The month of May is Small Business month, and so all this month in the Freedom Friday blog and email newsletter I want to answer questions which will help you succeed as a small business owner. In today’s Freedom Friday blog and email newsletter, I want to answer the question, “Is an S-Corp Right for My Small Business?” I am frequently asked what an S corporation is, and what it is not, along with what the requirements and advantages of S corporation status.
Let me begin by saying what an S corporation is not. An S corporation is NOT a business entity. An S corporation is actually a tax election, and it can be elected for an LLC or a corporation. If you’re a small business owner, you can choose to form either an LLC or a corporation. Either way, you can elect S corporation status with the Internal Revenue Service (IRS). If you don’t elect S corporation status, then your LLC will be treated as “pass-through entity” by the IRS (also known as a “disregarded entity”). Alternatively, your corporation will be a C corporation, which can experience “double taxation.”
The primary advantage to S corporation status is tax savings for your small business. With S corporation status, its possible that the shareholders or members can split their income. The shareholders or members can decide to take a reduced salary (it must be reasonable), pay income taxes, apply Social Security and Medicare taxes to the smaller salary, and take the remainder of their compensation as dividends for a corporation, or distributions for an LLC. Dividends or distributions are not subject to self-employment tax but remains subject to personal income tax for each shareholder or member. Also, losses of the S corporation can be written off on the shareholder’s or member’s personal tax return, which is an advantage for a startup or newer company.
Lastly, S corporation status is not right for everyone; its not a good fit for every small business. Is an S corporation right for your small business? If you’re a new small business, and not you’re not making much profit, then you might not be making enough money to have an S corporation make sense. As a rule of thumb, your small business needs to make at least $50,000 in annual profits before considering S corporation status. When you’re making profits at that level, that’s when an S corporation is right for your small business.
If you are interested in starting a small business anywhere in Oklahoma, or you are interested in taking your small business to the next level, please contact me at Jonathan@libertylegalok.com to schedule a FREE strategy session.
For more information about Liberty Legal Solutions, LLC, please visit our website at https://www.libertylegalok.com/