I run a tiny e-commerce business by myself, no employees. I was about to file S corp papers because a friend said it saves on taxes. Then I looked at the extra payroll and paperwork and realized I don't make nearly enough profit. Ended up forming a plain LLC. Did anyone else get talked into S corp hype?
LLC Formation
I almost formed an S corporation when I only needed an LLC
S corp only makes sense if your net profit is consistently above a certain threshold, usually around 40k or more after paying yourself a reasonable salary. For a small solo operation, the payroll cOsts and administrative burden often cancel out the savings. You made the right call.
Almost did the same. I paid a lawyer to set up an S corp and then realized I had to run payroll and file extra forms. Switched back to LLC the next year. The legal fees still sting.
What do you mean by payroll costs? If you're the only employee, you still have to pay yourself a reasonable salary and withhold taxes. That means using a payroll service or doing it yourself, which adds time and money. Not worth it for many small businesses.
Exactly. And some states also charge an annual franchise tax or minimum tax for corporations, which LLCs often avoid. Depends on the state though.
I'm in California so the $800 minimum franchise tax applies to both LLCs and corporations anyway. But the S corp would have added payroll tax and filings on top. Glad I skipped it.
Don't forget the self-epmloyment tax. With an LLC, you pay SE tax on all net profit. With an S corp, you only pay it on your salary. In theory that's the big advantage. But you have to justify a low salary, and the IRS is watching.
FrugalDad, that's true, but for many small businesses the profit isn't high enough to offset the extra accounting and payroll fees. I ran the numbers for mine and S corp would have cost me more in admin than I saved in SE tax.
Also, if you're a single-member LLC, you can always elect S corp later if your profit grows. No need to rush it at formation.
That's a good point. Start simple, revisit as you grow.
I think the hype comes from social media influencers who make it sound like a magic tax hack. They ignore the compliance costs and the risk of penalties if you mess up the salary requirement.