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When is it time to become a public limited company?

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For most new businesses and business owners, it's essential to stay simple. After all, launching a new business requires attention to detail and doing a lot of things. For this reason, most new businesses simply start out as a sole proprietorship or limited liability company (LLC). As a successful business matures, however, the savvy owner should take the time to consider the company's business form S.

Owners of an actively operating business as an S group company enjoy a distinct tax advantage over other types of tax entities, particularly individual corporations , partnerships and limited liability companies. For the owner of a profitable sole proprietorship, partnership or LLC, earnings are subject to both income tax and 15.3% self-employment tax, which finances social security benefits and the Medicare health system. This SE tax is often unforeseen, especially for new entrepreneurs, and can wreak havoc with cash flow at tax time.
In an S corporation, the owner becomes an employee and must receive a reasonable salary and receive a W- 2. ​​"Reasonable" may be different depending on the type and size of the company, as well as the level of profitability. The profits of a S corporation that are not withdrawn in the form of a W-2 compensation escape the additional tax of 15.3% for social security and Medicare.

The IRS is also aware of this "loophole" and is vigilant in face of blatant situations. Using the analogy that "pigs get fatter," we encourage all S Corporation owners to compensate themselves reasonably for mitigating the risk of a costly IRS challenge.While "reasonable" is different in every situation, pay can be a very useful mechanism for paying income tax so as to minimize the penalties of underpayments.

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Sole proprietors, associates, and LLC owners have an annual opportunity to decide whether switching to an S corporation is the right thing to do. For an already existing company, the election window is open every year between January 1st and March 15th. Elections made during the reporting period are retroactive to January 1 and are effective for the calendar year. Thus, the following window period for sole proprietors, partners and LLC owners will be open from January 1, 2019 to March 15, 2019 for the 2019 calendar year.

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For newly created companies, the election window is initially opened for the first 75 days of their existence and then becomes the annual window described above.

Got a question? Contact Paul Mueller