Sole proprietorship vs. S Corp Taxes

Can small business owners save on taxes by switching their entity types?

Although we have a new president who has sworn to cut taxes and boost American business, many independent professionals and small business owners are still feeling the burden of taxation. Many have gone into business for themselves to earn more and profit more, but can find they are almost worse off, and are pocketing less after tax time comes around. What can be done?

One commonly posed solution is switching entity types, or opting to be taxed differently. Every tax professional and attorney may have their own opinion of the best structure. Some of the options may include switching from sole proprietor to S-Corp. S-Corp to C Corp. Offshore trust to domestic LLC and so on.

Each entity has its own pros and cons. Different legal entities may have more or less advantages at different stages of business, and for different business strategies. However, let’s take a look at just one of these potential shifts and the benefits to be gained. Sole proprietors bear a big tax burden. This is especially true when it comes to self-employment taxes. Not all want to switch to a C Corp and all that comes with. Yet, there can be some potential perks of switching to a S-Corp. Most notably this is due to the difference in how income is taxed. As an S Corp owner only a portion of net proceeds needs to be taken as a salary. The rest can be taken as dividends, or reinvested in the business. You may even be able to back date these changes and enjoy more tax savings, or losses which can be carried forward to offset income in future years.

How do you change from sole proprietor to S Corporation? It’s smart to work with both your tax professional and attorney to make the right choice. Then have a corporate attorney file the necessary documents for you with the department of state. Note that the change isn’t 100% official until the change has been accepted and approved by the state.

You’ll also want to make sure all parts of your business are correctly rolled over to the new entity. This may include employment contracts, leases, business vehicles, bank accounts, business licenses, etc.

What’s most important for each self-employed person and small business owner to consult relevant professionals who can give expert and personalized advice for their individual situation.


Authored by Titanium Asset Protection

Titanium Asset Protection is an elite asset protection firm with licensed California attorneys on staff who specialize in asset protection, trusts, corporate law, succession planning, bankruptcy, real estate, and tax law. Our team has successfully represented clients to the highest levels of the justice system in fighting to protect them, and their finances, with lead counsel Matt serving as the Ethics Chairman for Le Tip International, The Chapter of Orange for 15 years, being an honored member of the revered Wealth Counsel.

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