Does Your Business Have To Become An S Corp? 5 Crucial Questions To Ask Yourself BEFORE You Make The Big Change

So you’re at the point in your business where it’s time to think about the next move. You’re ready to up your game, and that might mean taking the next step in your business’ legal definition. You might be considering the move from where you are now (Sole Proprietorship, LLC, etc.) to the “big-time,” becoming an S Corp.

A lot of entrepreneurs think that they have to make this move because they’ve been told it’s the right choice. But just because all the “cool kids” are doing it doesn’t mean it’s right for you.

The truth is that there are a lot of responsibilities that go along with being an S Corp. It’s the “fine print” that your financial advisors might not mention.

CPAs also sell the S Corp thing as a tax-saving strategy. But they often leave out the bigger picture about making the switch.

So is this “upgrade” right for you? First, let’s define what an “S Corp” is.

Unlike an LLC, an S Corp isn’t a exactly business entity. It’s a designation that refers to the way the business is taxed under IRS code. A lot of the time, switching to an S Corp can save you a lot at tax time, which is a big selling point.

You might be motivated by a potentially lower tax bill (who wouldn’t, right?). But before you go all S Corp crazy, be sure it’s even an option for your business as it is right now.

First, you need to be sure you have the cash flow to support this new status. Then, you need to know the regulations that govern the S Corp change to determine if you qualify. (Find that list of qualifications right HERE.)

Now, the real fun begins AFTER you take the S Corp plunge.

This is when the benefits start. But there are also more fees, filings, and responsibilities that kick in after you make the change.

If you’re not sure if it’s the right time for you, ask yourself these 5 questions. They’ll help you gauge your readiness, and make a more informed choice for your business.

• Do you have a Tax Advisor? After you invested the time to start up an S Corp, it needs to be maintained. And the laws are always changing. Ensuring you have your books in order is equally as important. So if you didn’t have a solid accountant or tax attorney before, you’ll definitely want one now. Make sure that you have the proper support and advice to help you maintain your status once you make the change.

• Do you have the cash flow to support the S Corp requirements? It’s important to consider converting into an S Corp only after your business is profitable. With this status you’ll need to factor in officer payroll costs. That includes payroll taxes & payroll processing fees. And a new tax form 1120S (this replaces the Schedule C you used when you were an LLC or Sole Proprietor ) costs an average of $761 annually. You will also need to file and annual report with your state. Fees range for this from $0-$400 depending on the state.

• Are you protected? You should always have a certain level of protection for any type of entity. But for S Corps, especially if you have more than one shareholder, you need contingency plans for worst-case-scenarios. This includes a business will and Life Insurance to cover closing the business costs.

• Do you know what to do if you decide to dissolve your S Corp? Of course, I never want to see a business close. But it happens, and for all sorts of reasons. If you’re not committed anymore, or you don’t see it as a long term gig, consider officially (and legally) closing the business. That also means dissolving your S Corp. Get the basic details on how to close your business right HERE.

Going the S Corp route might be just what your business needs, but it’s NOT for everyone at every moment. Make sure you know what you’re in for BEFORE you make this decision. If you have any doubts, get the support and advice you need to make that call.

Looking for a little more guidance to make an informed decision there? We at Coaching With Kaylee partner with a legal firm that specializes in small business. When you work with us, you get business alerts and access to additional support and advice.

Schedule a call with me right HERE to learn more about how we can help you!