The Benefits of Becoming An S Corp (Is It Just For Taxes?) Choosing LLC vs. S-corp in 2023

LLC versus S corp, which is the right business entity for you? And how are you supposed to sort through this alphabet soup of business entity designations, online gurus, people who are giving you tax advice on TikTok? What does it actually mean for you as a real business owner who wants to make sure that you're doing things right but also not overpaying your taxes? I've got your solution right here. I'm attorney Brittany Ratelle, a lawyer for creators and online business owners just like you, and I'm here to help you demystify the confusion about getting Business Legally Legit. My goal is to give you information in a clear and a fun way because I actually don't think that making it boring makes it any better. So that's why I'm in front of you today dressed like Rosie the Riveter. Let's get into it. Now to start us off, I am a lawyer and what kind of lawyer would I be without a little disclaimer? So while this is important information for you, it's not official legal advice and this is not an attorney-client relationship. I don't know enough about your business to make that happen. If you have any questions today or on any of my online resources, including my podcast, on my website, contract templates, or any of the other videos I have here, make sure that you ask a competent professional in your jurisdiction. All right, let's talk about S-corps. What are they and do you need one? So an S-corp is actually quoted and given a bad name online, or at least a misunderstood character. A lot of people talk about, I don't know, LLC versus sole prop versus S-corp as if those were all entities that you could choose from, doors you could walk through on your business journey. That's not exactly right. An S-corporation is actually a tax designation or a tax election.. It's basically a switch you can turn on or off with the IRS, but it's not an actual entity. A business entity are things like an LLC or a C corporation. Those are actually choices that you can fill out and go through the steps, and then you are setting up a new legal person for your business that's separate from yourself. You're not just you anymore. You have a business self, and business self is the one that's making money, paying bills, entering into contracts, which is great news because that way if the business has a problem, yo, I'll solve it. Like Vanilla Ice teaches us, the problem is actually with the business and not with you personally. And you get that asset protection that you want and need in your business. So how do you know if an S-corp is right for you? Let's talk about step 1 is to look at your numbers. And if you have an accountant that you talk to regularly, bring them into this conversation and check. If you don't, for whatever reason, then it may need that you need to keep an eye on this, especially if you're having a really great year or really great launch, because your numbers can change and some of the pros and cons can be differently. Most people suggest when looking at your numbers, it makes sense to switch to an S-corp designation, remember, and this means you already have to have an LLC set up. Okay, so that's step 1. If you haven't set up an LLC yet, go back and watch my previous video. We want to make sure we have that asset protection out of the way first step, no matter how much money you're making. If you're making somewhere around $50,000 profit in your business, meaning you make whatever you make, you sell whatever you sell, you pay all your expenses, and at the end of that, there's at least $50,000 or enough to maybe pay you a reasonable salary, then it could be beneficial for you to switch to an S-corp designation with the IRS. The reason why this works and why there's some tax savings here, and I want to make sure you know about that, is that when you have an LLC, everything gets taxed all in one bucket. It's what's called pass-through tax designation. It doesn't make any difference to the IRS. They're going to tax it all, and they do tax it all, including they have you pay self-employment taxes on all of the money, any profit that you make. When you change to an S-corp, you say, I'm going to be my number one employee. Look forward to that employee of the month parking spot. You put yourself on salary and then you are only paying payroll taxes on your salary. The rest of the money, as high as that can go, that's not part of your normal salary, that's just profit distribution and it does get taxed, but it gets taxed at a lower rate because we're not paying that extra 15.5%, 16%, depends on your state, that you are paying on that whole nugget that we had before. So there's some real tax savings for you as a business owner. But the reason why we care about how much money we're making is setting S corps do cost a little bit more money because you have to run payroll and there are some expenses associated with payroll. You also need to make sure that there's regular income coming in because you need to make sure that the business is adequately capitalized and that the shareholders actually have some money that's coming into the business. For this reason, S corp elections maybe may not be a good vehicle if this is like a real estate investment vehicle. We're talking about a normal business. Now you could be in any type of business model. You could be in e-commerce, you could be a social media influencer or creator, you could be freelancer, a web designer, or graphic designer, photographer. I've helped all these people set up businesses, and a lot of them switch to S-corps, and all of those can be a good fit. There is some timeliness element into it depending on when you file. Sometimes the IRS thinks that you filed too late. They like you really to do this at the beginning of the year. If you're later in the year, you could beg their forgiveness and say I have valid reason to do now, but it's at their discretion, and good luck getting a response from them. It's more about what is that reasonable salary, and can you afford can afford that reasonable salary in your business, because you're going to need to pay that. And that's one of the really important compliance issues to make sure that your S corp stays alive and stays compliant and that you don't get in trouble with the IRS. Bye-bye. Now we know what an S corp is. Our step 1 is we looked at our numbers, we talked to an accountant if we have an accountant. If not, we looked at it ourselves and ran the numbers and they're like, uh, can I afford this? Let's move over to step 2. Step 2 is going to be you file a form with the IRS. Now there are companies that can set up an S corp for you, and there's a lot of other people business gurus on this platform and others who will walk you through and say, oh, save money, save an S corp, this is the best way. And all they're doing is shilling software that takes hundreds of dollars for you and fills out this form. You