How One Business Owner Saved Over $12K by Electing S-Corp Status
When Mike started his consulting business, he did what many new entrepreneurs do—he operated as a sole proprietor. It was simple, required no formal setup, and allowed him to focus on building his client base.
But two years in, with business booming and $200,000 in net income on the books, Mike’s CPA asked a pivotal question:
“Have you thought about electing to be taxed as an S-corporation?”
Mike had heard the term before but didn’t quite understand how it worked—or why it mattered. What followed was an analysis that changed the way Mike ran his business and saved him thousands of dollars every year.
The Tax Breakdown: Sole Proprietor vs. S-Corp
As a sole proprietor, Mike was paying self-employment tax on every dollar of his $200,000 net income. That meant:
- Sole Proprietor Self-Employment Tax:
$200,000 × 15.3% (Social Security + Medicare) = $30,600
Ouch.
But under an S-Corp structure, things look different. Mike would pay himself a reasonable salary (let’s say $96,000) and take the rest of the profit ($104,000) as a distribution, which isn’t subject to self-employment taxes.
Here’s how the S-Corp scenario plays out:
- S-Corp Employment Tax on Salary:
$96,000 × 15.3% = $14,688 - Remaining $104,000 in profit is not subject to employment tax.
- Tax Savings:
$30,600 (Sole Proprietor) – $14,688 (S-Corp) = $15,912 saved
The Cost of Making the Switch
Of course, S-corporation status comes with a few additional administrative requirements:
Even after subtracting these estimated costs, Mike stood to save between $12,212 and $14,212 per year.
Bonus Tax Benefit: State Income Tax Deduction
But that’s not all. Because S-corps are pass-through entities, Mike also became eligible for Missouri’s pass-through entity tax election, allowing state taxes to be paid at the business level—rather than being limited to the $10,000 SALT deduction cap on his personal return.
This strategy gave Mike additional federal tax savings, since he could now fully deduct state taxes paid by the S-corp.
Other Advantages of Being an S-Corporation
Beyond tax savings, Mike discovered several practical and strategic benefits:
- Professionalism: Operating as an S-Corp signaled to clients and vendors that his business was established and credible.
- Liability Protection: As an LLC electing S-Corp status, he gained legal separation between personal and business assets.
- Retirement Contributions: With W-2 wages, Mike could contribute more to certain retirement plans (like a solo 401(k)).
- Ownership Flexibility: He could bring on other shareholders or investors without reworking the business structure.
- Improved Bookkeeping Discipline: Payroll, regular compensation, and distributions helped him create clearer financial records—critical for future growth or financing.
Additional Considerations When Converting to an S-Corporation
Fringe Benefits May Be Less Favorable
S-corporation owners who hold more than 2% of the company are treated differently than sole proprietors or C-corporation owners when it comes to fringe benefits.
- For example, health insurance premiums must be included in the shareholder’s W-2 wages and deducted on their individual return—not the business return.
- This approach does not reduce FICA taxes and can limit the overall tax benefit.
- The same applies to HSA contributions and certain other fringe benefits, which may not be deductible at the entity level.
Reasonable Compensation Is Required
The IRS requires that S-Corp shareholder-employees pay themselves a reasonable wage before taking distributions. This is a common IRS audit focus.
Tip: A reasonable salary should be based on industry standards, the services performed, and the time spent working in the business. In our earlier example, $96,000 appears reasonable—but this figure should be justified and documented.
State Tax Workaround – SALT Cap (PTE Election)
Some states, including Missouri, allow Pass-Through Entity (PTE) tax elections, which can help bypass the federal $10,000 cap on state and local tax (SALT) deductions.
However, this strategy comes with caveats:
- The election must be made annually and on time.
- It isn’t always beneficial, depending on whether you itemize deductions and your income level.
- Not all states allow this workaround, so consult your tax advisor to see if it applies.
Tracking Basis and Distribution Rules
S-Corp shareholders must carefully track their basis (i.e., their investment in the company).
- Distributions in excess of basis are taxable.
- Losses may be disallowed if the shareholder doesn’t have enough basis to absorb them. This becomes more complex if the business has significant debt, inventory, or variable income.
Timeline for Electing S-Corp Status
To be effective for the current tax year, you must file Form 2553 by March 15.
- If you miss the deadline, you may still qualify for late election relief, but you’ll need to follow IRS procedures.
Exit Strategy and Flexibility
S-Corp status is relatively easy to revoke if your situation changes. However, once revoked, you generally cannot re-elect S-Corp status for five years without IRS approval.
Bottom Line: Is It Time to Make the Switch?
For Mike, the math was simple: Save over $12,000 a year, protect personal assets, and run a more structured, scalable business.
