Examples:

• • Anita saved $8,000 in self-employment taxes her first year after switching from sole prop to S corp by splitting her income into salary & distributions.
  • When a client sued Rick’s company, his personal assets like his home and savings were shielded by his S corp’s limited liability status.
  • Stacy spent a few hours extra a month keeping up with the additional payroll, tax and recordkeeping paperwork required for her S corp.
  • Tim hit the 100 shareholder limit on his thriving S corp and had to convert to a C corp to keep bringing in new investors.
  • After forming her Solo S corp, Vanessa found that larger corporate clients took her more seriously and sent her higher-paying projects.

How to Proceed:

• • Assess your business income and expenses to determine if you could save on taxes by splitting your pay into S corp salary & distributions.
  • Consider if your work has liability risks that could jeopardize your personal assets if you continue as a sole prop without S corp protection.
  • Be honest about whether you have the time, organization and diligence to maintain the additional formalities & paperwork of an S corp.
  • Evaluate if you plan to expand ownership beyond yourself or a spouse in the near future, which may make S corp election attractive.
  • Consider if S corp status could give your solo business a professionalism boost for attracting higher-caliber clients and growth opportunities.

FAQs:

• • What’s the main tax benefit of an S corp over a sole prop? The ability to split your business income into employee salary and shareholder distributions, which can lower your self-employment tax.
  • How does an S corp protect my personal liability? It creates a legal separation between your business and personal assets, shielding your personal property from the company’s debts & liabilities.
  • Do I have to do payroll in an S corp? Yes, as the owner-employee of an S corp you must pay yourself a reasonable salary and run regular payroll, which a sole prop doesn’t require.
  • Can I own an S corp by myself? Yes, a California S corp can have a single owner, called a “solo S” or “single-shareholder S corp”, which is a popular choice for solopreneurs.
  • Will being an S corp help me get funding? It can lend more credibility with banks and investors vs. a sole prop, as it shows you’re serious about your business structure and growth.

Examples:

• • When Karl’s freelance income consistently topped $80,000, his CPA advised that an S corp could help him save big on self-employment taxes.
  • After a client threatened to sue her, Jen realized her sole prop left her personal assets vulnerable and an S corp could shield her better.
  • Angling to land bigger corporate contracts, Luis felt having an S corp would give him the professional polish to compete with larger agencies.
  • With dreams of ultimately selling her e-commerce business, Maggie knew investors would prefer to buy an S corp over a sole prop.
  • Mixing personal and business finances as a sole prop made Tyler’s taxes a nightmare, so he craved the clear separation of an S corp.

How to Proceed:

• • Assess your total annual net income from self-employment to see if you’re in the $40-50K+ range where S corp tax benefits kick in.
  • Evaluate your risk of legal liability based on your industry, client base and scope of work to see if S corp protection is warranted.
  • Consider if you’re targeting a higher tier of corporate clients who may expect you to have a more formal business structure than sole prop.
  • Think long-term about your exit strategy and if you anticipate seeking outside investors or buyers who prefer S corp ownership structure.
  • Reflect on if you’re feeling frustrated by financial commingling and yearn for a true legal divide between you and your business.

FAQs:

• • How much can I actually save on taxes with an S corp? It depends on your net income, but generally S corp owners can save around 15-20% on self-employment taxes.
  • Will I be protected from all lawsuits with an S corp? No, but it can shield your personal assets from the company’s liabilities in many cases when a sole prop can’t.
  • Do I need an S corp to land corporate clients? Not necessarily, but it can add legitimacy that makes you more attractive to larger companies vs. being a sole prop.
  • What if I don’t plan to seek investors or sell my business? An S corp can still be advantageous for tax savings & liability protection even if you plan to stay solo.
  • Can I still be taxed as a sole prop with an S corp? No, an S corp is a distinct entity requiring separate taxation, payroll and recordkeeping from your personal finances.

Examples:

• • Kai appreciated the simplicity of reporting all his business income & expenses on Schedule C as a sole prop, but knew he could save more on taxes with an S corp.
  • Wary of risking her house & savings as a sole prop, Amara felt safer knowing her S corp would shield her personal assets if her company ever got sued.
  • As a sole prop, Chris rarely kept meeting minutes or tracked corporate resolutions, but his new S corp required him to maintain pristine records.
  • Leila only paid $50 a year for hersole prop business license, but forming and running her new S corp cost over $500 for state filings and tax prep.
  • After switching from sole prop to S corp, Rashid found banks and investors took his business plan more seriously and were willing to extend credit & capital.

