CPA/Attorney Mark J. Kohler explains why small-business owners should convert to an S corporation. Two main reasons: asset protection shields your personal assets, and you can avoid the 15.3% self-employment tax on profit distributions by paying yourself a reasonable salary and taking the rest as a K-1 pass-through. LLCs protect assets but don't cut self-employment taxes.
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Hi, Mark Kohler here, CPA Attorney, best selling author and I want to talk about the reasons to convert to an S corporation or set up an S corporation if you're a small business owner. Now there's two main reasons to consider converting to an S corporation or setting one up. And that is the one we all know. Asset protection. If you're operating as a sole proprietorship and you have any sort of business that could be creating exposure for you, it's a great time to consider incorporating to get that asset protection. Now the second second reason to consider an S corporation and probably the biggest reason is the savings on self employment tax. If you're operating as a sole proprietorship or LLC and generating ordinary income. I'm not talking about investing in rental property, but if you're selling a product or a service, this type of income is taxed with self employment tax or fica, Social Security and Medicare. This is a big tax of 15.3% right off the top. Now remember, LLCs do not save taxes. That's a great way to get protection. But when that income flows through with ordinary income, the SE tax hits first. Now how does the S corporation save you taxes? It's because you become an employee of the S corporation, take a salary and then the rest of the pass through income is no longer subject to self employment tax, pseudo food of FICA or workers comp and it avoids Obamacare and corporate tax because it's an S corporation. Folks. This is the power of the S corporation to split your income between salary and pass through K1 income. Talk to your accountant, review your numbers and see if the S corporation is a good fit for you.