If you’re earning over $50,000–$60,000 in annual net income, talk to your CPA or financial advisor about whether electing S-Corp status could be right for you. With the right structure and planning, you may save thousands each year in taxes—while building a more scalable and protected business. For many small business owners, this single decision can meaningfully boost profitability and financial efficiency—without changing the work you do.
Want to explore whether switching to an S-Corp could save you thousands too? Let’s talk.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.
This is a hypothetical example and is not representative of any specific situation. Your results will vary.
How a Financial Professional May Be Your Valuable Business Advisor
Small businesses have new reasons to consider the value of financial planning in working towards their business goals. Many owners are “bandonneurs” (a French word for “jack of all trades”) who may successfully wear many hats, but trying a DIY strategy for your financial planning may be a challenge even for the most diligent entrepreneurs.
During National Financial Planning Month, consider why a financial professional might be of value in assisting you with steering your business toward long-term effectiveness.
Experienced Financial Guidance
A financial professional has vast experience in many financial issues to coach you through circumstances, such as how to use money day-to-day, how to manage complex concepts such as cash flow, how to take advantage of tax structures, and much more.
● Cash Flow Management: Keeping tabs on cash flow may help you to have enough to pay operating expenses, expand into growth opportunities, and prepare to weather an economic crisis.
● Tax Optimization: Tax laws are complex. Trying to figure them out may be a daunting task. A financial professional along with your tax advisor may help you develop a tax-efficient strategy to manage your taxes and improve your after-tax income.
● Business Expansion: If you want to expand your product offerings, enter new markets, or grow your staff, a financial professional may help you.
● Risk Management: Identifying risks may help to mitigate them. A financial professional could identify potential risks. Then, recommend proper insurance coverage and contingency planning to help preserve your business’s longevity.
● Investment Advice. It’s also important to look for clever investments to grow your business and maintain your presence in the market. Whether it’s buying new equipment or buying the neighboring land for expansion, a financial professional may help you figure out a strategy for improving your return on investment (ROI).
Decision-Making
Running a business could give you tunnel vision. A financial professional operates at a distance, providing helpful support that could enable you to make choices based on data rather than emotion.
Succession and Transition Planning
Another important consideration is succession planning—a plan to hand over your business to the next generation. Another option is to make a plan to sell to a competitor who wants to buy you out. A financial professional may help you prepare a succession plan and consider the benefits and drawbacks of any buyout offers you may receive.
In Closing
Does your business have a financial planning challenge? By partnering with a financial professional, you gain helpful financial planning guidance, investment advice, and support for financial discipline, and you may also enjoy an overall enhancement to your business’s financial management. Financial planning advice is no longer a luxury for business owners—it’s an indispensable tool for navigating the complex financial challenges you face.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This article was prepared by WriterAccess.
LPL Tracking #609848
Tips for Navigating Inflation as a Small Business Owner
Small business owners face many challenges, which may become even more significant during inflation. As inflation hit new highs in recent years, small business owners are being tested and challenged by high costs and high interest rates that have caused some to close their doors. So, how do small business owners weather the storm of inflation? Here are a few tips to help you get through it.
1. Know Your Numbers
One of the most important tips for small business owners is to know your numbers. As a small business owner, you should know the numbers on your financial statements and balance sheets and understand your cash flow. You also should always have budgets and projections, so you have a basis for comparison and should spot when things start going askew before it is too late to get back on track.1
2. Optimize Your Goods and Services
When costs and interest rates are high, supply chain issues may occur. Managing your goods and services to make a solid profit is vital. Take the time to calculate the revenue and costs of each product and service you offer to determine their gross margin and net profit. Find any poor performers and consider eliminating them so you don’t waste valuable time, material, and resources on products and services that yield little profit.1
3. Know How Inflation Might Impact Other Areas Outside Your Business
Your business is likely to be your top priority, but it is equally important to understand that inflation also affects other areas outside your business. Inflation may affect your ability to borrow, lead to a business slowdown, and drastically affect your pricing models for your products and services. Understanding all the peripheral areas affected by inflation may make your business more resilient and better able to withstand the ups and downs.1
4. Know the Difference Between Strategic and Non-Strategic Spending and Cost-Cutting
In times of disruption, it is easy for business owners to panic and begin cutting costs or spending without developing a plan to either lower company costs or outdo the competition. In either case, spending or cutting costs without following a strategy may lead to severe problems, especially during times of inflation. Always do your due diligence before implementing new spending or cost-cutting measures to ensure they align with the company’s goals and needs.2
5. Automate if Possible
The more work you automate, the more efficiently you can run your business. Perform a time study of each operation in your business. If any operations take longer than they should, or if there would be a more time-saving way to automate them, see if the cost would be worth the time it would save. You may even want to look at your daily tasks to see if there are ways to automate some of your processes to free up time to develop more business for your company.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
LPL Tracking # 553066
Footnotes
1 How Small Business Owners Can Navigate Inflation and High Interest Rateshttps://www.uschamber.com/small-business/how-small-business-owners-can-navigate-inflation-and-high-interest-rates
2 6 Strategies to Help Your Company Weather Inflation
Am I Prepared to Sell my Business?
