it yourself or work with some mass internet service like LegalZoom).
There are also going to be annual fees you need to pay to keep your LLC active, and these can range from $0 in some states to $800 in CA. So again, take all of these factors into consideration when you’re deciding the right timing for creating your LLC.
Once you start generating a profit and paying yourself in your business, your tax bill can go up quickly, and it usually catches new business owners by surprise.
At this stage, we typically recommend that our clients look into electing to be taxed as an S-Corporation. This is a tax election you file with the IRS to change how you are taxed, but you are still considered to be an LLC or your legal structure. This confuses people a lot. So you are an LLC taxed as an S-Corp.
An important note – you can’t elect S-Corp until you are an LLC, so if you know you are going to hit these profit numbers, get that LLC set up right away!
Here’s our ‘threshold’ calculator that we use to determine the timing.
Revenue for the Year (All of the business sales, meaning cash collected) for the year
Expenses for the Year (all of your business expenses – before you pay yourself)
= When that equals $50-60K for the year, it’s time to have the S-Corp conversation with your financial team.
There are some awesome tax benefits to being taxed as an S-Corp, and also there are going to be increased Administrative costs and complexities required, so you will want to weigh both of those when making this decision.
It’s not just about the tax savings, but those are pretty great.
Not only are the overall tax rates lower, but there are deductions that are available to an S-Corp that aren’t even available for a Sole Proprietor or LLC. The savings can be significant for the right business, at the right time.
If you are ready to create your own LLC, we love working with CorpNet. You can find Amanda’s contact info below. Let her know that Empowered Profit sent you and she’ll take great care of you.
Amanda J. Beren
Direct: 888-449-2638 Ext. 105
And, if you already have your corporate structure set up but need to get a tax strategy in place and discover if it’s the right time to S-Corp, let’s talk today!
This is provided as information only and as a starting point for a conversation with your own legal and accounting team, this should not be considered legal or financial advice.
All of these decisions are based on a number of factors and we cannot guarantee that you will experience any specific results based on any information provided. Please speak with your own retained professionals to ensure that you are making the best decisions for your business & personal situation.
We may receive compensation for recommendations that we make, but we never recommend something that we don’t love.