When to Know if It's Time to Form an S Corporation - The Creator's Law Firm
At some point in your business journey, you MUST determine which type of entity to form. You may consider a C Corporation or an S Corporation, or even a Limited Liability Company.
I’ve found that most of my clients who are just getting started avoid C Corporations because Uncle Samuel taxes them twice (1x at the corporate level and another time at the shareholder level).
On the flip side, S Corporations (“S Corps”)—corporations taxed under Subchapter S of the Internal Revenue Code—and limited liability companies (“LLCs”) are generally taxed once. This difference is a major key because it could mean millions of dollars in tax savings over the lifecycle of your business.
However, knowing when to transition between an S Corp and an LLC is one of the biggest roadblocks business owners face.
Here are my top tips if you’re considering riding the S Corp train to success:
- Know the S-Corp Rules: S-Corps have to follow certain rules, such as limits on the number of shareholders, the requirement to hold annual meetings, and restrictions on who can serve in a corporate capacity. LLCs just aren’t that pressed. If you form the LLC, don’t commingle funds, and pay the fees with the Secretary of State, you’re straight. Brush up on the S-Corp regulations before taking the big leap to ensure you’re in compliance.
- Pay yourself a “Reasonable” Salary. An S-Corp owner MUST pay themselves a reasonable salary. Essentially, this means your salary should be comparable to others in your same industry. The IRS would probably give you a side eye if you pay yourself $25,000 when others in your same industry make an average of $50,000. (0 Stars, Not Recommended)
- The $36,000 Question. A few years ago, I heard a CPA share via Clubhouse that if you’re able to pay yourself $36k a year, switching to an S-Corp should be the #1 thing you do (after you discuss your unique situation with CPO, of course). I’ve found this to be true and a great metric to keep top of mind before making the switch.
Following these three tips should help you transition to an S-Corp with ease as your business scales.
Making sure your business is properly organized is a key step toward future success. If you’re ready to set your business up for success, check out our Business Formation course, which covers the basics PLUS tons of bonuses to help you form a beautiful brand.
Every good wish,
Ticora Davis, Esq.
P.S. If you’re not about that DIY life, please contact a business attorney at The Creator’s Law Firm, and we’ll help you get your brand set up the right way.
P.S.S. If you need to hire an awesome accountant and tax pro to hold your hand, here are three of my recommendations: Patrice Berry, Myranda Harper-Penn, and Amelia Thomas.