/Tag:S Corporation

S Corporation Election Deadline Is Almost Here: What Startups And Existing Businesses Need To Know

If you’ve legally established your business as a C Corporation or Limited Liability Company (LLC) that has elected to be viewed as a corporation for tax purposes, you have the option of filing IRS Form 2553 to get S Corporation tax treatment.

Why would you want to do so, you ask? Because it could make a big impact on your business’s bottom line.

The Potential Advantage for LLCs

LLC owners who find themselves with a high self-employment tax burden might benefit from choosing the S Corp election. LLCs are normally taxed like sole proprietorships—with all business profits subject to self-employment taxes. With S Corp tax treatment, self-employment taxes are only applied to wages and salaries rather than on all business profits.

The Potential Advantage for C Corporations

C Corporations can benefit from S Corp election because it avoids the costly double taxation C Corps normally face.

As a completely separate entity from its owners, a C Corp essentially pays taxes twice on its income:

1) When the corporation makes money, it files a tax return and pays taxes on those profits, and

2) If the corporation distributes profits to shareholders, those distributions get taxed again on the shareholders’ personal tax returns.

If a C Corporation opts to be treated as an S Corp for tax purposes, however, the business itself doesn’t file its own taxes. Instead, shareholders report their individual shares of the business’s profits and losses on their own personal tax returns.

For instance, if you’re an S Corporation shareholder with 50 percent ownership of the business, you would pay taxes on 50 percent of the profits. That income would be taxed as a profit distribution, and you might get a favorable tax rate. Note that you would also pay taxes on any income you received as wages and salaries (and that portion of your income would be subject to self-employment taxes).

Ultimately, the advantage of filing for S Corporation tax treatment comes from the fact that the corporation doesn’t pay taxes on its profits—all profits flow through to the individual shareholders’ tax returns.

Heads Up: The S Corporation Election Deadline Is Approaching

To make the S Corp election, you need to file Form 2553. If you want the election to be effective in the next tax year, you can file at any time during the tax year prior. If you’re filing in the year you want it to be effective, you must do so no more than two months and 15 days after the beginning of the tax year. According to the IRS, the “2-month period begins on the day of the month the tax year begins and ends with the close of the day before the numerically corresponding day of the second calendar month following that month. If there is no corresponding day, use the close of the last day of the calendar month.”

For existing C Corporations and LLCs, you have until March 21 to take the S Corp election for 2017.

New companies have 75 days from the date of their incorporation to file Form 2553. If they meet that deadline, they’ll receive S Corp tax treatment starting in their first tax year.

IRS Form 2553 provides additional detail about the filing deadlines and other important information, including S Corporation election eligibility restrictions.

Time Is Of The Essence For 2017

If you’re considering the S Corporation election for 2017, I recommend talking with a tax advisor to determine the potential impact it will have on your businesses tax obligations. If you find it is a great fit for your business, contact CorpNet as soon as possible to take care of filing your Form 2553 so you have the peace of mind it’s completed accurately. There’s still time (but not much!) to get it done before the deadline.

By | March 2nd, 2017|Other|0 Comments

Setting Up a Corporation – FAQ

Happy November! We are excited to bring you another post in our monthly FAQ series!

When starting a business, one of the first questions an entrepreneur must ask themselves is, “What entity type should I register?” Here at CorpNet, we are often asked to explain the differences between a C Corporation and an S Corporation, how to file a corporation, and even, “What is a corporation?” In this month’s FAQ post, our CEO Nellie Akalp answers all your burning questions about corporations!

Q: What is a C Corporation

A: A C Corporation is a standard corporation. It is considered a separate entity from its owners. This means that the corporation is responsible for any of its debts and liabilities. This is often called the “corporate shield” as it protects the owner’s personal assets from debts and liabilities of the business.

A corporation has a formal structure consisting of shareholders, directors, officers and employees. Every corporation must select at least one person to serve on its board of directors and officers are required to manage the day-to-day activities of the company.

As a separate business entity, a corporation files its own tax returns. As a C corporation owner, you’ll need to file both a personal tax return and a business tax return. In some cases, this can result in a “double taxation” burden for small business owners (see the question on double taxation below for more details).

Q: How do I create a C Corporation? 

A: To create a C Corporation, you’ll need to file the proper formation documents, typically called the Articles of Incorporation or Certificate of Incorporation, with your state’s secretary of state agency. You will also need to pay the necessary state filing fees. If you incorporate with CorpNet, you simply need to complete the online order form (or give us a call!). We’ll prepare the necessary paperwork and file it with the state.

