Question by TheErrandBoy: When do you convert your business from sole proprietorship to a company and what are advantages of a company?
Say you are running a small business as sole proprietor and business is growing. What minimum annual revenue before one should convert to company?
Other criteria to consider on whether to convert to company or remain as sole proprietorship? Would appreciate if you can also mention good online business sites or articles that I can refer to.
Answer by MissDeviance
There are tons of advantages, especially legal.
Most people pursue S-Corp or LLC, but honestly, unless you are making $ 250,000+ in profits, it’s not worth it. It’s actually MORE work than a standard C-Corp, because it tacks on MORE paperwork onto your personal income taxes.
The easiest thing to do is a standard C-Corp. There is no limit for how much you have to make. You can make $ 100 a year and be a legitimate C-Corp. The best part is, all you have to do is file quarterly withholding payments (no different than your sole proprietorship estimated payments), pay yourself a regular paycheck (with standard withholding and matching amounts, again, ending up no different than your self-employment taxes), and file an annual 1120 tax form (really simple, really easy) and W3/W2 form. On your regular taxes, you’d file your salary as an ordinary W2 from any other employer, no additional paperwork needed.
DEFINITELY CONTACT A BUSINESS LAWYER to help set up the C Corp, however. They will offer you very good advice and explain all the filing timelines. It’s really not that hard, but there’s a lot to keep track of until you get the hang of it.
S-Corp or LLC is only really useful when you have high volumes of income. Then it is helpful because you can shelter some of your income over to your personal income as salary, without paying double taxes on it (corporate taxes, 15%, plus income taxes).
If you are C-Corp and essentially end up paying almost all of your profit out to yourself as income, your net corporate tax will end up being 15% of $ 50 or so… no biggie. And the only limit on salary is “normal ranges” for people in that position. (You can’t pay yourself a $ 25 million dollar salary on a $ 25 million dollar business, and say all of your profits went to pay for the CEO; but you CAN do that if you earned $ 120,000 on a $ 135,000 annual business, no problem.)
S-Corp or LLC requires additional forms on your income tax, since you need to show how you diverted the extra “unusual” income over to your personal income. So a profit of $ 1 million where a salary should be around $ 250,000 can still transfer $ 750,000 over to your income tax using an S-Corp (and you wouldn’t be taxed the full 15% on that at the corporate level).
A lawyer will be able to recommend the best option for you based on your expected income.
Know better? Leave your own answer in the comments!