S Corp Problems: Are You Set Up for Success?
Many small business owners struggle when starting out. There are a lot of reasons for this, but perhaps the most common early pitfall is setting up the business with the wrong foundation. While a good accountant is a necessity for any business, what they think is best for you may not actually be the best for your business. In particular, many CPAs will advise small business owners to set their company up as an S Corp. While this is generally a great idea for some companies, it is not always your best option.
When it comes to long-term success for your business, it always helps to consult a local Miami and Fort Lauderdale business attorney.
First, do you actually need a separate entity? Accountants often recommend setting up a separate entity in order to shield you from liability. However, keep in mind that accountants also tend to charge more when preparing corporate returns. If you are a small business in an industry with high liability risks, then a simple LLC should suffice to provide protections. However, keep in mind that if someone is injured on your business premises, they can still file a claim or lawsuit with your insurance carrier. As long as you are well insured, there is likely little difference between sole proprietorship and having a separate entity. The biggest benefit is if the damages exceed your coverage. That is where having a separate entity makes a lot of sense.
Taxes on S Corp
While it is true that the S Corp is a great way to avoid paying payroll taxes, there are big pitfalls to avoid. For instance, with an S Corp (including LLCs that are taxed as S Corps), you have the ability to pay yourself a salary that is reasonable in proportion to your overall earnings. Your salary is subject to payroll taxes, but any profits beyond that are considered distributions, which are taxed at a much lower rate because they are not subject to payroll tax. There is a catch, however. As you can imagine, a lot of business owners underpay themselves to avoid payroll taxes. This is perhaps one of the fastest ways to get audited. Sometimes, it is better to just be a simple LLC, rather than opting to be taxed as an S Corp. It all depends on the nature of your business and your degree of risk, as well as earnings.
Getting Advice Early
As an experienced business law firm, the team at the Sejour-Gustave Law Firm, PLLC stands ready to assist you with all your planning and business startup questions. Plan early. The last thing a new business owner wants is to have to change entities or restructure a business due to a poor initial decision. For answers to all your challenging small business legal questions, give us a call or find us online today.