Q: Who can form a C Corporation? 

A: There really aren’t any restrictions on who can form a C Corporation. Some states do require that the directors of a corporation are 18 and older, but there aren’t any age, residency, or other legal requirements for who can form a C Corporation. Keep in mind that the IRS places several restrictions on who can elect S Corporation status.

Q: What organizational roles are required in a C Corporation?

A: C Corporations have three groups: shareholders, directors, and officers. Shareholders own the C Corporation (via their shares of stock), yet the shareholders typically don’t manage the company. Shareholders do elect and remove directors, and can vote on major corporate issues.

The board of directors manages the affairs of the C Corporation, and can appoint and oversee officers. It’s the officers who are responsible for the day to day management of the corporation.

It’s possible to be a shareholder, director, and officer. In fact, in most states, you can be the sole shareholder, director, and officer for your C Corporation.

Q: What’s the minimum number of directors required for my C Corporation?

A: Most states allow just one director for a C Corporation, but you can have more. In some states, the minimum number of directors depends on the number of shareholders.

Q: What is double taxation?

A: Income earned by a C corporation is typically taxed at corporate income tax rates. Then, after the corporate income tax is paid, any distributions made to stockholders are taxed again as dividends on the stockholders’ personal tax returns. This is often called “double taxation” since corporate profits are first taxed on the corporation and then dividends are reported on the individual stockholder’s return.

Q: What is the difference between a C Corporation and S Corporation?

A: C Corporations are subject to double taxation as described above. A C Corporation entity is required to pay tax at the corporate level. An S Corporation is considered a pass-through entity for tax purposes. This means that the company’s profits and loss are passed through to the individual shareholder’s tax return (and each shareholder is typically taxed on the company’s profits based on their share of stock ownership).

Q: What are the benefits to forming a C Corporation compared with an S Corporation?

A: A C Corporation can offer greater tax flexibility. In addition, if you’ll be keeping the profits within company (as opposed to distributing dividends to shareholders), then the C Corporation can shield shareholders from direct tax liability.

Q: Can I form a Corporation with just one person?

A: Yes. A Corporation can have just one shareholder. Keep in mind that even if you’re the sole shareholder, you will still need to comply with corporate formalities such as director and shareholder meetings, and keeping meeting minutes.

Q: If I have multiple businesses, what’s the best way to legally structure them?

A: There are three different ways to structure multiple businesses. There are advantages and disadvantages for each approach – and the best structure will depend on your personal situation.

  • You can file an LLC or corporation for each of your businesses. This approach isolates the risk to each individual business, but involves maintenance fees and paperwork for each of the LLCs/corporations.
  • You can file one LLC or corporation, and then set up multiple DBAs (Doing Business As) for each of the other businesses. With this approach, you just need to pay your annual LLC/corporation maintenance fees for the LLC/corporation (and not each individual DBA). However, each DBA isn’t protected from the other DBAs. So if one DBA is sued, all the other DBAs under the main LLC/corporation are liable.
  • In the third approach, you can create individual Corporations/LLCs for each of your businesses and put them under one main holding Corporation/LLC.

Q: What is your Express Filing Service?

A: It’s a way to reduce your formation filing timeframe and get your corporation set up faster – sometimes as fast as 24 hours or even the same day! To understand the express filing timeline, it’s important to understand there are two different processing times: CorpNet and the state.

With the Express Filing Service, we’ll process your documents the same day (if submitted, Monday through Friday, before 4 pm PST). Depending on your state, we’ll hand deliver, fax, or send your documents via courier – whatever your particular state/county allows as the fastest option.

Then, the state office is instructed to process your filing as an expedited filing. State processing time estimates vary by state, and not all states support expedited filings. When you fill out your incorporation package online, you will see if the expedited service is available in your state and what the state’s estimated processing times are.

Do you need help registering a corporation or have a questions regarding the process? Call the CorpNet.com team today for a free business consultation at: 888.449.2638

                               

Fall Tips To Help Your Business Have A Strong End-Of-Year Finish

Although most of the year has already passed and we’re now into the autumn season, don’t panic if your business has fallen a little bit behind on its goals. It’s not too late make changes that can help lead to a strong finish in 2016.

