What is the S-Corp?
An “S-Corporation” is a filing designation with the IRS that “elects” to file your LLC as a “sort of” corporation; this means is that you can still function as an LLC (which is a pass-through entity, more on that in a bit) but also gain some of the benefits of a corporation, such as:
* Paying yourself a salary
* Paying for yours and your family’s health insurance premiums from the
business as an employee benefit
* Starting a 401k for your business and contributing to it from both your
wages and matching those contributions (up to the annual limits) from the
business as an expense
* Purchasing assets (such as equipment and vehicles) for the business to use
and take deprecation expenses for
* Showing legitimate separation between your personal and business
finances and enabling the ability to apply for credit from the business
instead of personal
Now an LLC by itself as we mentioned is a pass-through entity; this means that the net income from the operations each year “passes through” the business to land on your 1040 as taxable income. You will not pay any income taxes from the company itself but rather you will add to your income taxes with the net income from the business that you pay on your 1040. What the S-Corporation does is allow you to leverage the same benefits of a full corporation to pay yourself a salary and benefits, something unavailable to sole proprietors normally.
The major benefit from the list above is the payroll and benefits piece; until you elect to be an s corporation it is very difficult to get payroll for yourself. You will be limited in your ability to truly leverage your business income to save the maximum you can each year on your taxes. Every dollar you pay yourself in salary can reduce your taxable income from the business AND if you go the extra step of contributing to a 401k as much as you can then it further reduces your taxable income, often by a significant sum, each year.
Do you want to learn more about the S Corp and how to corporate your business?