I've looked into this route and couldn't find benefits on filing S-Corp for a small operation. It seems to only benefit towards the big guys. eg. In Delaware, you'll get access to a special court system that fast lanes business related issues instead of sharing time slots with criminal and civil cases. But that's only really useful if you're in court regularly (implying you're big enough for to staff a legal team).
What benefits have you gotten out of the S-Corp filing?
BTW, I see no reason NOT to file as an LLC instead of sole proprietorship for a one man startup. SP will put you personally in danger of lawsuits while the LLC shields you. You can still file taxes as a "single member LLC" with the protection active. It's mostly the same as 1099 filing except you can add more deductions to it. If you go this route, you must keep everything as separate as possible at all times. eg. Set up your business account to pay you through ACH every two weeks, never directly take from it. If you get in legal trouble, the other guy can issue discovery on your bank account, prove you used it for personal reasons through a couple grocery store payments, and then sue you as an individual person instead of suing the LLC (meaning, you as a person are on the hook for debts instead of the business entity). This is known as piercing the corporate veil. Don't be victim to it.
I've never filed as an S-Corp or any other business type entity for tax purposes. I've only filed with W-2 wages as an employee. I learned this in a
Corporate Tax class when I was in college. Also, I work for a small HVAC business where they set up as an
LLC/S-Corp. The primary benefit would be
higher cash flow (generally more so than as a sole proprietor or C-Corp.). Basically, you save more by setting up this way, which as a cost of doing business, is more cash going back into your pocket.
For small businesses, especially start ups, you may or may not make a profit early, but it wouldn't hurt to go ahead and set it up this way. I look at legal protection as a shield against higher costs down the road. It'll save you headaches later. I'm looking at it from a purely accounting perspective.
You have to pay yourself a
salary (SE tax, 15.3% of salary, deduct employer 1/2 on 1040), you can take
distributions (usually not taxed unless you overdraw, then taxed as a CG), and report
share of profits (K-1 income, goes on 1040).
The key is to report the minimum salary (to reduce SE Tax), don't overdraw on distributions (to avoid CG tax), and to report as many business expenses as possible (to reduce taxable profits).
It's all legal, and the IRS allows you to do it. Also a
legal Corporation is similar in legal protection to an LLC. But it's simpler to set up as an LLC.
1. Salary (no affect on ownership basis)
2. Share of Profits (increases ownership basis)
3. Distributions ( decreases ownership basis)
Those 3 items is where the IRS will try to tax you on.
Also, once you start making profits, you add those profits to your basis (ownership), which in turn, allow you to take more distributions before the CG tax kicks in. The more profits you accumulate over time, the higher your basis will be. You can play around with that in regards to distributions.