Whether you’ve just started your business or have been running yours for years, the key is to take action sooner rather than later—and to focus on efforts that will improve your bottom line now and into 2017.

 

  1. Nurture Customer Relationships.

If you’ve fallen out of touch with some customers, now’s the time to reconnect. Just be careful to do so with their best interests at heart, so you don’t come across as desperate or pushy. One easy way to start conversations is by emailing them an interesting article that has information they can benefit from. I recommend reaching out to each select customer individually rather than in a mass email. By personalizing your communications, you’ll make them feel special—and more engaged in revisiting the status of your business relationship.

Also, consider putting a formalized customer relationship management process in place, so there’s a method (rather than madness) in how you follow up with customers after certain actions, transactions, or lack of activity. A number of customer relationship management systems (at varying price points) are out there that can help you track customer activity and automate personalized communications.

A little goodwill and top of mind awareness can go a long way in generating more sales, so it pays to check in with customers regularly to show you care.

 

  1. Upsell, Upsell, Upsell!

Why would you not seize the opportunity to sell more products or services to the customers who have shown they’re raving fans of your brand? If you haven’t been sending emails or postcards or calling loyal customers with information about your other products and services, you’re missing sales opportunities.

Afraid you’ll seem pushy? You don’t have to fear that if you approach customers with the intention of helping them solve a problem or benefit in some way. As I mentioned before, showing you care fosters goodwill and can generate sales as a result.

 

  1. Streamline Your Administrative Activities.

Take a moment to review your administrative processes and discover where you might have excessive paperwork, duplicate work, and bottlenecks that are slowing down productivity. From accounts payables to billing to project management to customer data entry, look for ways to save time by streamlining tasks.

 

  1. Keep Spending In Check.

Although you should always be cognizant of your business’s spending habits, it’s especially critical now if you’re behind schedule on reaching your financial goals for the year. Look closely at your costs, and zero in on the “must haves” versus the “nice to haves” so you can cut out unnecessary expenses. Lowering costs has a direct impact on your profit and loss statement, so if even if you ignore all other suggestions, pay attention to this one!

 

  1. Make Sure You’ve Met Your Business Compliance Requirements.

Rather than discover you’ve dropped the ball, check to make sure all your t’s are crossed and i’s are dotted now regarding your business compliance responsibilities. If required, have you filed your initial and/or annual report and complied with your business license and permit obligations? Corporate compliance services like those from CorpNet can help you ensure you’re up to date and won’t be hit with penalties. Best of all, when the New Year begins, you’ll be able to focus on activities that will drive revenue rather than put out fires.

 

  1. Think Ahead About Your Business’s Direction.

Whether you’re just starting your business or planning to close it, taking care of matters before the end of the year offers some potential advantages.

If you plan to launch your business in 2017, you can avoid becoming over-stressed during the busyness of the New Year by taking advantage of CorpNet’s delayed formation filing process. It allows you to submit your formation paperwork before the end of the year, but make the effective date of your business the first of the year.

If you know you’ll be closing your business in the near future, you might consider taking care of filing for dissolution now. Doing so before year-end might help you avoid paying additional taxes and penalties.

 

Move Your Business Forward This Fall—And In The Future

Also, think proactively about what you can do to succeed in 2017. All of the things I mentioned earlier will help, but also consider reviewing your choice of legal structure for your business. By making a change to an LLC, S Corporation, or C Corporation, you have the opportunity to gain liability protection and possibly some tax advantages, as well.

By putting more effort into your customer relationships, running your business more efficiently and cost effectively, and paying attention to compliance requirements, you’ll be taking positive steps toward a strong finish in 2016 and a successful start to 2017.

Back to Basics: LLC or Corporation? Which Is The Better Choice For Your Business?

Both forming an LLC and incorporating your business safeguard you by protecting your personal assets if legal action is taken against your business. They also give your business a boost of credibility by having either “LLC” or “Inc.” behind your company name. But there are differences that could make one or the other the better choice for you.

I can’t emphasize enough the importance of knowing the pros and cons of the legal structures available to you before you decide which will serve your business most effectively.

 
The Low-down On LLCs

Many owner-managed businesses opt to form as LLCs.

LLC owners are referred to as “members,” who each own a certain percentage of the business. Single-member LLCs are uncomplicated from a compliance and management standpoint. When you have multiple members, however, you should have an operating agreement that documents who can make decisions and how transferring membership interests should happen if a member leaves, dies, or files bankruptcy. Some states require that the remaining members dissolve the LLC under the circumstance of a member’s leaving, death, or bankruptcy.

