Why Avoiding S-Corp Election Is Sensible For Businesses Making Less Than $250K

As far as important decisions for small business owners goes, selecting the right entity structure is right at the top of the list.

Although setting a business up as an S-Corporation is often promoted due to the opportunities for tax-saving that it provides, this particular entity structure isn’t always the right choice, particularly for those businesses that don’t earn more than $250,000 annually.

If your business earns less than this amount every year, it would definitely be worth consulting with professional accounting in Fort Lauderdale, to determine if electing for a S-Corp structure would benefit you or not.

Let’s look in a little more detail at exactly what an S-Corporations is:

Allowing businesses to pass their income through to its owners, while offering possibilities for reducing taxes for self-employment, small business owners can choose to register their company as an S-Corporation. While single-member LLCs or sole proprietorships don’t require their owners to pay themselves what is deemed to be a reasonable salary, while complying with stringent IRS and payroll rules, S-Corps do. While it may be that these strict rules offer benefits for businesses that are high-earners, they tend to simply complicate matters for smaller entities.

Why should some smaller businesses avoid S-Corp election?

Now let’s look more closely at why small businesses earning less than $250,000 per annum, should avoid S-Corp election:

• Costs associated with payroll can wipe out tax savings

Business owners are required to pay themselves a salary that is reasonable when operating an S-Corp, which inevitably leads to payroll taxes being triggered, filings, and administrative costs. If a business earns less than $250,000, the expenses that are triggered, often outweigh any potential for saving money on taxes.

• Rise in accounting and compliance fees

Electing for an S-Corporation involves a need for professional services such as payroll, bookkeeping and accounting, which when added up, can significantly reduce the potential financial benefits of an S-Corp.

• Increased scrutiny from IRS

If you choose an S-Corporation structure and underpay yourself to increase distributions, you could find yourself being scrutinized by the IRS, who closely monitor S-Corps for exactly such activity. For a lot of smaller businesses, this may be too risky when compared to the potential savings.

• Reduced benefits for lower incomes

The main advantages offered by an S-Corp, such as tax-savings for self-employment, only really kick in when net profits of $250,000 are earned annually. For businesses that fall under that threshold, the benefits are often outweighed by the complexities.

• Less flexibility in terms of expenses

With rules that are much stricter surrounding business deductions, health insurance and distributions, S-Corp owners may struggle to operate the business when compared to a single-member LLC or sole proprietorship, which allows for much simpler management of such things.

Under what circumstances might S-Corp election be beneficial?

Consulting with professional accounting in Coral Gables is the best way to know categorically whether electing for an S-Corp structure will offer your small business benefits, but in general, those that are able to fulfil the following criteria, may find it beneficial:

• Net profits of more than $250,000 per annum
• Able to effectively separate salary and distributions
• Able to handle all requirements for compliance and payroll

S-Corps are most appropriate and advantageous for those businesses able to absorb the additional cost and complexity involved. But for most small companies who don’t make more than $250,000 annually, the flexibility and simplicity of a sole proprietorship or single-member LLC is more appealing, and can even rival an S-Corp in terms of tax efficiency.