Should My Business Be An S-Corp?

I love social media.  There are so many quasi-tax “gurus” out there that spur phone calls to my office.  The latest question spurred by the “gurus” is should my business select S-Corp tax status.  While the S-Corp election has its benefits, whether your business should select this status has a lot to do with how you operate the business daily.  Let’s look at some key questions to ask yourself before you make the commitment to go S-Corp.

1. Are your business and personal bank accounts separate?  If your business is any entity other than sole proprietor, it should have a separate bank account.  The only transactions on the business account should be business transactions.  Comingling of funds, having personal & business transactions on the same account, is a big no-no for an S-Corp.
2. Is regular bookkeeping completed in your business?  S-Corps must have financial records on hand for review.  Depending on the amount of revenue the business earns a year, the business will have to complete additional forms on the annual tax return.  Be it an excel workbook, some bookkeeping software, or a bookkeeper, the S-Corp must be prepared to maintain good financial records.
3. Are you ready to consistently run payroll?  That’s right.  S-Corps are required to pay the shareholder (owner)-employee reasonable compensation.  There is a misconception that owners can simply draw money instead of a paycheck.  Nope! Can’t do it! The IRS expects the shareholder-employee to receive a paycheck for the work she/he does in the business.  It can’t be some random number in the sky either.  It must be based on the industry standards and the number of hours the shareholder-employee works in the business.  I like to ask, ‘How much would it cost you to hire someone to do what you do in the business?’   That’s your base number for reasonable compensation.
4. Does your business have enough net profit to justify the change in status?  If the net profits are next to zero every year, why bother with the change in taxation status.
5. Are you ready to be accountable to someone about business operations?  S-Corps are required to have a board meeting annually.  Even if the S-Corp has only one shareholder, it is expected to have a meeting with an advisory board. 

Becoming an S-Corp requires business owners to operate their businesses at a corporate level.  The items above are a small portion of what to evaluate before making the leap to S-Corp status.  While we are thankful for the social media quasi-tax gurus, it is important to speak to your tax professional or attorney to determine what is the right tax election for your business.  Feel free to contact us for a consultation on S-Corp election.

Alexandria Louis Tax Solutions, LLC (901)414-1751

A boutique tax firm in Memphis, TN