From a tax standpoint, you can choose to have your LLC treated in one of two ways.

  • As a pass-through entity, with the profits and losses of your business passed to your LLC members’ personal tax returns. If your business isn’t profitable, that will lower your personal tax obl
  • As an S Corporation, whereby only salaries and wages are subject to self-employment taxes (FICA and Medicare), not company profits taken as distributions to members.

Because there are notably less formation paperwork and compliance requirements with an LLC than there are with a corporation, business owners who want legal protection and tax flexibility without a lot of complexity find the LLC structure an attractive option.

One potential disadvantage of forming an LLC, however, is that you cannot sell stock to raise capital for your business. And if you seek funding from venture capitalists, you may get turned down because many will only invest in corporations.

 
Insight About Incorporating

Whether S Corporation or C Corporation, the owners of corporations are called shareholders. Their percentage of ownership corresponds to their percentage of shares in the business. Unlike with an LLC, it’s typically simple to transfer shares (ownership) from one person to another. That means the business can continue onward when shareholders leave, die, or sell their shares.

S Corporation

With an S Corporation, a business’s income, losses, and deductions pass through to its shareholders. Typically, the shareholders report corporate income on their personal income tax returns.

Unlike LLCs and C Corporations, S Corporations are limited to 100 members/shareholders. So while they can sell stock, their potential to raise capital in that way is somewhat limited.

While S Corporations require more paperwork and ongoing compliance than LLCs, they don’t come with as much formality as C Corporations.

C Corporation

Tax treatment of C Corporations involves what is often called “double taxation.” A C Corp pays corporate income tax on its profits, and then its shareholders pay personal income tax on the profits they receive as dividends.

C Corporations don’t have a limit on the number of shareholders that can invest in them, and they may be more attractive to outside investors.

Because C Corporations operate as separate legal entities from their owners, they provide more personal liability protection than other business structures.

Note that potential drawbacks to incorporating as a C Corporation are the higher formation costs, extra compliance requirements, and additional oversight they are subject to.

 
Do Your Due Diligence, Then Decide.

With both legal and financial aspects of your business affected by your choice of legal structure, make sure you carefully evaluate your options. I encourage you to seek professional expertise and guidance, so you fully understand the advantages and disadvantages of each structure.

In the meantime, you can get off to a great start by using the CorpNet Business Structure Wizard for gaining a better idea of the structure that might work best for you.

                               

Ready For Estimated Tax Payments?

When starting a business, you need to do quite a bit of heavy lifting. Of course, a big part of this is handling the complexities of the US tax system. In fact, one particular area that often trips up entrepreneurs is something called estimated tax payments.

The main reason is that this is quite different from when you have a job. You see, a self-employed person needs to essentially do what an employer does – that is, make ongoing payments to the IRS.

This often comes as a complete surprise to first-time entrepreneurs. After all, when April 15th rolls around, they usually get stuck with fees from the IRS for interest and penalties. But even worse, the overall tax bill can be hefty. As a result, you may have no choice but to take steps to resolve this, such as with an installment agreement (hey, the early days of a startup can be very lean).

So what do you need to know about estimated taxes? First of all, they include not only federal income tax but also the amounts for Social Security and Medicare. You’ll also need to make equal payments according to the following schedule:

April 15 (first quarter)
June 15 (second quarter)
September 15 (third quarter)
January 15 (fourth quarter)

Note: You may also have to pay estimated taxes for the state you are based in and the deadlines could be different (as is the case with California).

OK, there are some exceptions to being required to make estimated tax payments. They include:
• You expect to owe less than $1,000 for the year (whether as an individual, sole proprietor, member of an LLC or S-Corporation)
• You did not have to pay any taxes during the prior year
• You have a corporation where you expect to owe less than $500 for the year
• You are in an area that has suffered a natural disaster

Now, if you do not meet the above, you will need to follow either of these:
• You pay 100% of the tax you paid for last year (the percentage is 110% if your adjusted income is $150,000 or $75,000 if you are married and file separately) or
• You pay 90% of what you will ultimately owe for the current tax year.

And if you have a corporation, the requirement is that you pay the lesser of
• 100% of the tax you paid for the last year or
• 100% of what you will ultimately owe for the current year.

