Tax attorney Mark J. Kohler explains why small-business owners convert to S corporations: asset protection from lawsuits and tax savings by splitting income into a reasonable salary and distributions that avoid the 15.3% self-employment tax. He warns against one-size-fits-all advice and recommends consulting a tax professional.
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Hi, Mark Kohler here with a two minute tax and legal tip. Now in my opinion, every small business owner at some point should consider converting to an S corporation. Now I'll address some of the naysayers and their issues briefly at the end of this video. But let's talk about the two big reasons. First, asset protection and second, tax savings. Now asset protection comes down to the typical reason why a sole proprietor might incorporate and that's to get protection from the operations of your business. That typical corporate veil, asset protection. That's important with any small business owner that might have some risk going on in their business. But the second main reason is tax savings and I love this. It's a huge reason why S corporations make sense for the small business owner. See if you're operating as a sole proprietorship or a single member LLC or even multiple partners in an llc, if you have ordinary income, all of the net income attributed to the owners is going to be subject to self employment tax. That's at 15.3%. Then you have federal and potentially state income tax as well. It adds up. But in an S corporation when you establish that you become an employee as well and can now take a salary only the salary is subject to the self employment tax, suda, fuda, FICA or payroll taxes as some of us call it. The net income flows through as a dividend and escapes that self employment tax. Now finding the right balance between those two numbers is a very important but it can be powerful and save you thousands of dollars. Talk with your tax professional and look at the options. Now for the naysayers out there, please be cautious of those that say a C corporation is the perfect fit for every small business owner or just operate as an llc. You may get the asset protection of an llc but you're not going to save any taxes. And the C corporation is really a big corporate strategy and oftentimes doesn't work for the small business owner. Get a second opinion folks. I hope these strategies help keep looking at your options and keep living the American dream.
