Reasons To Consider Switch From LLC To S Corp
As the income for an LLC increases, there are two major advantages gained by business owners that choose to switch to an S Corp.
Self Employment Tax Breaks
Tax relief is the most well-known and perhaps the biggest advantage afforded to business owners that opt for an S Corp. Business owners utilizing the LLC business structure are responsible for paying self-employment taxes at a rate of 15.5 percent. On the other hand, the owner of an S Corporation can be paid an individual salary by the company and then claim a Foreign Earned Income Exclusion to lessen the amount of income tax to be paid.
Retirement Savings Benefits
The S Corp business structure also provides business owners to contribute more money toward retirement accounts. S Corp owners are allowed to contribute up to $18,000 to a Roth Solo 401 K plan and depending on the salary paid to the owner, he or she can then contribute up to another $36,000 a year towards a traditional Solo 401 K plan.
When To Switch From LLC To S Corp
A number of details can influence the timing of this decision including the following:
S Corporation owners are paid a salary from company profits and what constitutes a sensible salary is dependent on the individual factors regarding the business in question. A general rule that is spoken in business circles is that two-thirds of net business income should be paid as salary to the owner but this should be considered only to be a reference point.
Foreign Earned Income Exclusion
It may be a good idea for business owners that qualify for this tax exclusion to switch to the S Corp structure sooner than later as it permits them to become exempt from paying income tax on up to $101,300 of their salary.
Location Of Business
Tax regulations for S Corporations vary slightly from state to state and business owners should become knowledgeable of the guideline of their particular state.
Business owners that feel they need a more comprehensive understanding of the benefits of switching from an LLC to an S Corp can contact Foster Financial here.