But as should be no surprise, coming up with the amounts can be tricky. In fact, you may ultimately pay way too much, which essentially means you are loaning money to the IRS! Because of this, you may want to use software like TurboTax or get the assistance of a tax professional.

And once you come up with the amount, the process of making the payment is straightforward. You can either file Form 1040-ES or Form 1120-W (for a corporation). But the easiest approach is to use the IRS’s Electronic Federal Tax Payment System.

The good news is that – once you get things setup – the process of handling estimated taxes should be smooth. But of course, the important thing is to make sure you make it a habit.

                               

By | September 20th, 2016|Business Filings, Running A Small Business, Taxes|1 Comment

Running Your Business: Do You Know What You Don’t Know?

With school back in session, students of all ages are learning new things—and discovering how much they don’t know in the process. Whether you’re an aspiring entrepreneur or long-time business owner, one thing is certain: like the kids who are back to school, you always have room to learn and grow.

As I’ve learned and grown as a business owner, one of my favorite phrases has become, “You don’t know what you don’t know.” How true, right? It’s far too easy to fool ourselves into thinking we really know all there is to know. But the truth is we will never ever know everything when it comes to starting and running a business, because things change all the time. We have to “school” ourselves. That means doing additional research and staying tuned in to new developments. The business climate, legal requirements, and technology constantly morph, sometimes subtly and sometimes significantly. If we don’t keep up with the various moving parts that affect us, our businesses could fall behind—or worse.

So I urge you to stay attentive and continue to learn about what’s new or what has changed with respect to:

  • Business structures, liability protection and filing requirements– for example, potential benefits of changing from a sole proprietorship or partnership to Corporation, an S-Corporation or a Limited Liability Company.
  • Tax laws and filing requirements – such as changes to the business tax rates, mileage reimbursement rates, valid tax deductions, filing deadlines etc.)
  • Corporate compliance requirements – such as annual reports, tax deadlines, permit and license filing due dates, etc.
  • Marketing tools, best practices, and regulations – like new social media platforms and automation tools, SEO, content marketing, the CAN-SPAM Act, etc.
  • HR issues – including employee benefits, hiring, firing, affirmative action, documentation requirements, etc.
  • Business technology – like cloud-based accounting software, CRMs (customer relationship management systems), virus and malware protection, mobile payment platforms, etc.

This is just the short list! Basically, anything related to entrepreneurship demands ongoing learning, because owning a business isn’t a static condition but rather a dynamic process. So as the kids strap on their backpacks this school season, prepare to gear up for your own journey in learning. Trust me, your homework will pay off!

Looking to start your own business? Remember, you don’t know what you don’t know—and we can help fix that. Download our free Starting A Business Checklist now! It’s a sure way to learn about what you need to do to get a successful business off the ground.

                               

How to get an LLC License

Here at CorpNet, we are often asked how to form an LLC, also referred to as a Limited Liability Company, when wanting to start a business.

To be clear, an LLC is not a business license; as one cannot obtain an LLC license.

A Limited Liability Company (LLC) is a legal entity that bears similarities to both corporations and partnerships. An LLC is formed under specific state statutes that provide for the creation and regulation of this special type of entity that has come to be commonly used and respected in business.

An LLC can be used to combine the limited liability features of a corporation with the flexibility and tax benefits of a partnership. Owners of an LLC are generally known as “members.” Management and control of the entity resides with the members, unless otherwise provided in the articles of organization of the LLC or within the LLC operating agreement.

An LLC provides the same personal asset protection with fewer hoops to jump through. You can also raise capital with an LLC. Additionally, with an LLC, you can:

● File your business LLC taxes on your personal tax return
● Allocate profit and loss to members of the LLC
● Avoid having to have an annual shareholders’ meeting (unlike a corporation)

New small business owners often assume that forming an LLC is a complicated thing. It’s not, actually, but it is one of the best things you can do to protect your personal assets and your business.

Here are 7 steps to follow as to how to register your new business by filing an LLC application within your state:

1. Choose a Name.
Your name will be the first thing people see or hear as it relates to your new business, so make it a good one! Next, you’ll want to make sure you’re the only one using that name. You can do that with a free corporate name search in your state.

2. Register the LLC and File Your Paperwork
If you’re doing the filing yourself, you’ll need to download your state’s Articles of Organization paperwork and fill it out. If you’re letting a document filing service like CorpNet handle it; you’ll just need to provide basic contact information and a few details about your company.

