Time to Update an LLC to an S-Corp?

The best time to switch a small business from an LLC to an S-Corp depends on various factors, including tax considerations, business goals, and administrative capabilities. Here are some key points to consider:

Tax Benefits:

• Self-Employment Taxes: S-Corps can provide savings on self-employment taxes because owners can take a salary and receive the remaining profits as dividends, which are not subject to self-employment taxes of 15.3%.

• Payroll and Salary: You need to pay yourself a reasonable salary, and the IRS can scrutinize this aspect, so careful planning is needed.

Income Level:

• If your business is generating significant profits beyond what you would consider a reasonable salary, the tax savings of an S-Corp might be beneficial.

Administrative Requirements:

• S-Corps require more extensive record-keeping, payroll, and compliance with corporate formalities than LLCs.

• S-Corps need to file specific forms with the IRS, such as Form 1120S annually.

Timing:

• It's generally easier to make the switch at the beginning of the tax year. If you want the election to be effective for the current year, you must file Form 2553 no more than two months and 15 days after the beginning of the tax year the election is to take effect.

• If you switch mid-year, you might need to file separate tax returns for the LLC and S-Corp portions of the year, which can complicate your tax situation.

Legal and Financial Advice:

• Always consult with an experienced accountant or CPA to understand the implications specific to your business.

Generally, if your business is consistently profitable and you can benefit from the tax advantages of an S-Corp, it may be a good time to consider the switch.