Understanding S Corporations: Benefits and Complications

:moneybag:S Corporations allow members of an LLC to be treated as employees and earn both a salary and distributions.

:clipboard:The IRS scrutinizes S Corp member salaries, so it's important to choose a reasonable salary to avoid penalties and fines.

:chart_with_upwards_trend:The main benefit of an S Corp is saving on self-employment tax by paying a reasonable salary and receiving the rest of the income as distributions.

:calendar:S Corps require more work and complexity, including running payroll and organizing tax withholdings, which may require hiring a professional accountant.

:money_with_wings:S Corps are beneficial if you plan to withdraw all profits from the company, but may not be worth it if your distribution is less than $10,000.

What is the difference between an LLC and an S Corp?

—An LLC is a business structure, while an S Corp is a tax classification. Both LLCs and corporations can choose to be taxed as an S Corp.

How are S Corp members taxed?

—S Corp members are taxed on both their salary and distributions, with the salary subject to employment tax and income tax, and distributions subject to income tax only.

What is a reasonable salary for an S Corp member?

—A reasonable salary for an S Corp member is determined based on industry standards and work performed, and should be researched or consulted with an accountant.

What are the drawbacks of choosing S Corp status?

—The drawbacks of an S Corp include increased complexity, the need for additional accounting services, potential penalties for unreasonably low salaries, and limited reinvestment options.

Is an S Corp the right choice for my business?

—Choosing an S Corp depends on factors such as your projected profits, willingness to handle additional complexity, and plans for profit reinvestment. Consulting with an accountant is recommended.

00:00Introduction to S Corporations and their benefits and complications.

00:55An S Corp allows members of an LLC to be treated as employees and receive both a salary and distributions.

01:58Choosing a reasonable salary as an S Corp member is crucial to avoid penalties and fines from the IRS.

03:07The main benefit of an S Corp is saving on self-employment tax by paying a reasonable salary and receiving the rest of the income as distributions.

04:46S Corps require more work and complexity, including running payroll and organizing tax withholdings, which may require hiring a professional accountant.

05:50S Corps are beneficial if you plan to withdraw all profits from the company, but may not be worth it for smaller distributions.

06:49Considerations for choosing S Corp status and the importance of consulting with an accountant.