Mark J. Kohler explains when to switch to an S corporation. The main benefit is tax savings, not liability protection. Once your business nets $3,000 to $4,000 monthly, you can split income between a reasonable salary and distributions, cutting the 15.3% self-employment tax that applies to LLCs and sole proprietors.
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Hi, Mark Kohler here with another two minute tax and legal tip. Let's talk about when to set up an S corporation. Now many of you have heard me time and time again say that every small business owner should consider an S corporation at some point. But really, when do you make that conversion? Now in my opinion it's really not an asset protection issue because if you've got a risk in your business and you need that protection, you you can set up a limited liability company LLC and get the protection you need and still operate as a single member LLC or as a partnership with your other members in the llc. But the real difference between an LLC and an S corporation is tax savings and saving on self employment tax. See, as an LLC or a sole proprietor all of your income is going to be subject to the 15.3% self employment tax. But when you have an S corporation you can set up a salary, minimize that SE tax by taking a dividend or having some pass through income. So I've always believed that that level of income, where it starts to create savings, where it makes sense, is around three to four thousand dollars a month net income. So after your gross income and all your expenses, if you're taking home about three to four thousand dollars a month, we can now set up some sort of payroll differential between that and your flow through income or where the savings starts to add up. So if you're in that pay range per se, I think you need to consider an S Corp even more sooner than later and it can really add up. So look at your options, keep living the dream and wish you the best. If you thought that information was amazing and helpful, I have so much more to share with you. Please look at the links below and head to my website markjkohler.com youm can subscribe to my weekly newsletter. Check out my weekly radio show. I have my online videos for tax and legal strategies that will save you thousands. Ways to learn quickbooks with my fun videos online and also if you enjoyed it, please leave a comment and give it a like and follow me on YouTube. I promise that these videos will change your life. Thanks so much.
