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.

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Among the different ways of incorporating your business – C corporations, S corporations, and Limited Liability Corporations – there are practical reasons for choosing a given method, such as the number of shareholders or liability considerations. For many small business who are considering incorporating in Georgia, the tax advantage of the S corporation should not be overlooked.

Tax Advantages of S Corporations

As a LLC, LLP, partnership or sole proprietorship, you are subject to the 15.3% Self Employment/FICA tax on all of your net earnings. The S corporation, on the other hand, pays you a deductible salary (which is subject to FICA), and then the profits flow through your personal return via a Schedule K-1. This K-1 income allows for permanent deferral of the FICA tax. The S corporation allows small business owners to legally save taxes as long as they pay a fair and reasonable salary to themselves.
Please take a look at the following comparison. It shows the tax effects on a single year’s income for a LLC, LLP, partnership, or sole proprietor vs. a C corporation, and compares it to a subchapter S corporation. Due to the way C corporations are exposed to double taxation, the payments are spread out over two years, which is not the case for partnerships or S corporations.

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The Advantages and Disadvantages of Incorporating as a Subchapter S Corporation, C Corporation, Limited Liability Corporation or Partnership

When looking at what type of entity your business should be, we strive to balance the legal protection issues vs. the tax savings. Over the years, we have developed the mindset that there is no perfect election but there are ones that are better than others. The information below and the assumptions we make are based upon the fact that my clients tell me that they want to pay as few tax dollars as legally possible. Below are some very specific rules, as well as some generalities. If you are considering incorporating in Georgia, we suggest that you sit down with a tax professional to see how these guidelines relate to you.

About S Corporations

Subchapter S Corporations can have no more than one hundred shareholders and they all need to be U.S. citizens or resident aliens. This corporation type almost always has to have a calendar year as the fiscal year. S Corporation rules have been around since the 1950s and were set up to simplify the rules and regulations of being a business owner.

Liability Protection and Subchapter S Corporations

A subchapter S Corporation, like a C Corporation, affords the business owner personal liability protection from business risks. Some of the keys to maximizing that protection is to treat the corporation like one by doing all your business in the corporate name, signing all of your documents listing your corporate title, not co-mingling any personal issues/bills in the corporation, and by having your annual Board of Directors and Annual Shareholder Minutes Meeting.

Tax Advantages of S Corporations

No income taxes are paid with the corporate return.

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