Transitioning or Converting Your California Business from A Sole Proprietor To S-Corp & the Tax Savings in Self-Employment Taxes

If your business is suffering as a result of recent changes in the economy and you are considering converting to an S-Corp, there are some things you need to take into consideration. There are advantages to switching off, such as tax benefits. In this article, we’ll discuss what is involved in switching over from a sole proprietor an S-Corp and the advantages involved with that.

Advantages of Converting a Sole Proprietorship to a Corporation

●     As a corporation, you will have limited liability protection. This means that in the event that you are involved in a lawsuit, the corporation’s assets are at risk rather than your personal assets.

●       It will be easier to split your profits and income with your staff through the use of dividends.

●       The tax rate is lower for a corporation that it is a sole proprietor.

As you can see, there are advantages of switching to an S-corporation. Following we will give you a brief guide as to how to make the transition.

●       Adding “LLC” or “Inc” to your company name can greatly increase your credibility as a reputable business.

●       As a corporation, you are eligible for more tax reductions than you would be as sole proprietor.

●       You will have more stock options as an S-Corp than as a sole proprietor.

The Transition Process

It is advised that you seek legal counsel to ensure that the transition is a smooth one, and that everything is done legally. Following are the steps you need to take to make the transition from a sole proprietor to an S-corporation for the purpose of tax reductions.

First, you need to file for corporate status. Make sure you adhere to the proper guidelines. You need to form a board of directors, file the necessary paperwork with the California Secretary of State, draft your company by-laws and establish a corporate bank account. Also, you should check to see if your chosen name of your corporation is available for use in the state of California.

Next, you need to apply for an Employer Identification Number or EIN. This will be your number for federal tax identification for tax filing purposes.  It will also be used for payroll purposes and banking such as obtaining a line of credit for your business or opening a business account. You can apply for your EIN on the IRS websit, or call the IRS 800 number (1-800-829-3993). In addition, you a mail in or fax your completed Form SS-4 to the Internal Revenue Service.

Third, you will need to file with the IRS for S-corporation status by completing Form 2253 within 2 months and 15 days prior to the beginning of the first business day as an S-Corporation.

Next, you would need to transfer your assets from your sole proprietorship to your S-Corporation. This includes both tangible and intangible assets. Tangible assets include company vehicles, office machinery, furniture and equipment and so forth. Intangible assets are those assets that are not psychical in nature such as trademarks, patents, and copyrights.  Essentially intangible assets are the estimated value of the company’s brand and reputation.

Make sure that you have filed for the necessary permits and licenses required by the state and county government such as re-sellers permit, health permit and any other required professional certifications, permits or licenses. You might have to reapply for the aforementioned when you are making the switch from a sole proprietor to an S-Corporation. Check to make sure that all of your permits, and so forth are up to date with your city, county and state government to ensure that you do not incur any fines in the future.

If you have any questions or need assistance during your transition from a sole proprietor to an S-Corporation, please contact us at (714)-827-9955. Our staff will assist you with any concerns you may have. We have years of experience and expertise in dealing with corporate law and asset protection. You can count on us for expert legal advice!


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