When Do S-Corps Make Sense?

Corporations have two tax options. C-Corp or S-Corp. We rarely use C-Corps due to “double taxation” issues.  If you form a corporation, there are strict formalities that must be followed. Corporations must keep Resolutions, Amendments, and Meeting Minutes documenting all business activity. Even if the company is 100% owned and operated by you, you still must follow these formalities. Over the past two decades, I’ve only had a couple of clients that did a good job with these formalities. Thus, in the event of a lawsuit, if your corporation is not in compliance, the courts will most likely pierce the corporate veil and hold you personally liable.    

If you form an LLC, you get to choose how you’re going to be taxed. The LLC has four options: C-Corp, S-Corp, Partnership, or Disregarded. When you hire NCH to form your LLC, we specifically include in your Operating Agreement, that your only legal requirement for compliance is to have ONE BOARD MEETING each year. Even if the LLC is owned 100% by you, you must have on board meeting each year with yourself. I talk to myself all the time, so it’s not a difficult task…

99% of the time, we set up LLCs taxed as an S-Corp for any Active Income producing business.  Remember that rental income is Passive Income, and there are no social security and Medicare taxes.  However, Active Income is subject to state, federal, and social security & Medicare taxes. Making the S-election can potentially save you thousands of dollars in taxes each year. Having the S-Corp, or LLC taxed as an S-Corp allows you to pay yourself a small reasonable salary, and a big K-1 Distribution. The K-1 Distribution is not subject to self-employment taxes. This is how we’re able to minimize the self-employment taxes.

But what if you’re just getting started with a new business and you have no profits? Making the S-election is still a very wise move. You see, if you don’t make the S-election, you’re going to have to file a Schedule C, itemizing your business expenses on your personal tax return. The US Treasury Inspector General does a report card every year disclosing the audit risk for various filings. The Schedule C is at the top of the list.  You are 900% more likely to be audited with a schedule C. This statistic is from before congress authorized the hiring of 87,000 new IRS employees!

Filing an S-Corp, or LLC taxed as an S-Corp, puts you at the bottom of the audit list. Yes, you’ll have to pay a CPA to file an extra tax return, but it makes complete sense. Generally, all the business expenses from the date of incorporation moving forward will flow through to your personal return via K-1. These active expenses will offset your w-2 income, saving you money!  

When you start of business of any kind, the very first thing you should do: FORM AN LLC! We are limited to $5k in start-up costs, and $5k in education, for any expense prior to the date of incorporations. From the date of incorporation forward, generally, all expenses are 100% tax deductible. Working with your tax professional, you can decide how you want the LLC to be taxed. We have 3 years and 75 days from the date of incorporation to make the late s-election if needed.

With NCH, the state’s top business formation service, you can register your LLC in Nevada quickly and easily. Our specialists will help you choose the right entity for your company and understand why an LLC in Nevada is your best option. We’ll assist you with all necessary Nevada LLC forms, including the vital Articles of Organization, and help you comply with state regulations. In addition, we offer expert assistance with tax compliance, credit building, and payroll management. Schedule a private consultation to explore effective solutions to minimize tax liabilities and protect your wealth. Start unleashing your LLC’s full potential today with NCH. Schedule a consultation with David Vanlandingham today!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.