Your average person can spend weeks and even months researching, investigating and analyzing the benefits of incorporating.  It’s almost like someone decided to create a perplexing process of getting information with regards to entity choices. So, what are your choices? You have the S-Corp, C-Corp, Sole Proprietorship, LLC and the Partnership. Today we are going to focus on the S-Corp. The other day I was on the phone with one of my favorite clients. Let’s call him Sal.  I really like Sal. He just turned 30 and is a very hard worker. I emphasize to him that he is a rare individual.  I say Sal is special because prior to 30 he has been in business for the past 5 years and that alone is a feat in itself.  Being in business and growing before 30 is not as common as we might think.

Sal calls me up and tells me that he really needs time to talk with me regarding:  “Should he go forward with moving his accounting over to the S-Corporation?” I knew I was in for a treat because Sal is smart. He does his homework.  Well, 2 hours later and a lot of back and forth we concluded that the S-Corp entity choice was right for him.

I was challenged that day and I decided to write this article.  The next time a client  calls me with regards to an S-Corp,  I will lead him to my article. Here are the  laymens terms on this topic.

As far as I can see, the absolute best reason to become an S-Corporation is that:  An individual can waive an amount near 50% of his net profit that is subject to Social Security and Medicare tax (FICA).  Now..listen carefully, this is not etched in stone. The percentage might be higher and might be lower depending on your role within the company. Let’s lay out some numbers.

If Sal makes $100,000 profit as a sole proprietor every single dime of that money is taxed at his income tax rate as well as the FICA tax.

If Sal was an S-Corp or taxed as an S-Corp (which an LLC can do, we can talk about that another day) he would have been able, depending on his role in the business to take $50,000 away from being taxed the FICA. The full amount is subject to federal income tax however, he does not pay payroll tax on the other 50%.

I caution small business owners about incorporating until they at least have 3 years in business especially if it is a low liability business. I have met too many people who started corporations prior to really having all that much business experience. The fees associated with incorparation, tax filing and here in California the “Franchise Fee” (this has nothing to do with a franchise) is way too much when you’re first starting out. The moral of the story is

Be Like Sal.