3. Get Your LLC’s Tax ID
Before you can start operating as an LLC, you need an Employer Identification Number. This is like a social security number for your business, and one you’ll need before opening a business bank account.

4. Create Your Operating Agreement
This document outlines the rights and obligations of the members of your LLC and lists the distribution of income of the Limited Liability Company to its members. Your LLC Operating Agreement won’t need to be filed with your state, but you will need to keep one on premises, signed, if you have other shareholders.

5. File Business Licenses and Permits
Additionally, you should apply for any business licenses or permits you’ll need to operate your business. It’s best to do this before you start operating your business to avoid potential fees or issues down the road.

6. Keep Your LLC Compliant
Once you’re operating as an LLC, your work isn’t done for good. Each year, you’ll need to file your annual report. The due date for this annual report depends on where you filed your LLC. For example, if you filed it in Michigan, Delaware, North Carolina, Georgia, Florida, or Texas, there’s a specific date that your annual report is due. In most other states, it’s due on the anniversary of when your LLC was filed.

7. Finally, Take Care of Loose Ends
Depending on where you’re based, you may need to publish your intent to form an LLC in a local newspaper. If you form an LLC in New York, for example, you’re required to run that intent in an approved newspaper for 6 consecutive weeks.

Many of our customers prefer the LLC over the S Corporation because they require fewer formalities and less paperwork than the corporation, while still providing that protection of your personal assets, as well as tax benefits. Contact CorpNet.com today and let us help you file your LLC application and make your business reams into a reality!

                               

Legal Steps to Start a Business & Special Offer

image002So you have an idea and want to get that business off the ground – congratulations!!

When planning the steps to start your business, there are some legal aspects you don’t want to overlook. These steps may not be the most glamorous parts of starting a business, but you want to make sure the business is set up properly from the start to avoid issues down the road.

Here are my must-do steps to legally start a business followed by a special offer on CorpNet.com services:

1 – Choose a business name

Have an ideal name in mind for your business? That’s a great start, but before you get too attached and order those business cards you’ll want to make sure it’s legally available for use. You can do a corporate name search and/or check with your state’s Secretary of State database to see if the name is registered by someone else. I also recommend running a trademark search to see if someone has already filed for a trademark. If you search both places and the result is clear – great job! You should move forward with that name. If you find that the name is already in use – you may want to go back to the drawing board and brainstorm some other options.

2 – Choose a business structure

If you don’t officially form a business structure your default is to operate as a sole proprietor. A sole proprietorship does not separate your personal and business finances so if down the line your business is sued, your personal assets can be threatened.

Forming an LLC or Corporation will protect your personal assets from any liabilities of the company.

Forming an LLC, otherwise known as the Limited Liability Company, is a great option for businesses that want legal protection without a lot of paperwork.

The C Corporation requires more paperwork and formalities, which can be a headache for small business owners. However, this structure is ideal for businesses that plan to reinvest their profits back into the company, seek venture capital funding or plan to go public.

Another popular structure is the S Corporation. The S Corp does not file its own taxes but is treated as a pass-through entity. It is a great structure for a small business owner who can qualify as the IRS places limited both on the number of owners and who can be an owner.

Not sure what structure is best for you? Try the CorpNet Business Structure Wizard that can help you decide!

3 – Register your business name

If you are forming an LLC or corporation, this step automatically registers your name with the state. However, if you choose to operate as a sole proprietorship or general partnership, then you will need to register your business name by filing a Doing Business As (DBA).

Registering your business name ensures that you are legally able to operate your business under that name in the state and also ensures hat no one else can use the name in your state.

Ready to take these legal steps to start your business? Use CorpNet.com and for a limited time get 10% off any Deluxe or Complete order! Call us at 888.449.2638 for a free business consultation and mention SOCIAL10 for your discount!

                               

Got Hit Hard By Taxes This Year? It’s Time To Change Your Legal Structure For Tax Year 2016

BizStructure_changeEven though the agony of filing your income taxes is done for 2015, you might still be feeling the pain if your tax liability put a hurting on your bank account.

And you might be wondering how to avoid a hit like that in the future.

Maybe It’s Time To Change Your Business Legal Structure

If you’re self-employed and operating as a sole proprietor, I suggest exploring if a change in legal structure might provide some tax relief for your business.