can fill this form out. You want to file Form 2553. Okay, 2553. It's an IRS form. It's 3 pages, but you really usually only need to fill out the first 2. And it's literally, you like fill out your name and address, you put yourself as the owner, and you sign. It's very straightforward. And then I recommend that you send this to the IRS via certified mail with a confirmation receipt that they will send back to you. The reason being, I don't know if you guys know, but the IRS is slow. They're a government entity, and apparently they've given up answering their phones. So all that to say is I wouldn't depend on the IRS receiving your form and keeping a good record and knowing that it was delivered. And now that you've held up your hand and said, I told you I wanted to be an S corp. You should have your own back. So I recommend that you send this form by certified mail to the IRS, which means you actually, yes, need to go to the post office, fill out the little form with the read receipt. You'll get that back, take a picture of it, and put it in your business files just in case it was ever questioned or challenged that you actually did become an S corp. If you never see the S corp confirmation letter, which you may or may not get, you got your own back and know that you've done what you needed to satisfy that formality. Step 3, you need to set up payroll. The really important part is you have to set up payroll. You just told the IRS IRS that you as an owner are going to be also an employee and you have to pay yourself a reasonable salary. Now, I know you're asking, Brit, what is a reasonable salary? I don't know because I don't know what your business is, but I would take a look at how much money are you making, other people who are doing that job for other companies, what are they making, what's a reasonable number that you could defend to the IRS? Because if you're doing the math here, you can see why there is a tendency for people to want to game the system and give themselves a really low salary, like non-existent, and then they get the most tax savings. But that's just begging to be audited and challenged by the IRS. So please don't do that. Please have a number that's reasonable, that you could substantiate. Is this a gray area tax law? Reasonable lawyers could disagree, and accountants— yes, and they do all the live long day. I know, to each their own. But pick a number. And again, if this is an area that you want more support in, go and work with an accountant. I have some great accountants that I love and recommend, especially that works with creators. I love Amy Northard, a CPA. She's the accountant for creatives, is amazing. Also Kaylee at Little Fish Accounting is amazing too. We'll link them in the comments below. So we need to set up payroll. For setting up payroll, I like using software, payment processing. The one that I find has been the slickest and the easiest is Gusto. They're a modern company. They're set up to make payroll easy for non-accountants, non-bookkeepers, non-financing people who want to make sure that we can pay ourselves and pay other people as our teams grow. What I really like about Gusto is not only can you run your own payroll so you can become a satisfied and compliant S-Corp, but you can also pay 1099 contractors. Which if you've delved into that role and you started adding those 1099 contractors to your team, you found that paying people is a little tricky. Ideally, they are invoicing you and that's how you're paying them, but you could still do that through Gusto, right? They could send you the invoice, but the actual money going to their account, I don't recommend you use PayPal because the transaction fees will be weird to figure out. And you also need to make sure that you're treating it as a real business expense, and PayPal makes that difficult. So I like Gusto. I do have an affiliate link in the comments below. They're what I use for my own business, so I'm walking the walk here. I think Gusto is doing a great job of making that easy. So set up your payroll, you'll have to put in your numbers and your EIN and your business address, and then let them know what state you're in. And then they will help you also form the other documents that you need to get set up. Keep in mind that with your state, there might be some other compliance things, meaning your state might want you to have unemployment insurance and workers' comp. Some states say, hey, if you're an owner, we get what you're doing here, and you probably don't need unemployment insurance and workers' comp on yourself., but you may need to fill out an exemption form. So check with your state. What I like is that Gusto helps and has links to these forms for your state. So again, they're helping you with resources here, but just know you need to close that loop on setting up payroll. This is your first time setting up payroll, make sure that you're getting all the information you need to from your labor commission for your state to do that correctly so that you're withholding what you need to withhold and that you're not surprised by any of those forms or any of those things saying, hey, you're paying all this stuff when you don't really need to. And then the last step, step number 4, is keep that money separate. And this This is the rule for all of our business entities, okay? As soon as we start to put that business owner hat on, we need to own our business, and that means that we keep our money separate, okay? Our business money and our personal money. An LLC does that, a C corp, an S corp does that, because remember, an S corp is really an LLC, just taxed differently. So we don't commingle assets unless we're on the dance floor, okay? I myself have been known to commingle assets at conferences that I go to, okay? In fact, I've gotten many a client that way. It's not everyone who can say that they found their attorney in a dance-off, but I'm proud to say that a few of mine have. But that's all that to say, we're not commingling our assets, not those kinds of assets. We're keeping our money separate, we're keeping them in their own lane. I'm so grateful that you're able to take time to learn about S-corps and whether they're right for you. Remember that there's a lot of hubbub online and probably a lot of people trying to get your eyeballs and sell you stuff, but I want to make sure that you're getting good information about your business by someone you can actually trust. This is just start of your journey into figuring out what's going to be right for your business, that you're getting all the information you need to make an informed and empowered decision as a confident business owner that I know you want to show up and be. Make sure you head over to Creative Contracts and take my legal contract quiz to find out exactly what do you need to get your online business legally legit and protected and ready to move forward. Thanks so much for being here. We'll catch you on the flip side.