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May 14, 2020

Frequently Asked Questions About S-Corporations

The great thing about the S-Corp is that you can retain the independence and flexibility that you would enjoy as a simple LLC while also leveraging tax savings, compensation, and benefits that normally would be unavailable as a sole proprietor with an LLC. Here are some great FAQs about the S-Corp:

Q: Can you set up an LLC if you already have your S-Corp? I was originally set up as an S-Corp. Never did individual LLC.   
A: Actually, if you have an S-Corp then you most likely have an LLC already. An LLC is a legal designation while an S-election is a tax designation that you can apply to an LLC or a corporation.  

Q: Is it complicated to transition from the LLC to the S-Corp? We have had an LLC for one year but we are thinking about moving to the S-Corp.  
A: Not at all; it’s a simple form that can be filled out and filed with the IRS via mail or fax any time up to 3 years after your LLC is created. It does change the way you operate the business in some ways which is what Formations can help with and is where most businesses fail to capitalize on the benefits of the S-Corp structure.  

Q: We are past the  75-day  S-Corp election period for an LLC. Is it better to convert the LLC into a corporate registration now or wait until the beginning of the year?  
A: You can actually do it any time up to 3 years  from the LLC start date. There’s a bit more paperwork involved but we at Formations are very experienced in submitting and getting accepted late S-elections.  

Q: Why is it suggested to have an LLC with the S-Corp versus a C-Corporation with the S-Corp election?  
A: LLC with S-Corp election offers greater flexibility and fewer restrictions than a C-Corp with an S-Corp election. The LLC offers the ability to easily amend the operating agreement, add or remove members, and generally have fewer corporate formalities. The C-Corp is a more rigid form of business structure and is subject to additional regulations and reporting requirements.

Q: What insurance companies are offering HSAs these days? In the past two years, I haven’t been able to find one that offers an HSA.  
Most insurance companies do not directly offer HSA accounts but rather health insurance plans that can work WITH an HSA that is administered by a bank or credit union. These plans often come with a higher deductible and monthly premiums but the benefit of being able to sock away tax-free contributions to the HSA account often outstrips the additional costs of the plan. We suggest talking to your bank or credit union about an HSA first and then hitting the insurance carrier for plans that can help.  

Q: If my partner has good health insurance for the family, is it still beneficial to get second health insurance out of my revenue?  
A: Yes it can be; you should know that the health insurance paid by the S-Corp on your behalf is added to your W2 compensation and is taxable for federal income tax just like your wages so it’s not a full deduction of the expense technically. But if you can benefit from supplemental health insurance or want to explore FSA or HSA accounts then it can be more beneficial to have the insurance via the S-Corp. If not then you can just use the money you’re not paying for insurance as additional wages from the S-Corp for pretty much the same effect.  

Q: I am a Residential Realtor and have rental income. Do you recommend I have a separate LLC business account for the real estate income and a separate LLC for the rental income? And if so, should each property have a different LLC account?    
A: We do recommend separating your S-Corp realty income from your rental holdings. This is both to keep the liability from the rental properties separate from your S-Corp income and to keep the S-Corp as simple as possible to administer. You will realize more tax benefits from the S-Corp this way.  You do not need to have a separate LLC for each rental property however UNLESS you are owning said property with other businesses/individuals. If you are the sole owner, then one LLC can hold all of your properties and your S-Corp can just deal with the commissions from your real estate brokerage. You may want to have separate bank accounts for each property in the LLC though; this would enable you or your bookkeeper to track the incomes and expenses for each property more easily.  

Q: For an S-Corp, does one need an EIN separate from SSN?  
A: Yes; you will need to form an LLC which will issue an EIN for the entity then file the S-election on that EIN.   

Q: As an LLC that just started. When should I incorporate W2s? Income has not started to come in yet. 
A: You can elect to be an S-Corporation now but forgo payroll until you start receiving income. The IRS requirement for reasonable compensation is tied to your net income so if you are not receiving any income yet then you can’t reasonably compensate yourself. If you expect your net income to reach at least $50k this year we recommend electing then waiting until you start getting some income to open the payroll account and start salary. There is of course no harm in starting the payroll account early and then just waiting to use it.  

