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When to switch your LLC to an S-Corp?
When you first start your business (in the United States, in most states), you don’t need to have any sort of official, legal entity.
Many businesses may choose to create an LLC as basic legal protection which requires very little money and time to set up. Some businesses and people may choose to create a partnership structure if they are in business with someone else. Read more about choosing a legal structure for your business.
LLCs are also state-based entities. Some states recognize LLCs created in other states as “foreign” entities which may require you to file business documents (and potentially pay business fees) in two states.
As your business grows or if you move your business or personal location, you may choose to change your business legal structure once it’s started.
Why would you change your business structure?
Some businesses may start as a partnership and maybe one partner no longer wants to be a part of the business. That would necessitate a legal change.
Moving states may also be an opportunity to change legal structure if your LLC isn’t recognized or if the new state you live in requires additional paperwork or fees.
Another reason might be as a tax strategy.
Accountants may recommend that once your business starts generating between $60K-100K you may want to consider changing from an LLC to be taxed as an S-Corp to pay less in overall taxes.
LLCs generally provide very little tax benefit, and owners pay Social Security and Medicare taxes on all profit. Profit is considered anything after expenses NOT including whatever you pay yourself.
Being taxed as an S-Corp allows owners to pay themselves a salary which pays Social Security and Medicare taxes, but any profit outside of that salary does not have the same taxes applied. This structure may also allow owners to create tax-deferred retirement plans for themselves.
How to change your business from an LLC to an S-Corp?
Changing your business to be taxed as an S-Corp (note, this changes the tax election NOT the business structure) requires a few things:
- Change your tax status with the IRS by submitting a form 2552. You can do this yourself or some online services may also assist with this (for a fee).
- Register for business payroll and begin to pay yourself the owner as an employee. This also requires correctly signing up for (and paying for) Social Security, Medicare taxes, and other requirements (like unemployment) that may change per state. Online payroll companies maybe be able to assist with this set up or you may have to do it yourself.
If you already have employees, this may be an easy option to include yourself on payroll as an S-Corp.
If you are a single owner/sole proprietor, it may not be worth the time and extra set up at first.
In summary, make sure you review your individual tax situation and work with an accountant and/or tax professional to make the best decision for your business if you are considering changing your business structure.