How to Proceed:

• • Analyze your income sources, expenses & estimated taxes to determine if an S corp’s savings & complexity fit your business needs better than a sole prop.
  • Conduct an honest risk assessment for potential liability based on your work and if S corp limited liability would bring vital peace of mind.
  • Gauge your willingness to keep up with all the formal recordkeeping & filing requirements of an S corp before leaving sole prop simplicity behind.
  • Tally the estimated costs to start and maintain an S corp, including formation, licensing, payroll, bookkeeping & tax prep fees to see if it’s financially feasible.
  • Visualize your long-term business plan and if S corp status would open more doors to serious clients, financing & growth opportunities than staying sole prop.

FAQs:

• • Is there a minimum income for an S corp to make sense? While it varies case-by-case, usually once you top $40-50K net, the S corp tax savings start to exceed the added costs & hassles.
  • What if I get sued after I switch from sole prop to S corp? As long as you observe the proper corporate formalities, your S corp should shield your personal assets from the business’s liabilities.
  • How hard is it to do all the S corp paperwork vs sole prop? It’s definitely a step up in recordkeeping – you’ll need to track meeting minutes, file annual reports, issue stock, etc. that sole props don’t.
  • Do I have to pay myself a salary AND run payroll in an S corp? Yes, a reasonable salary is mandatory in an S corp, which means regular payroll & payroll taxes, unlike a sole prop.
  • Will an S corp really improve my business image over sole prop? It often lends more credibility with clients, vendors & lenders, but your mileage may vary depending on your specific industry and market.

Examples:

• • Javier brainstormed ideas & ultimately chose “Javier Perez Marketing Inc.” for his new corporate name that would distinguish his solo S corp.
  • Busy with clients & travel, Natasha hired a professional registered agent service to reliably receive her S corp’s legal notices & documents.
  • Excited but nervous, Malik downloaded the Articles of Incorporation form from the CA Secretary of State website, filled it out & filed it with the required fee. He then realized it would be best for an experienced incorporation to take it from there.
  • Though just a solo owner, Elena drafted & adopted corporate bylaws and issued herself 100% of the shares in her new S corp.
  • Excited to get rolling, Keisha went to her local bank branch with her S corp docs & opened a new business checking & credit card.

How to Proceed:

• • Brainstorm at least 3-5 potential corporate names that are professional & unique, ending in the proper designator like “Inc.” & check availability on the CA Secretary of State’s website.
  • Research & compare a few incorporation attorneys, considering their experience, cost & scope of services to see who you feel comfortable using.

FAQs:

• • Can I keep my existing sole prop business name when I switch to S corp? Yes, as long as it’s available to register as a corporate name & includes a proper designator like “Inc.” at the end.
  • Hire an incorporation attorney? It’s not legally required but can be helpful to ensure you properly complete all the formation steps & draft custom bylaws.
  • I missed the S corp filing deadline. Now what? The IRS may reject your election & you’ll be taxed as a C corp, but in some cases you can request late relief.
  • Can I have a solo S corp? Yes, in California you can have a valid single-shareholder or “solo” S corp as long as you follow all other rules.
  • Continue using personal bank account for everything? No, you must open a separate corporate account to properly segregate business & personal finances, or risk losing liability protection.

Examples:

• • Every month, Quinn runs payroll & pays herself a $4,000 salary from her S corp, withholding payroll taxes & remitting to the IRS.
  • Valerie has separate S corp & personal checking accounts & credit cards so she never mixes funds & puts her liability shield at risk.
  • Every June, Ethan holds his solo S corp annual meeting, electing himself the sole director & recording minutes per his bylaws.
  • Aliyah makes a note in her calendar to file her S corp’s annual Statement of Information with the state & prepay the $800 franchise tax each April.
  • Gustavo has standing meetings with his CPA each quarter to review his books, plan for taxes & strategize his S corp salary vs distributions.

How to Proceed:

• • Work with your CPA to determine a reasonable salary for your S corp role & set up quarterly payroll & tax deposits using an online payroll service.
  • Commit to only using your S corp’s bank account & credit card for all business purchases, income & expenses, keeping detailed records.
  • Set a recurring annual calendar reminder for your S corp’s shareholder meeting to stay compliant, prep the agenda, hold the meeting & record minutes.
  • Mark your calendar with your S corp’s key compliance & tax due dates, like filing your annual report & franchise tax payments to avoid penalties.
  • Assemble a go-to team including your CPA, attorney, bookkeeper & other advisers you can regularly consult to optimize your S corp operations.

