S corporations are C corporations that have elected to be taxed as a pass-through S-corporation (form 2553) that generates a K-1 to be filed with each shareholder's 1040 tax return. LLC's have the option to be taxed as a C corporation, S corporation, partnership or a single-member disregarded entity if the LLC has only one member, or a member and spouse, leading to many LLCs to be taxed as an S-corporations. If you have an LLC taxed as an S Corp, you will have an Operating Agreement and you will own an interest. If you have a corporation taxed as an S Corp, then you will have Bylaws (and perhaps a Shareholder Agreement) and you will own shares.
If you are a professional such as attorney, accountant, medical doctor or engineer, you typically have to register as a professional entity, either a Professional LLC (PLLC) or a Professional Corporation (PC). Many states, such as California, do not recognize PLLC and require a professional corporation Good news is, you can elect to have your c corporation taxed as an S Corporation and receive a K-1, and enjoy the benefits.
in addition to medical companies, companies that benefit from the S-corporation structure include consulting companies, company that make impressive income with low cost, companies with low equipment investment, and companies with low start-up costs.
If you are contemplating starting a business, have an S-corporation or have a C corporation and want to understand if converting to a S-corporation is beneficial, reach out to get a conversation started. We will make sure you are - or will soon - manage the business in compliance with S-corporation rules, and maximize the financial, tax and retirement savings benefits.
Twelve Benefits of an S corporation
1. Reduction of Self-employment Taxes
Reducing your self-employment taxes is the main reason business owners want to be taxed as an S Corp. But if you have $30,000+ in net business income after expenses, you might want to give it some serious consideration. Why? You could save about 8% to 10% of your net business income in taxes. If you earn $100,000 in your business after expenses, either as a sole proprietorship or LLC, you could save $8,000 to $10,000 in taxes. This is a significant tax benefit, so of course there are rules such as a W-2 reasonable wage salary. Once this hurdle is cleared, shareholders can qualify for tax-free distribution of income above this level, making the s-corporation decision an easy one for many companies - including professional medical corporations.
2. Ability to maximize Retirement Savings
By maximizing shareholder/employee retirement contributions and employer profit sharing contributions, shareholders can contribute up to $61,000 in retirement accounts in 2022. Profit sharing contributions made by the company are a tax-deductible expense.
3. Asset Protection
The "corporate veil" that protects corporations is not pierceable, and the personal property of the shareholders is protected as long as the S corporation follows the rules.
4. Pass-through Taxation
S corporation shareholders enjoy the benefit of pass-through taxation. Tax deductions, losses, and business income are passed to the owners instead of the corporation being taxed at the corporate level.
5. 20% 199A QBI Deduction
This is an above-the-line deduction 20% deduction of qualifying business income for qualifying businesses and single and multi-entity shareholders. This is also a significant benefit, so again, we find rules and limitations, and calculations can be tricky. You will want to engage in proactive planning, to ensure, when possible, you make decisions to maximize deduction potential.
6. California Pass-through Entity Tax eligible
The s-corporation can elect to pay to the shareholders personal California tax when criteria is met. Calculations need to be worked up in advance to determine which shareholders will benefit, and a payment needs to be made the California FTB in advance by the deadline. Tax paid by the company is a tax-deductible expense.
7. Splitting of Income among Family Members (including children) Easy
Gift of Stock will transfer tax on a pro-rata share of income to the donee. Beneficial to many, but not to all. You'll want to run scenario analysis and evaluate your options well in advance of taking advantage of this option.
8. Ability to Shareholders to Rent Property to the S Corporation
In exchange for rental income, shareholders often rent real estate or other property to the S-corporation tax deductible to the company.
8. Accountable Plans
Allow shareholder/employees to reimburse themselves as an employee, for the benefit of avoiding the income taxed as compensation.
9. C corporation to S corporation conversion
Ability to convert from a C-corporation to an S-corporation when an analysis reveals this is beneficial.
10. Diversity of Shareholders Allowed
Up to 100 Individuals, LLCs, certain trusts and estates can be shareholders (no partnerships). S corporations are often used in multi-entity structures to maximize risk protection and design specific financial attributes to certain shareholders
11. Shareholder Distributions
Distributions taken through the year are entered on the books as of December 31
12. Loss Limitations
Unlike partnerships, loss limitations include shareholder investment plus share of liabilities.