Q: Is there a cap on the percentage I give myself payroll out of my gross income for the year?  What is reasonable compensation?  
A: No cap; you can literally pay yourself every cent you want of your net income as payroll. However, this may not create the most ideal tax situation for you personally. You are invited to read more about the reasonable compensation on our blog post  

Q: Is there an option for an LLC partnership or should I just select  SMLLC?  
A: You can be an S-Corporation as a partnership but note that the same requirements for reasonable compensation will now apply to each partner. If we’re talking about a married couple there’s really no need to form a multi-member LLC; by default married filing jointly individuals receive the same benefits of the S-Corp even if only one of the couple is listed as a member of the LLC.  There are advantages to paying your spouse or family in the S-Corp as well; the additional salary and taxes can increase your personal tax savings and enable further savings by contributing to retirement savings for the additional employee.  

Q: What are the main differences between the S-Corp and the C-Corp, specifically when it comes to owners’ tax, revenue, and profits?  
A: The short answer is restrictiveness; S-Corps are “passthrough” entities, meaning the profits from the activities pass through to the shareholder’s 1040, whereas a C-Corp is an income tax paying entity and is more restrictive in letting equity holders take funds from the company. There are additional taxes to pay at both the C-Corp and the 1040 level. You are invited to read more about the differences in our blog post: LLC VS C-Corp VS S-Corp  

Q: SMLLC (Single Member LLC) - Does single means one owner owned only? can your family member work with you?   
A: Yes technically this means only one owner. Your family can in fact work in the business though and as we’ve noted above can have good tax benefits as well.  

Q: I am an Uber driver; can I form an S-Corp?  
A: Absolutely! How much savings you can leverage from the S-election will depend on how much you make of course but you can at the very least form yourself as an LLC for liability protection and then seek some advice on when/if you should elect to be an S-Corp.  

Q: What if someone is paying me as a W2 employee (not 1099 contractor), can I put that money into my corporation? And count it as money the BUSINESS earned?  
A: No; W2 income cannot be put into an S-Corp as business income, nor should you want to. W2 income is taxed already so by putting that into the company as business income you would create additional state and federal tax liabilities.   

Q: Can we do payroll on the LLC?  
A: Not for the owners of the LLC; you can do payroll for any employees of the LLC but not the officers/owners of that LLC. Only as an S-Corp can you compensate yourself as the officer of the company with W2 wages.  

Q: What are the pros and cons of adding a family member as an employee?
There’s really not a downside to it unless the family member has another source of W2 income that may need to be considered. You’d be considered an officer of the corporation and as such, no further state taxes would be required, and the new family member added, could also contribute to retirement via his payroll just like the company owner.

Q: Can I put personal funds into my corporate account if my funds are low and I need it to run my business?
: Yes absolutely; those would be considered equity contributions, or you could loan the company money from yourself with interest if you write up an agreement between the LLC and yourself to formalize it.

Q: Can I switch over to an S-Corp if I am an LLC startup? I have only been an LLC for 2 weeks and haven’t made any money in my business yet.
YES! You are at perfect timing to file to be an S-Corp. You can file the paperwork for 75 days from your LLC creation to be an S-Corp. 

Q: Should I still form an S-Corp if I make less than $50k/year? At what level of income do you recommend onboarding Formations?  
A: You can form an S-Corp any time you want; at $50k gross income per year, the tax benefits of being an S-Corp will be limited but still present to some degree, and if your business is expected to grow, then it’s a good idea to get the structure in place to take advantage of those future profits. If you wait until the money is pouring in you may not be as ready to leverage the S-Corp to its maximum benefits during the year.  Formations has several plans available right now for businesses of multiple levels of income.  Contact our team of consultants to see which plan will work for your business.  

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