An LLC is a limited liability company that allows a business to operate with a flexible structure and with fewer requirements than a corporation. Additionally, it provides protection to the individual operating the business and potentially offers tax savings. However, as an organization grows and changes so does its legal structure.
Knowing when it makes sense to move from a single-member LLC to filing as an S corporation can aid you when the time comes to make this important change to the way your business is structured.
The size of the organization is a key factor in determining when it is time to move from an LLC to an S Corporation. An LLC is perfect for an individual who wants to flexibly manage their business without a board of directors. As the company grows then moving to an S Corporation should be considered.
An S Corporation allows room for a maximum of 100 shareholders. When your organization shifts from being operated by a single member or a small group of members to a large number of shareholders then it may be time to consider filing as an S Corporation.
When operating as a single-member LLC or a sole proprietorship, all profits from the business flow through as Schedule C income, and are taxed fully as self-employment income at a high rate. If the profitability of the business is high enough, moving to an S corporation can allow the owner(s) to take a salary, and then pay out additional profits as a distribution to save taxes. Profitability of the business as an S corporation will flow through to the owner(s) on a Schedule K-1.
Tax Preferred Retirement Savings
Establishing an S Corporation gives the taxpayer additional options and opportunities when it comes to saving for retirement. Once a taxpayer has an S Corporation they are able to set up a Solo 401(k). A Solo 401(k) is a 401(k) that is designed for a business with no employees. There are no age or income limitations or restrictions with the only requirement for establishing a Solo 401(k) being that you are a business owner with no employees. After the Solo 401(k) is set up an individual can contribute up to $61,000 with an additional $6,500 catch-up contribution if an individual is 50 years of age or older.
Desire For Shareholders
As a business grows and decides to expand it may decide to offer stock options. Once they begin selling stock the individuals who purchase equity in the company in this manner become known as the shareholders. An LLC does not have shareholders only members who share the profits of the business. An S Corporation can have shareholders who own stock in the business. An S corporation is permitted to have 100 shareholders at any given time.
Need to Complete Ownership Transfers
After it is established there are no restrictions on ownership transfers within an S corporation. Stakeholders are able to sell their shares of the company at any time. They have the option of using their shares to raise capital or to potentially attract new investors. There is no ability to offer stock as an LLC meaning there is no easy method of transferring shares of the company. An S Corporation allows for smooth transfers of ownership shares to multiple individuals over an extended period of time.
Ready to Establish a Board of Directors
The shareholders of an S corporation are not responsible for overseeing all of the activities of that corporation. The body responsible for that task is referred to as the board of directors. This board is elected by the shareholders so if an organization believes it is ready to establish its own board of directors it will need the shareholders of an S corporation to do so. These board members appoint officers and executives for the corporation, determine the mission of the corporation and decide the policies regarding the overall management of the corporation.
Our Raleigh Business Startup Attorneys Can Help
The shift from operating a single-member LLC to managing an S corporation can be a major one. Preparing to establish a board of directors, accommodating shareholders, and completing ownership transfers are all large steps that are vastly different from running a business as an LLC.
Knowing when you are ready to begin filing as an S corporation can make the change in filing easier for you to manage. The team at Wilson Ratledge has the experience and expertise to help your business grow the right way – contact us today to schedule a consultation!