First of all, anytime I speak about S-Corps and then transcribe it or am using voice to text, it understands S-Corp it as “S Corpse” or “Escort” and it cracks me up, every single time.
OK, now to the real info…
Some accountants recommend becoming an S-Corp, but they don’t actually tell you why or how to take advantage of this newly elected S-Corp status. We also see a lot of people try to take care of the paperwork themselves (or with an accountant who doesn’t understand it) and it can cause a big mess (often down the line). Don’t worry, we are here to help from the start so you understand what an S-Corp is and if it makes sense for you.
An S-Corp is a business entity that has elected to be taxed as an S-Corp. It’s called an “S”-Corp because it’s subchapter S of the IRS tax code that addresses these types of businesses. Nothing more than that. And btw, I don’t recommend you read subchapter S of the tax code, lol it’s pretty boring.
This election doesn’t change your legal structure and it it’s not something you can ‘create’ you just ‘elect’ it as a tax strategy. I know that seems like semantics, but it’s a really important distinction and one of the things that confusing folks the most about S-Corps.
It’s a pretty simple IRS form (Form 2553) from the IRS that you fill out and send to them as your formal request for your business entity to be taxed as an S-Corp. If you work with us here at Empowered Profit, we’ll help you get it all filled out with the specific verbiage the IRS requires. All you have to do is sign it and send it back to us! We take care of everything else. Note – some states require a separate S-Corp election form. If you’re in one of these states, we will assist with this as well.
YES! An S-Corp is just a tax election, it doesn’t change your legal structure/status. So you will still create your LLC, Corporation or Partnership with your state as your legal entity and then you will elect to be taxed as an S-Corp. For example, my business is an LLC taxed as an S-Corp. There’s no such thing as a legal entity of an S-Corp.
It’s super important that your legal structure is created correctly, so please work with a trusted advisor to take care of this important first step. We have a great company we work with that can help you get all that set up, just ask!
You can have the start date of the LLC/Corporation/Partnership and your S-Corp Election be the same day, that’s totally fine. So, if you are going to receive tax benefits from the S-Corp, you will want to do this sooner rather than later!
Becoming an S-Corp eliminates the self-employment taxes you would be paying as an LLC or Partnership, and it also opens up some other strategic benefits, once your profit is high enough to take advantage of them, they are awesome. S-Corps are historically audited at a lower rate than LLC/Sole Proprietorships, so that can be another benefit as well.
One important note: Electing S-Corp may trigger some additional state or local taxes, depending on your location – so you will want to definitely run through all of the options you have with your tax team.
Absolutely! Typically we advise considering this once you are consistently making $50,000+ of profit in a year (before you pay yourself) – but there’s no requirement of how much you need to make before you become an S-Corp. That’s just when it will typically be beneficial from a tax perspective. Just keep in mind that a S-Corp comes with a few additional expenses and the potential for increased state tax so we don’t recommend you make this decision without looking over all the factors first and chatting with a financial team who understands your business.
There are a lot of things your accountant or attorney may go over with you when considering becoming an S-Corp.
In order to maintain S-Corp status, the IRS requires the owner to be on payroll. This increases expenses for the business both in the way of payroll taxes and payroll processing fees. It also requires a completely separate tax return. So these things can increase your admin costs, you will want to be sure your consistent profit is high enough for their to be enough tax benefit to outweigh these costs.
Also, some states implement an S-Corp tax that you don’t have to pay as an LLC. There’s no simple trigger for when you should become an S-Corp. But this is why tax strategy is SO important! As we go through tax strategy check-ins with our clients, we review their tax savings (and any state tax increase that may occur) with the election and talk through it with them to determine when it’s the right time for them to elect S-Corp status.
Keep in mind that S-Corps may not have non U.S. Citizens/Residents as shareholders. If you have it in your future plans to live in a different country, you will want to discuss that with your tax team before doing an S-Corp election.
There is also a limit of the number of shareholders. It’s 100, so you’re probably safe there but good to mention if you have big goals and growth in mind for your company and are planning to offer stock or bring investors into your business.
You’ll get an acceptance document in the mail from the IRS. Make sure to keep this on file with your other important business documents. Remember, your business name and LLC are still the same name, you’re just now being taxed as an S-Corp. You’ll want to notify your bank, your payment processing/merchant service companies, financial advisors, and anyone who pays you via check or bank transfer. You’ll also want to update your W-9 to mark your S-Corp election. Lastly, make sure you add any new deadlines you have as an S-Corp to your calendar. The filing dates are different than they were before you become an S-Corp, and they can sneak up on you!
Hopefully you’ve already chatted with your tax professional, accountant and legal team to make this decision. But if you do decide to revoke your S-Corp status, all you have to do is submit a notice The IRS website lines out exactly what to include in your statement of revocation here.
That’s it! There is not one blanket option you should choose as a business and an S-Corp isn’t right for everyone (despite what you might hear out there). It depends on YOUR specific business.
S-Corps don’t have to be complicated. It is just important to do your research and work with a company (like Empowered Profit) and also consult with an attorney, both who can help you compare and decide if it’s the best decision for you and your business and what timing makes sense for you.
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.
Please speak with your own retained professionals to ensure that you are making the best decisions for your business & personal situation.