Are you ready to take the next step in your business journey and convert your sole proprietorship or partnership to an S corporation? There are a few things you need to know before you get started making this transition, including the advantages of forming an S corporation as opposed to a C corporation or sole proprietorship.
Let’s take a look at some of the main things to keep in mind as you make the shift from a one- or two-person operation to a company owned by shareholders, courtesy of The Lacy Employment Law Firm:
In 2009, the Internal Revenue Service (IRS) ruled that any company that is taxed as a partnership or sole proprietorship can be transformed to an S corporation without spending a year as a C corporation (in which the owners or shareholders are taxed separately from the entity itself). This means that you can declare your business an S corp at the beginning of a given year without having to have a transition year as a C corporation.
The IRS decisions aside, you will need to determine your company’s readiness to move ahead with this important transition. Ask yourself: Do you want to transfer ownership to shareholders? Do you want to make sure you’re not being taxed double as a corporation? Do you want more flexibility and asset protection? If the answer to all of these questions is ‘yes,’ then you’re ready!
One of the benefits of declaring your business as an S corporation is the tax structure. With a sole proprietorship or partnership, owners have to file their taxes along with the business. With an S corporation, on the other hand, the owners or shareholders file their taxes as they normally would, while the corporation files its taxes separately. That helps keep your taxes separate from those of the business, which, in turn, protects your assets and even allows you to draw a tax-deductible salary from business profits (more about that below). The S-corp status also means that your business is not subject to Medicare or Social Security taxes since it has a pass-through tax status.
Limited liability companies (LLCs) and corporations need to file an annual report in order to continue operating under the law. States use these kinds of reports to keep tabs on companies and make sure they have the right information on file for their records. Typically, corporations are required to file an annual report through the office of the Secretary of State in their state. You can learn more about the process here.
One of the main advantages of transitioning to an S corp status is that, as a shareholder-employee, you are required to obtain a taxable salary through the profits generated by the business. This is one of the most scrutinized numbers that the IRS will look at, but selecting a reasonable salary by making the appropriate financial decisions is a definite benefit of this type of business structure. You’ll absolutely want to consult your accountant for a good starting point.
After reading about the advantages and several things you should keep in mind, if you’re still thinking about making the transition, there’s no time like the present! When you’re ready to take the next step in the process to transition to an S corporation, you’re going to need a trusted accountancy partner by your side to guide you through the taxation changes. Get in touch with a trustworthy CPA to learn about service offerings.
For employees seeking top-notch representation in discrimination, harrassment, wrongful termination suits, and more, connect with Attorney Andrew Lacy. Call (412) 301-3908 or click here for more information.