Four Dumbest S Corporation Setup Mistakes

By the end of this article, you should have gained enough new knowledge on this subject to be able to explain it�s main points to another person.

I see and heed about a lot of dumb S corporation setup mistakes.

Some of the mistakes are made by entrepreneurs and investors tiresome to rescue money on accountants and attorney fees. And I speculate that�s approve–albeit currency-clever and hammer-foolish.

But you know what truly irks me? Some of these mistakes�in actuality, most of them�are made by attorneys and paralegal military� Professionals who should know better.

What we have explored up to now is the most important information you need to know. Now, let�s dig a little deeper.

But enough buzzing. lacking extend flourish, here are the four dumbest mistakes that I see people make again and again when it comes to backdrop up a new S corporation.

error #1: Not with an LLC

An LLC is almost forever the place to flinch if you want to end up with an S corporation. Why? I like to tell students and clients that LLCs are akin to lite beer. evoke the lite beer commercials? Same great bite but with half the calories?

LLCs work like that. LLCs grant you with all the same great liability protection, but they entail only half the red recording.

This might all look irrelevant, but LLCs can make an sselectedion to be treated as an S corporation for proceeds tax purposes. Acccordingly, you want to use an LLC as the heart of an LLC in almost all suitreasons�and not a corporation.

error #2: Forgetting about the strange Corporation Registration system

Read those tempting advertisements for Delaware or Nevada corporations? The advertisements sound sweet good, but most small tradees shouldn�t use out-of-splendor llcs or out-of-splendor corporations.

Here�s why: If you�re liability in trade in, say, New York, you�re not available to be able to sidestep splendor taxes by forming your llc or corporation in, say, Nevada. The tax and corporation laws in your splendor will entail you to enlist your out-of-splendor, or alien, llc in the splendors where your trade operates. Those same laws will entail you to pay splendor proceeds taxes in the splendors where you earn your proceeds.

A pair more speedy points: Large tradees do like Delaware for a sort of reasons�generally having to with how sophisticated the Delaware chancery courts are. But this applies to truly big tradees that will litigate in Delaware�not small tradees. And Nevada does submit corporations a no-proceeds-tax sanctuary�but you indigence to set up a heartfelt trade specter there, with an workplace, workers, land�the full enchilada.

error #3: Electing to be Treated as a C Corporation

A long time ago if you hunted to ride an LLC into an S corporation�before July of 2004 as I remember�you first had to ride it (for tax purposes) into a C corporation. You did this by filing something called an 8832 person Classification sselectedion with the IRS overhaul highlight in Philadelphia. Then, once that person classification took provoke and the LLC was considered a C corporation, you made a back sselectedion to have the new C corporation treated as an S corporation. You did this by filing another form called a 2553 with the same IRS overhaul highlight you�ll later march your corporate reride with.

This two-steps-to-an-S corporation method was sweet greatly a mess. Thankfully, the IRS lastly threw its hands up and said you only indigence to march the S sselectedion paper (the form 2553).

Some people still want to do it the old, unfortunately. Which is truly dumb. The old way doesn�t work very well. And, in a nastiest reason scenario, you may end up with your LLC converted to a C corporation but not converted to an S corporation.

comment: If you do foul up an S corporation, know that the IRS is very, very forgiving. You might want to get an accountant�s or attorney�s help if you get into this bother, however.

error #4: Electing to be Treated as an S Corporation Too Early

Once a trade generates profits well in extra of the amounts rewarded to landlords for salaries, an S corporation sselectedion rescues the landlords big money–sometimes tens of thousands of dollars per landlord per year.

But you don�t want to selected S corporation stage too early if you were smart enough to flinch off your trade as llc. This is especially correct if you�re the only landlord of the llc.

By selecteding S corporation stage, the llc indigences to march an exclusive corporate reride, indigences to originate liability payroll–even if the only worker is the landlord, and may indigence to pay additional payroll taxes like the 6.2% central unemployment tax. (This tax is levied on the first $7,000 of wages rewarded to each worker.)

pause awaiting your trade is profitable to selected S stage for your llc. You patience will pay off in two behavior: simpler accounting and minus exclusive tax rerides.

Over time, you will begin to understand how these concepts really come together if you choose to venture into this subject further.