An S Corporation is Often The Right Entity for a High Wage Earner

S Corporation Is Often The Right Entity for High Wage Earner

Did you know an S Corporation is often the right entity for a high wage earner or self-employed individual in San Diego and across California?

If you are forming a company that is basically “You, Inc.” and you expect to earn more than $100k, then you should give serious consideration to an “S Corporation.”  An S Corporation or “S Corp” provides a legal business vehicle that allows you to conduct business and protect your personal assets while reducing the associated tax burden on a large portion of your income when compared to an LLC.

Let’s use round numbers of $200k in income and 10% state income tax to make things easy.  If you make $200k in an LLC it all flows directly to you as income, and you will pay federal and state taxes on the full $200k, including (in this case) $20,000 in state taxes.  With an S Corp, you would pay yourself a salary (say $50,000) and give yourself a “distribution” of the remaining $150k which is exempt from state taxes, saving you $15,000 a year in this hypothetical example.

Recent tax changes provided additional financial and tax-based incentives.  For these and many reasons, an S Corporation is often the right entity for a high wage earner or self-employed business person.

The numbers will be different for each entity based upon the type of business they are conducting and the nature of their corporation, but the choice of your business entity, LLC or S Corporation in this example, will make a substantial impact on the protections you receive as well as the tax burden that is established by any resulting income.

An S Corporation is often the right entity for a high wage earner, but is it the right solution for you?  How do you transition an existing LLC, C-Corporation or other entity to an S Corporation?

Dan Watkins Founding Partner of the Watkins FirmPro-Tip: “Well, before we even select an entity, everyone thinking about going into business or in business, you should do what most successful business people do, and that is get a relationship with your lawyer. So you’re doing everything the best way, not just legally, but from a an experienced perspective.

You’re giving birth to a living creature that’s been recognized by the United States Supreme Court. And so what it means is birth is what we call capitalizing. And so you have these corporate documents and you have to decide on how much ownership will be and who owns what. Then you decide about what potential ownership there are. Reserve shares, I mean other ways in which people can own it. And then you capitalize it. Either you capitalize it with cash or you capitalize it with goodwill or a combination or a property. But how you capitalize it can determine whether or not it’s a real company or you have all those protections of corporate veil and creditors and you’re personally shielded. So how you start it is very important. And thinking about it, we’ll send you on the right path to avoiding all kinds of pitfalls and trouble.

Now corporations are all formed as C Corporations, but you can elect to make it an S corporation, which means that you don’t have to pay double taxation on your money. You can pay yourself a shareholder distribution that is not subject to your payroll tax and all those other withholdings you have to do if you’re not a corporation. And you can pay yourself a small salary and you can save yourself money that way and still receive the benefits and protections of the corporate veil.” – Dan Watkins, Founding Partner

The attorneys at the Watkins Firm have helped thousands and thousands of businesses over the course of the more than four decades we have served the San Diego and California business community.  You have the opportunity to connect with that vast resource of experience and insight to maximize the likelihood of success for your own business.

We invite you to review our podcast Episode 34 – Business Formation Attorney as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.