How LLC’s Can Convert To An S Corporation Saving Owners Big $
Atlanta CPA on How LLC’s Can Convert To An S Corporation Saving Owners Big Dollars
LLC’s came in vogue approximately fifteen years ago when the state of Georgia enacted legislation allowing LLC’s (Limited Liability Company’s) to be established. Although the LLC does allow for some greater flexibility and ease of operation it often results in a higher tax obligation that might not have been incurred if the business was an S Corporation.
Tax law treats all the earned income from an LLC as being subject to both FICA & Medicaid taxes whereas an S Corporation has to pay those taxes reflected on W-2’s. For tax purposes, the law allows an S Corporation to legally convert to being an S Corporation as long as all active employee/owners pay themselves a fair and reasonable salary. This number is best determined by the facts, position, and profit of a business and the truest test of this calculation is what a business owner would have to pay someone else to perform their position.
All businesses are unique and therefore all saving opportunities are different. But even the smallest of businesses with the smallest of profits may save approximately $6,000 by converting from an LLC to an S Corporation. Already this year, we completed this process for an LLC saving them $25,274 of FICA/Medicaid taxes.
There are only four rules to qualify for being an S Corporation. You must:
- Have a December 31st year-end.
- Have less than 100 shareholders.
- Have shareholders who are U.S. citizens or resident aliens.
- Have only one class of stock.