I'm sooo frustrated with the advice some CPA firms are giving out to people who are just getting started in business! Last week, I had an appointment with a fairly "new to me" client to get their QuickBooks file straightened out for year end. The client is a service based business that has office space in town. 2010 was their first "official" year in business, even though they started purchasing things for their business in 2009.
Why they shouldn't be an S-Corp:In order to start their business, they took out a small business loan, and got some money from their parents. Then, they went and met with a local CPA firm (like they thought they should) to see what was next. What was next was shocking to them...the CPA firm told them they needed to become an S-Corp, because of all the wonderful benefits they'd get. Now, mind you, this was before they even had their first customer! In fact, this was OVER 6 months before they finally had their first customer.
And, I asked what "wonderful benefits" the CPA firm promised they'd get as an S-Corp, and they couldn't tell me!
Because they were unsure, but trusted this CPA firm (which is really the largest CPA firm in the town they live in) they checked around locally for a lawyer to put together an S Corp for them. Couldn't find any good referrals (how sad), so ended up going to an online legal service. They STILL had to spend over $1,500 to get the paperwork done and be legally setup as an S-Corp.
That wasn't the worst of it! The CPA firm said it would cost $1,200 or so to get their bookkeeping setup on QuickBooks, and it would cost another $1,200-$1,500 to get their tax return filed each year. And, on top of that, there is a $170 fee this business has to pay every year to their "Registered Agent".
Maybe in the future an S-Corp would be a great way to go for this business. But, this situation DID NOT call for an S-Corp at the beginning. Looking at the year end records, there was no income! In fact, a pretty large loss remains after their first year in business. The only thing the S-Corp has provided so far is lots of paperwork, large bills to pay, and many recordkeeping headaches.
Here's what to expect when you form an S-Corp for your business:
1. Tax return preparation rates are at "corporate return" rates.
2. Hiring someone to setup your paperwork is not inexpensive for a business just starting out.
3. You'll need to keep yearly Shareholder Meeting Minutes.
4. You'll need to file a yearly fee with the "Registered Agent."
5. Keeping personal and business money separate becomes much more stringent.
6. Once you're making a profit, you'll need to pay yourself a paycheck...which means setting up payroll and filing payroll taxes. (When you're an LLC, you can still take draws from the business).
Now, there are benefits to S-Corporations, but it's obvious that this very tiny business did NOT need the hassles of the S-Corp status right now. They could have saved several thousand dollars this last year by just starting up as an LLC, and slowly growing their way into an S-Corp.
MORAL of the story:
1. If you're thinking about switching your business to an S-Corp, find out what benefits it will provide your business.
2. If you don't understand what benefits you'll get, then I would suggest talking more about it, asking others, and researching it some yourself. Never pay money for things you don't understand!
3. Know the costs of setting it up and maintaining it year to year. It'll cost more time AND money to maintain than your LLC.
4. And, if your business is at the right stage, and is ready to move ahead, then go for it!
Have you ever been talked into becoming a business structure that you didn't understand?
Why they shouldn't be an S-Corp:In order to start their business, they took out a small business loan, and got some money from their parents. Then, they went and met with a local CPA firm (like they thought they should) to see what was next. What was next was shocking to them...the CPA firm told them they needed to become an S-Corp, because of all the wonderful benefits they'd get. Now, mind you, this was before they even had their first customer! In fact, this was OVER 6 months before they finally had their first customer.
And, I asked what "wonderful benefits" the CPA firm promised they'd get as an S-Corp, and they couldn't tell me!
Because they were unsure, but trusted this CPA firm (which is really the largest CPA firm in the town they live in) they checked around locally for a lawyer to put together an S Corp for them. Couldn't find any good referrals (how sad), so ended up going to an online legal service. They STILL had to spend over $1,500 to get the paperwork done and be legally setup as an S-Corp.
That wasn't the worst of it! The CPA firm said it would cost $1,200 or so to get their bookkeeping setup on QuickBooks, and it would cost another $1,200-$1,500 to get their tax return filed each year. And, on top of that, there is a $170 fee this business has to pay every year to their "Registered Agent".
Maybe in the future an S-Corp would be a great way to go for this business. But, this situation DID NOT call for an S-Corp at the beginning. Looking at the year end records, there was no income! In fact, a pretty large loss remains after their first year in business. The only thing the S-Corp has provided so far is lots of paperwork, large bills to pay, and many recordkeeping headaches.
Here's what to expect when you form an S-Corp for your business:
1. Tax return preparation rates are at "corporate return" rates.
2. Hiring someone to setup your paperwork is not inexpensive for a business just starting out.
3. You'll need to keep yearly Shareholder Meeting Minutes.
4. You'll need to file a yearly fee with the "Registered Agent."
5. Keeping personal and business money separate becomes much more stringent.
6. Once you're making a profit, you'll need to pay yourself a paycheck...which means setting up payroll and filing payroll taxes. (When you're an LLC, you can still take draws from the business).
Now, there are benefits to S-Corporations, but it's obvious that this very tiny business did NOT need the hassles of the S-Corp status right now. They could have saved several thousand dollars this last year by just starting up as an LLC, and slowly growing their way into an S-Corp.
MORAL of the story:
1. If you're thinking about switching your business to an S-Corp, find out what benefits it will provide your business.
2. If you don't understand what benefits you'll get, then I would suggest talking more about it, asking others, and researching it some yourself. Never pay money for things you don't understand!
3. Know the costs of setting it up and maintaining it year to year. It'll cost more time AND money to maintain than your LLC.
4. And, if your business is at the right stage, and is ready to move ahead, then go for it!
Have you ever been talked into becoming a business structure that you didn't understand?
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