Sole Prop vs LLC vs S-Corp - Tax Strategy for Small Business

Your business is a legal entity with tax implications whether you know it or not. In this video, I help you get to the bottom of when it is time to incorporate, elect the S-Corp status, and how to structure your business and salary going forward. Minimizing your tax burden is an agenda that needs your attention, for the rest of your life. If you an entrepreneur, have a start up, or own a small business, this video is for you. Too many small businesses and Sole Props are paying more than their "fair share." Don't fall victim to over paying the IRS.
One thing not mentioned in greater detail in this video are the costs associated with operating a LLC/S-Corp as small operation. Plan on something between $1000-$1500/year for payroll software and tax prep. In the video, I go into great detail on WHEN you should pull the trigger on this strategy. It's not as hard as it sounds, and you could save many thousands by playing your hand correctly. There are also many scenarios where your K1 owner distributions aren't taxed at all. So look into your business's "cost basis" and consider a local CPA to help you play your cards most effectively. Make sure and subscribe to the channel to get video updates!
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[@raulsantos7660]

Hey Matt, great job on the video. My guess is that this would also be applicable for us that have a small side business on top of our usual paycheck.
Thanks for the info!

[@mattmurph]

Hey Raul, absolutely. We call that a straddle. That is, working a growing side hustle on the side of a full time job. Many start ups are born out of a straddle in that it helps mitigate some of the income fluctuation when one decides to make the jump. Now whether that jump is the goal or not, there comes a time when it’s wise to seal up a side hustle with a LLC for liability protection, and the optional S-Corp for when the profits start passing north through 40-50k. Thanks for watching!

[@martyvalor9200]

Great advice and gave me some guidance to tweak how I pay myself a little bit better. Loved it!

[@mattmurph]

Awesome! Glad I could help. In your situation, I’d consider making both you and Hill owners, W2 both y’all, then match those salary W2 payments with distributions, to each of you. Look into Intuit Payroll (formerly Paycycle) for an easy to use payroll system.

[@rogerree]

I don't know if this is coincidence, but youtube suggested I watch the episode of The Office with Malone's Cones after this one. I think Kevin would have done well with your advice. lol

[@mattmurph]

Malones Cones 😂 - the worst business idea in the history of the world… hands down.

[@stephanieswihart5731]

Great information! I learned so much & appreciate all of the visuals and humor throughout!! Question- At what point (if your a brand new LLC) do you opt for the S Corp election?

[@mattmurph]

Thanks Stephanie! I would work the timing like this: if you're passing through 40k in annual profit, with signs of growth... in a normal business of selling products, services, or ad revenue through social channels (IE, not property rental income)... then the S-Corp election should be on the radar. Passing 50k in profit and growing, it's probably time. At the same time, different industries can justify "reasonable salary" at different dollar amounts. Someone who cuts hair could probably justify a 30k-ish salary, even if the biz pulls 100K+ (which many stylists do). So it's a function of annual profit, and how you decide to split the salary and distributions number. That is generally where I draw the line because it can cost between $1K-$1.5K to run decent payroll services and annual tax preparation. So that 40-50k profit number is where the benefits start to outweigh the cost increase.