I’m Gina Bongiovi, and I’m a lawyer who works with start-ups and small businesses. And in this video, I’m going to talk about the myth of forming an S Corp. I have a lot of clients that come to me or they call me and they say I want to form an S Corp. It’s kind of a technicality, but that’s not exactly possible. And let me explain why.
First of all, the IRS allows entities like LLCs or corporations to elect be taxed certain ways. So basically there are two different worlds–you have a legal world over here where you choose your entity, your full proprietorship, general partnership, limited partnership, LLC, corporation, and then on this side, then you have the opportunity to choose how you want your entity to be taxed. But first you have to form an entity so most of the entities I deal with are either LLCs or corporations.
So if you choose an LLC or corporation, you form it at a state level, you get your EIN, which is your employer identification number. It’s kind of like your social security number for your business so you don’t have to use your own social security number. Then you have the opportunity with the IRS to determine how you want your entity to be taxed.
So for instance, if you form an LLC, you have four options. You can have your LLC taxed as a disregarded entity, which is essentially the same as a sole proprietorship. You can have it taxed like a partnership, you can have it taxed like a subchapter S corporation or S corp for short, or you can have it taxed as a C corporation. If you form a corporation, then you only have the option of choosing between a S corporation and a C corporation.
Now depending or when you make this decision depends on how much money you’re making that year. Even though I’m not a CPA, I’ve heard through the grapevine, many CPAs say that when you’re making about $50,000 a year, it makes sense to have your entity be taxed as S corp. So if you have an LLC that’s currently being taxed as either a partnership or a sole proprietorship or disregarded entity, then once you start to make $50,000 a year, then you can be the S corp.
The catch with the S corp is, because there’s always a catch, it is the IRS after all, the catch with the S corp is that you have to put, as an owner, you put yourself on a salary and then you have to pay the payroll taxes and unemployment insurance and everything that comes with hiring an employee, so you make yourself an employee of the business. And that’s why they say you should be making at least $50,000 a year so that the deductions you can enjoy offset the expenses that you pay, either payroll service or something to pay those taxes.