Part 2 S Corp Series

All right, so this week we're going to do a short video on some of the pros and cons of the S corporation, or part 2 to the last week's. When you compare an S corporation to, say, a C corporation, right, one of the, one of the biggest pros is that it's not subject to tax. The entity, the S corporation, does not pay tax at the entity level. All that stuff flows through the S corp tax return, it shakes out into a K-1, and then whatever the result is, That K-1 gets reported on the person's 1040. A C corporation, on the other hand, is taxed at the entity level, and then the dividends that the shareholders take out, those are taxed again at the individual level. So you have that kind of double taxation. You avoid that with the S corporation. Another thing is you can deduct the corporate losses on the individual tax return via that K-1. If the business has a loss, it flows through onto the K-1 and that loss gets reported onto the 1040. Additionally, you may be able to utilize what we call the QBI deduction, which is an additional, possibly maybe an additional 20% deduction on your tax return as well. Versus a sole proprietorship, one of the biggest things we always talk about is the FICA tax. If you have a sole proprietorship, you're paying 15.3% in FICA tax on the net income of the business. In an S corporation, you have to take a salary. Okay. And so what that means is that if you make $100,000 and you take a salary of say $40,000, only that $40,000 gets subject to that FICA. You can take a distribution of the $60,000 and you avoid the FICA tax on that addition, on that $60,000. If that was in the sole proprietorship, all $100,000 would be subject to FICA. So that's one of the biggest things that we like about the S corporation compared to a sole proprietorship. When you have a sole proprietorship, You're liable. You have personal liability for that, right? That the an S corporation is a separate legal entity. It does give you some like a veil between you and the business, which you want. Additionally, the S corporation gives you what we call continuity, meaning that if you die or something, the business will live on. Sole proprietorship that doesn't happen; it just ends. Now, with the pros, you got to talk about the cons. So the cons with regards to say a C corp. Is that the the people who can be a shareholder of an S corporation? It's let's just say that the rules for that are very strict. Okay, you only can have certain types of shareholders. There's only a certain amount that you can be that can be a shareholder. It only has it. It has one class of stock. It's very limited if you wanted to raise capital to grow this thing and bring on a ton of shareholders. So those types of things that you have to coordinate into your decision-making process when you. Decide whether or not to have an S corporation. The cons with regards to, say, a sole proprietorship is they're very strict running them. The compliance is very strict. There's additional administrative costs that come into play because again, you have to have your— you have to have payroll. So you got to set up payroll, you got to have a separate tax return. So that can— that's an additional cost. So you want to make sure that when you take on the S corporation, that it does in fact meet the needs of where you're at right now with respect to how much money your business is making? Is there a real need to take on these administrative costs? And do they— do the tax savings overpower the amount that you're paying in those administrative— in other words, are you saving more tax than you're paying in administrative fees for the new tax return and the payroll, things like that? So those are— these are just some of the ideas and some of the things you want to think about when you're deciding whether or not to have an S corporation or really any entity. You want to go through this whole thing. Is the entity that I'm considering Going with going to benefit me? You always have the tax piece and you have the legal piece. So you want to bring in those 2 separate sides of the coin to make sure that they're working in coordination to make sure whatever, whatever decision you make with entity status, that is the one that makes sense for your overall picture. Not just tax, not just legal. Okay. Hope that helps. Any questions, hit me up. Talk soon.