S corporations offer a number of advantages over sole proprietorships (visit our tax calculator to test it yourself), including the ability to avoid self-employment taxes and limited liability protection. However, many small business owners do not bother restructuring, but why?
There are a handful of reasons, you wouldn’t do this:
Cost: There is a cost associated with setting up and maintaining an S corp. You will need to file additional paperwork with the IRS and you may need to pay additional state taxes.
This is of course, relatively minor, but given that most entrepreneurs are always on the go and in mid-flight, many don’t bother with yet another stack of papers to fill out.
Complexity: S corporations do tend to be more complex than sole proprietorships. You will need to keep more detailed records and should hire a professional accountant.
This isn’t just an upsell of course, but makes for yet another reason many don’t switch to an S Corp. Hiring a CPA or accountant — even on an “as needed” basis — tends to pull away from entrepreneur’s time on the business. Growth is paramount, and hiring a CPA can appear like a lateral business decision. The reality however is a CPA can do more to increase your business’s profitability.
Lack of awareness: Many small business owners are not aware of the benefits of an S corp. They may not realize that they can save money on taxes by switching to an S corp.
Eligibility requirements: There are certain eligibility requirements for S corporations. For example, you cannot have more than 100 shareholders, and all shareholders must be individuals, estates, or trusts. Of course, for most business owners currently operating as a sole proprietorship, this is extremely unlikely.
A CPA can help
If you are a small business owner and you are considering switching to an S corp, it is important to talk to a tax professional. A CPA can advise you on the pros and cons of switching to an S Corp. They can also prepare the necessary paperwork with the IRS.
Work with one of our CPAs, so we can help you understand the costs and benefits of switching, and determine if you qualify.
Image by StartupStockPhotos from Pixabay