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Should I become an S corp?
Under what circumstances would it make sense to operate as an S corp?
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Answer
An advantage to operating as an S corp is owner(s) personal limited liability protection regardless of tax status that is provided. This protects the personal assets of the owners from being claimed by business creditors. This is like LLC’s personal limited liability protection. However, the S corporate tax strategy is
Also, like LLC, pass-through taxation benefit are passed to the owners instead of corporately taxed to avoid double taxation that would occur as a C corporation at both the corporate and shareholder levels respectively. An S corp is easily convertible to a C corporation if shareholders and ownership finds it advantageous to be taxed as a C corp. To accomplish this, an IRS election must be filed.
Last but most important, if a reasonable salary (that means realistic) is given to yourself as a business owner you can save in taxes by having an S-Corp vs an LLC. Another incentive is the Qualified Business Income (QBI) deduction that allows 20% deduction for business profits, not salary. IRS will determine how reasonable the deductions are. NOTE: If business revenue is primarily service based, then IRS can deem your profits as your salary. Therefore, this tax structure does not work so well for sole accountants, or consultants, etc.
To determine if an S-Corp is best for your business, consider the type of business and the amount of reasonable salary it generates for you as an owner. Consider whether you can take advantage of the QBI deduction and the company’s ability to form payroll and corporate formalities. Consider the amount of net business income is over or under the social security wage base as this can qualify you for the 20% QBI deduction. And consider the type of retirement account you have set up for the type of ownership entity structure.