When to Make Your LLC an S-Corp: A Simple Guide for Business Owners

This guide breaks down when and why you should consider electing S-Corp status for your business, simplifying the process so you can make the best financial decision.

Understanding the Basics: LLC vs. S-Corp

Many small businesses start as Limited Liability Companies (LLCs) because they offer flexibility, simple management, and liability protection. However, as profits grow, the tax advantages of an S-Corporation (S-Corp) become more attractive.

Key Differences:

• LLC Taxation: Profits are passed through to owners and taxed as self-employment income (subject to self-employment tax of 15.3%).
• S-Corp Taxation: Owners pay themselves a reasonable salary, and only that salary is subject to self-employment tax. The remaining profits are distributed as dividends, which are not subject to self-employment tax.

When Should a Business Convert to an S-Corp?

1. When Your Business Earns More Than $75,000 Per Year

If your net profit is above $75,000, converting to an S-Corp can provide substantial tax savings by reducing self-employment taxes.

2. When You Have Consistent Revenue Growth

S-Corp status is beneficial for businesses with predictable revenue and steady profit margins. If your business is growing, making the switch can optimize tax efficiency.

3. When You Plan to Pay Yourself a Salary

As an S-Corp, the IRS requires owners to take a "reasonable salary" before distributing profits as dividends. If you’re already drawing a salary, this transition can help separate personal compensation from business profits for tax advantages.

4. When You’re Ready for More Structured Payroll and Compliance

S-Corps requires formal payroll processing, corporate filings, and structured tax reporting. If your business is ready for this level of organization, the tax benefits can outweigh the added administrative work.

How an S-Corp Saves You Money

By switching to an S-Corp, business owners avoid paying self-employment taxes (15.3%) on the portion of profits that are distributed as dividends.

Example Tax Savings:

• LLC Taxation: A business with $100,000 profit pays $15,300 in self-employment tax.
• S-Corp Taxation: If the owner takes a $60,000 salary and $40,000 in dividends, they only pay self-employment tax on the salary, reducing tax liability significantly.

How to Convert Your LLC to an S-Corp

1. Register as an LLC (if not already) – Your business must be an LLC before electing S-Corp status.
2. File IRS Form 2553 – This notifies the IRS that you are electing S-Corp taxation.
3. Set Up Payroll – You must pay yourself a reasonable salary through a payroll system.
4. Maintain Corporate Compliance – Keep records, hold meetings, and follow S-Corp regulations.

What Tax Law Changes Can Business Owners Expect in 2025?

With the 2024 election bringing a potential second Trump administration, tax policies could shift significantly. While official changes are yet to be enacted, here are some predictions for how 2025 tax laws may impact business owners:

1. Lower Corporate and Business Tax Rates

Trump’s 2017 Tax Cuts and Jobs Act (TCJA) lowered corporate taxes. If re-elected, we may see lower tax rates extended for S-Corps and LLCs.

2. Extended 20% Qualified Business Income (QBI) Deduction

Currently, businesses operating as S-Corps or LLCs can deduct up to 20% of business income. This deduction is set to expire in 2025, but a Trump administration could seek an extension or permanent implementation.

3. Changes to Payroll Tax Requirements

There may be adjustments to self-employment and payroll tax structures, potentially affecting how business owners pay themselves under an S-Corp model.

4. Adjustments to Expense Deductions

If new tax incentives are introduced, businesses might see higher depreciation limits or increased deductions for operational costs, tools, and technology.

Final Thoughts: Is an S-Corp Right for Your Business?

For business owners, switching from an LLC to an S-Corp can provide significant tax savings, especially for those earning over $75,000 annually. With potential 2025 tax law changes on the horizon, now is the time to evaluate how your business structure can maximize profitability.

If you're unsure whether an S-Corp is the right choice for your business, Ledge Accounting can help. Our team specializes in tax filings and financial management for businesses, ensuring you take advantage of every tax-saving opportunity.

Book a Free Consultation Today to discuss your tax strategy for 2025.