When do I know I should become an S-corp?

dollar-499481_1280Do you want to know when to become an S-corp? The main reason people even choose to create a business entity is to protect their personal assets from creditors and excessive tax liabilities. As a sole proprietorship, the entrepreneur and the business are one in the same. This means that if the business makes money, creates debt and carries liability, so does the entrepreneur. In this case, if the business fails, the owner may have to sell their possessions, including their home, in order to satisfy any debts. For this reason, it makes sense for a small business owner to consider a business entity.

Some small business owners start right away with an LLC as it is rather easy to set up, both in low cost and simple paperwork. And, an LLC is usually the best option for new business owners as it separates the person and the business, making it as though one person is now two entities. This means the business now has its own liabilities and, in an LLC, creditors are only able to go after a portion of any debt owed and all income and expenses are passed through to the entrepreneur’s personal income taxes. This can lead to a double taxation, which is why it is important to know when it is a good time to become an S corp.

When a business owner decides to become an S corp, the owner pays themselves through both a salary and a dividend and can potentially save on taxes. Many small business owners wait until the company is a little larger, or has more revenue before making the decision to become an S corp. So it is important that you talk to a Colorado CPA, especially one that specializes in small business to know when you are truly ready to become s-corp.

When do you know it is time to become an S corp?

Remember regulations vary from state to state, so here is a quick checklist to discuss with your Colorado CPA:

  1. Are you starting to net $50,000 per year? (At this level, you will be able to see tax savings when you become an S corp)
  2. Are you are hiring employees?
  3. Are your books in order? (There will be new compliance factors that you will want to discuss with your accountants.)

Asking and answering these questions with your Colorado CPA can help you make a decision about the small business entity that is right for you. Knowing both the tax savings and the regulations are very important and are not easily navigated alone. If you need help with understanding small business tax, please contact Clear Path Accountants.

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