Business entity registration

Why changing from LLC to S corp?

My client had a IT Consultancy company as an LLC but during the year, his CPA suggested him to change the entity to S Corp!

I know the differences of different types of entities but I can’t understand how my clients benefit from LLC to S Corp!! Is it because he pays less tax by putting himself on payroll on the S Corp?

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Answer

  1. 29 Answers

    Great question!

    Setting up an LLC at the beginning of a business is a common practice entrepreneurs do in the US. This is generally a good practice at the start of an LLC to offer liability protection for the owner(s). As your income from the LLC increases, so does the self-employment tax. The more the LLC earns, the more tax is paid, but your ability to contribute to retirement accounts does not change. This is where converting the LLC to S Corp has an advantage. From a tax perspective, it makes sense to convert the LLX to an S Corp, when the self-employment tax exceeds the tax burden faced by the S Corp.

    I see on the Dashboard here a good straightforward article on benefits of S-Corp & LLC:
    https://askexper.com/ultimate-guide-accounting-bookkeeping-tax-freelancers/#A_Look_at_Sole_Proprietorship

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