Sole proprietors can rack up an exceptionally hefty tax bill because they’re required to pay self-employment (Social Security/Medicare) taxes in addition to their federal, state, and local income taxes. By transitioning to an S Corporation status, you might reduce your self-employment taxes. When operating as an S Corporation, you’re allowed to split your profits into two distinct payment types:

  • Your salary
  • S Corp distributions.

You pay the 15.3 percent Social Security/Medicare tax only on the salary portion of your revenue.

So, if your company made $100,000 in profit and you paid yourself $50,000 in salary and the other $50,000 in distributions, the 15.3 percent self-employment tax would apply to only the first $50,000.

Pretty sweet, right?

But don’t get carried away and think you can pay yourself something ridiculous like $5,000 in salary and $95,000 in distribution. The IRS pays attention and will take notice if any shareholder who is employed by the business isn’t receiving a “reasonable compensation” as their salary. Be sure you’re paying yourself the market rate for services you provide to your S Corporation—it’s far better to do it right from the start than to have to explain yourself and risk repercussions later.

When’s The Best Time To Make The Change?

The tax benefits you might receive by changing your business structure will begin upon the date you incorporated. They are not applied retroactively, so the earlier in the year you change your structure the more of your business income will be subject to the advantages. For instance, if your corporation receives a filing date of May 1, 2016, you’ll still need to file your taxes as a sole proprietor from January 1 up until that date. From May 1 through December 31, 2016, you’ll file your taxes as a corporation for the remainder of the year.

Beyond The Tax Benefits

Besides the potential tax benefits, changing from a sole proprietorship to an S Corp (or LLC or C Corp) also helps protect your personal assets because your business becomes a separate legal entity. This means your company (and not you personally) is responsible for all of its liabilities and debts.

Is A Change In Legal Structure Right For You?

Every business has its own unique financial situation, so there’s no definitive answer whether a change in legal structure will benefit you. To make sure you’re making an informed, educated decision, I recommend consulting with a tax advisor or CPA to discuss your specific circumstances.

Have you already made the decision to change your business legal structure? Give us call call today for a free business consultation and we can help get the process started for you! 888.449.2638

Image: Adobe Stock

Should You Convert Your Business Structure to an S Corp?

Question Mark for Making Decisions

You’ve been chugging along as a sole proprietorship for a while now, but you’re beginning to realize that might not be the best idea to protect your business. So you’re considering converting your sole proprietorship to another structure, specifically the S Corporation.

Ask yourself the following questions to determine if now is the right time to convert your business structure.

1. Do You Want to Bring on Investors?

Maybe you bootstrapped your business, but now you’re ready to take the company to the next level, and to do that, you need investors. This is an automatic reason to convert to an S Corp because investors rarely want to invest in a sole proprietorship (it puts their assets at risk).

If you want potential investors to take you seriously, change your structure to an S Corp. That way, they aren’t liable for your company’s debts or legal fees, and they’re more likely to give you the money you need.

2. Are You Worried About Protecting Your Personal Assets?

Did you realize that as a sole proprietor, the law sees you as an individual as the same as your business? That means if you are ever sued, you may have to shell out from your personal savings to cover legal fees if your business doesn’t have the funds.

Incorporating, on the other hand, separates you from your business, providing a legal shield around you that protects your assets and finances from being taken for the business.

3. Are You Looking for Some Tax Relief?

While incorporating won’t magically eliminate your taxes, there are some pretty great tax perks, like only being taxed once (versus twice like with the C Corporation) and being able to report your business profit and loss on your personal income tax forms.

4. Do You Want to Reduce Your Likelihood of an Audit?

Sole proprietors are nine times more likely to get audited than corporations. What does that tell you? It’s time to change your business structure! Being audited can be a paperwork nightmare that can eat up precious time you’re better off spending running your business, so if a simple switch of business structure could reduce your chances, go for it.

5. Do You Plan to Sell Your Business?

Whether you want to sell in a year or 10, the S Corp is the ideal business structure to make that transition a breeze. Because you can’t transfer ownership of a sole proprietorship (it’s tied to you and only you), the S Corp is a better entity to package up and hand over to the new owners.

If these questions made you realize that, yes, you do need to convert your sole proprietorship to an S Corp, now’s the time to do it. As long as you file File Form 2553 by March 15, 2016 (or let CorpNet do it for you), your business will be treated as an S Corp for the 2016 tax year.

Don’t delay! Get your S Corp Election order processed now with CorpNet so you can reap the tax benefits for 2016.

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