In this solo presentation Mark Kohler walks through the three primary ways to structure a small business—sole proprietorship/LLC (a DBA), C‑corporation, and S‑corporation—and explains the tax consequences of each. He shows that a sole proprietor pays 15.3% self‑employment tax on net earnings, a C‑corp pays a 21% corporate tax, while an S‑corp avoids both by passing income through to the owner’s personal return. The S‑corp, however, must pay the owner a “reasonable” W‑2 salary (typically 30‑40% of net profit) and the remainder can be taken as K‑1 pass‑through income, which is not subject to self‑employment tax. Kohler stresses the importance of setting a salary that satisfies the IRS, citing his own matrix and seminars. He explains that an LLC can be converted to an S‑corp retroactively at any point in the tax year, allowing a new business to start as an LLC (or sole prop) and switch to S‑corp once net earnings are projected to be about $40,000 or more, saving roughly 15% on the portion taken as pass‑through. He then introduces his “trifecta” model: (1) use an S‑corp for earned/active income, (2) hold rental or investment assets in LLCs owned by a trust, and (3) integrate everything on the individual’s 1040. This structure is presented as the standard path for dentists, contractors, realtors, attorneys, CPAs, and online marketers. The core recommendation: start as an LLC/sole prop, monitor earnings, and when you anticipate $40k+ net profit, elect S‑corp status (back‑dated if needed) to capture tax savings.
Chapters
Foreign. Tom asked a very important question. Now there's three ways to organize your business. Now everybody check this out. You could be a sole proprietorship, no llc. You're just a dba. That stands for doing business. As you reserve your little name, you take your Social Security number and you go down to the bank and get a bank account. Boom, you're in business. That's option one. Option two was would set up a C corp. That's all you could do 100 years ago. 80 years ago you'd set up a C Corp. Now you get protection. But let's say you bring in the same money. You bring in 100 grand in your sole prop or in your C Corp. You spend 25 grand on expenses and you net 75. You spend 25 grand on expenses. Now think of expenses as like auto marketing, travel, dining, home office, electronics, computers. Same thing, same expenses. You don't get any extra expenses in a C corp. Don't let anybody sell you otherwise. So you net 75. Well here's the problem. In a sole proprietor, you pay self employment tax of 15.3. In a C corp you play corporate tax of 21%. So both of these suck. So your only other options were 50 years ago came into play. The S corp, the S corp said hey, I get the same protection. Now this was before LLC is even existed, so don't go anywhere. So here's my S corp. If I bring in 100 grand, I spend the same 25 on expenses and I net 75. No self employment tax, no corporate tax and no Obamacare. That's pretty awesome. But here's the catch. You have to take a salary. So what we do is we take this 75 grand that you're going to make and on paper you don't have to wait around for a paycheck. But we claim maybe half of this or a good chunk of it as dividend kind of pass through. So this is dividend or K1 pass through income which is no self employment tax, no corporate tax. But up here you have to take a W2 for a reasonable amount. Now in most equations we're doing a 30 to 40% allocation. And I go to all the reasonable comp seminars around the country. I teach classes this to other CPAs. I interview IRS agents I am licensed to do to represent clients before the US Tax court. We make sure no client gets penalized for taking too low of a salary. But I have a matrix that helps you choose. So you might take a 25 grand salary and take 50 grand as pass through this just saved me 15% on 50 grand. That's $7,500. Now why did I bring all this up? People, you need to know as a small business owner, the difference between a sole prop, a C corp and an S corp, most of my businesses in the long run, I don't want to be a sole prop. I don't want to be a C corp. So we lean towards this S corporation. And that's what Tom is asking. He's saying, Mark, in a given year, should I set up my S corp halfway through the year or should I just stay a sole proprietor through the rest of the year? Well, here's the S corp insurance that I want to give you. Right here is what you can do is set up an LLC that doesn't say taxes. Llc, don't save taxes. But I can convert it to an S corp retroactively anytime during the year. So if you're a brand new small business owner in 20, 21, what I'd recommend, if you think you might make 10, 20, 30, 40, 50 grand or more, start out as an LLC, which is the same thing as a sole proprietor, and just see how the year goes. If you end up making a lot of money later on in the year, you can call me up and go, bark, bark, I made 40, 50 grand. That's when I think it makes a lot of sense to switch to an S corp and I can backdate an S election. You charge 150 bucks super cheap to go back and be an S corp. So here's what I recommend for a lot of clients. This is the trifecta that I've been teaching for years. You start out as a sole proprietorship with your little side hustle. So here's your side hustle. You start out as a sole proprietor or an llc and then you convert to an S corp when the time is right. On this side, this is your investment side. This is where we put your IRA 401k and we put your LLC for your rentals. So your LLC is owned by your trust and your LLC here is owned by your trust or your S corp. Down here is your 1040 and a river runs through it. Brad Pitt, you know what I'm saying? So here we take your passive income and over here we have your earned income. This is what I do for every dentist, plumber, electrician, contractor, realtor, broker, attorney, cpa, online marketer, fix and flipper. We all become S Corps in the long run. And then we use LLCs for our rentals and it comes down, owned by our trust, married or single. This trifecta is what 90% of our clients are coming to us for to help get organized. This is what I want you to know when you go to meet with your professional. Now, can you do your own tax return as a sole proprietor with your side hustle? Yes. That's what I'm talking about. You is a Schedule C. We can help you do that. But then you're going to graduate as your business grows over to the S corp. And Tom asked, when should I switch? When you know you're going to make at least 40 grand net. When you're going to net at least 40 grand. So maybe you grow 60 right off 20, but you know you're going to net 40. I want you to be an S corp. So, Tom, start out as an llc and then let's see how the year goes. When you start making money, call your mom and call me. You know what I'm saying? All right.