FAQs:

• • How much salary should I pay myself from my S corp? The IRS requires a “reasonable salary” based on your role, industry standards & S corp’s revenue – a CPA can help determine a defensible amount.
  • Can I still deduct business expenses paid by personal funds in an S corp? It’s best to have your S corp reimburse you for any business items paid personally, as it’s cleaner for recordkeeping & tax purposes.
  • What if I’m the only person in my S corp – do I still have to do annual meetings? Yes, even single-shareholder S corps must observe these formalities & record minutes to preserve the corporate shield.
  • What happens if I miss a state filing deadline for my S corp? You could face late penalties & even suspension or dissolution by the state, so it’s important to stay on top of required filings.
  • Do I need to have an attorney or CPA on retainer for my S corp? At minimum, it’s wise to consult them a few times a year & as issues arise to keep your S corp optimized & in compliance.

Questions: S Corp Basics & Benefits

• • 1. What’s the key tax benefit of an S corp over a sole prop?
    • A) Income splitting between salary & distributions to save on self-employment taxes
    • B) C corp taxation option
    • C) Elimination of pass-through taxation
    • D) Ability to carry forward business losses indefinitely
  • 2. How does an S corp shield personal assets vs. a sole prop?
    • A) Limited business debts & claim personal liability
    • B) S corp owners’ personal assets are 100% untouchable by corporate liabilities
    • C) S corps can choose which personal assets are protected
    • D) S corps & sole props offer equal personal liability protection
  • 3. What formal requirements do S corps have that sole props don’t?
    • A) Regular shareholder meetings & recorded minutes
    • B) Adopting corporate bylaws & issuing shares
    • C) Filing annual reports & franchise taxes
    • D) All of the above
  • 4. How can S corp status boost credibility & growth potential vs. sole prop?
    • A) Many clients, vendors & lenders view S corps as more legitimate & bankable
    • B) An S corp can eventually go public with an IPO
    • C) S corps are seen as less risky than sole props by investors
    • D) S corps get automatic approval for business loans & lines of credit
  • 5. What’s a key drawback of an S corp vs. a sole prop?
    • A) Higher formation & ongoing compliance costs like payroll & franchise taxes
    • B) Restrictions on foreign owners & subsidiaries
    • C) Less tax deductions & credits available
    • D) Harder to get financing & investors

Answers: S Corp Basics & Benefits

• • 1. A) The main tax advantage of an S corp is splitting income between a reasonable salary & distributions to minimize self-employment taxes owed.
  • 2. A) While an S corp provides limited personal liability protection, there are some instances where an owner’s assets could still be at risk, such as if they commingle funds or commit fraud.
  • 3. D) S corps have multiple formal requirements not applicable to sole props, including shareholder meetings, minutes, bylaws, annual reports & more.
  • 4. A) The S corp structure tends to convey more legitimacy & growth potential vs. sole prop, but doesn’t automatically guarantee funding, going public, etc.
  • 5. A) S corps typically involve greater set-up, legal, tax, payroll & ongoing compliance costs compared to sole proprietorships.

Questions: When & How to Switch from Sole Prop to S Corp

• • 1. When does it typically make sense to convert from sole prop to S corp?
    • A) When net self-employment income consistently exceeds $40-50K per year
    • B) As soon as you hire your first employee
    • C) Only if you have multiple business partners
    • D) The moment you begin generating revenue
  • 2. What’s a key driver for sole props to go S corp besides taxes?
    • A) Securing patents & trademarks is easier
    • B) Unlimited personal liability is too risky
    • C) To enable franchising the business model
    • D) Mandated by certain industry regulations
  • 3. Key sole prop to S corp conversion steps?
    • A) Filing Articles of Incorporation with the state
    • B) Drafting a detailed business plan
    • C) Buying liability insurance coverage
    • D) Business name trademark registration
  • 4. S corporation election method?
    • A) 2553 filing within 75 days of incorporation
    • B) Sending the IRS a certified letter requesting S corp status
    • C) Updating your tax classification in your payroll software
    • D) Paying your state’s S corporation fee within 30 days
  • 5. Do you need a lawyer to convert from sole prop to S corp?
    • A) It’s legally required in California
    • B) Not mandatory but advisable for a smooth conversion
    • C) Only if you have over $100K in annual revenue
    • D) No, CPAs can handle the full legal process

Answers: When & How to Switch from Sole Prop to S Corp

• • 1. A) The S corp tax savings usually start to outweigh the added costs & formalities once a sole prop consistently nets around $40,000-50,000 per year in self-employment income.
  • 2. B) In addition to tax savings, greater personal liability protection is a key reason many sole props choose to incorporate as an S corp.
  • 3. A) Filing formal Articles of Incorporation with your state is an essential step to legally form a corporation that can then elect S corp tax treatment.
  • 4. A) Within 75 days of formation file the S corporation election (IRS Form 2553).
  • 5. B) While not legally mandatory, working with a business attorney can help ensure a smooth, compliant sole prop to S corp conversion.