Should your new LLC be an S corp right away?

The S corp tip every new owner hears

Start an LLC and someone will tell you to make it an S corp. It is one of the first tax tips new business owners hear, and it can be a good move. The question is timing. Electing on day one is not automatically the right call.

Where the savings come from

An S corp can save tax because part of your profit skips Social Security and Medicare tax. As an S corp owner who works in the business, you pay yourself a reasonable salary, and that salary is still taxed for Social Security and Medicare. Profit paid out above that salary is not.

That only helps when your profit, meaning what is left after expenses, is big enough. If there is not much profit beyond a reasonable salary, there is not much to save.

Why low profit means small savings

Take a hypothetical business that makes $40,000 of profit. The savings from an S corp election are small at that level, and the election still brings extra filings and paperwork, such as:

• Running payroll for yourself, with payroll tax returns and a W-2
• A separate business tax return for the S corp (Form 1120-S), with a K-1 for each owner
• The added cost of preparing and keeping up with all of it

When those costs eat up most of the savings, the election is not doing much for you yet.

You can make the election later

For most new businesses, the answer is not yet. Your LLC can become an S corp later by filing Form 2553 with the IRS, once your profit is big enough to make it worth it. The useful step now is to keep an eye on your profit each year and revisit the decision when the numbers change.

How we handle it

At Sansone CPA & Financial, we coordinate your tax, investment, and retirement decisions so choices like when to elect S corp status are made with your whole picture in view. That is the core of our tax and financial planning for business owners in Crystal Lake, IL.