Jared Freese, CFP®, CLU®, ChFC®, CEPA
Certified Exit Planner & Wealth Advisor
INTRODUCTION
Meet John Carter, a seasoned business owner contemplating the sale of his successful tech startup. For over two decades, John has nurtured his business from a fledgling company into a major player in the tech industry. Recently, he’s been contemplating selling his company. While the thought of cashing in on his years of hard work is appealing, it’s mingled with a cocktail of uncertainty, nostalgia, and fear of the unknown. Selling his business isn’t just a financial decision—it’s a personal one, tied deeply to his identity and future lifestyle.
THE EMOTIONAL JOURNEY
The thought of letting go of his life’s work can be unsettling. John wonders if he is ready to part with his business and whether the sale will support his desired lifestyle. The mix of emotions is overwhelming, making it clear that selling his business is a life-altering decision that extends beyond financial gain.
KEY QUESTIONS TO ASSESS READINESS TO SELL YOUR BUSINESS
1. Why am I selling my business? Understanding the underlying reasons for selling-whether for retirement, pursuing other interests, or financial necessity-helps clarify goals and expectations.
2. Is now the right time to sell? Assessing market conditions, industry trends, and the current state of the business can determine whether it’s a favorable time to sell.
3. What is my business truly worth? A professional valuation is essential to set a realistic price and understand the factors that contribute to the business’s value.
4. What are the tax implications of selling my business? Consulting with tax professionals can help minimize tax liabilities and maximize net proceeds from the sale.
5. How will the sale affect my personal financial situation? Understanding how the proceeds from the sale will impact personal finances, retirement plans, and lifestyle is critical.
6. Who should be on my advisory team? Having the right team, including a business broker, investment banker, accountant, financial advisor, and attorney, can guide the process and ensure that all aspects are handled professionally.
7. What information will buyers want to see? Preparing thorough and transparent documentation about the business’s financial health, operations, and market position is crucial for due diligence.
8. How will I find the right buyer? Identifying whether the buyer should be an individual, a competitor, a strategic buyer, or a financial buyer influences the marketing approach and the negotiation strategy.
9. What are my plans after selling the business? Considering life post-sale, including potential new ventures, hobbies, or retirement activities, is important for a smooth transition.
10. How will the sale impact my employees and customers? Planning for the transition to maintain continuity for employees and service for customers can affect the legacy of the business and its continued success under new ownership.
HOW GATEWOOD WEALTH SOLUTIONS CAN HELP
At Gatewood Wealth Solutions, we understand the complexities involved in selling a business. Our team of Certified Exit Planners, Attorneys, Certified Financial Planner Professionals, and Chartered Financial Analysists are equipped to guide business owners like John through every step of the selling process.
SERVICES PROVIDED BY GWS
Our team of professionals provide:
· Pre-Sale Financial Planning: Aligning business and personal finances with post-sale goals.
· Business Valuation: Professional analysis to determine and justify your business’s market value.
· Tax Planning: Strategies to minimize taxes before, during, and after the sale.
· Letter of Intent Analysis: Professional review and analysis of LOI proposed deal structures.
· Investment Education: Demystifying the stock market and creating tailored investment strategies.
· Investment Management: Designing investment portfolios focused on preservation of purchasing power and income distribution.
· Emotional and Lifestyle Transitioning: Support in transitioning to life after business, maintaining an identity, and striving to achieve new goals.
OVERCOMING RELUCTANCE TO INVEST CASH POST-SALE
John Carter, like many business owners, harbors a deep-seated reluctance to invest in the stock market—a realm he perceives as volatile and beyond his control. His comfort zone has always been his business, where he could influence outcomes and directly see the impact of his decisions. This transition from a controlled, familiar environment to the unpredictable nature of the stock market is daunting.
EMPOWERING INVESTING THROUGH EDUCATION
At Gatewood Wealth Solutions, we understand the trepidation business owners feel about entering the stock market. We tackle this by educating John about investment fundamentals, crafting personalized strategies, and managing investments to generate stable income, ensuring his family’s lifestyle is maintained. Our approach is rooted in education and transparency. We provide:
· Educational Workshops and Resources: We demystify the stock market by explaining its mechanisms, the role of diversification, and the importance of asset allocation. This knowledge empowers our clients to make informed decisions.
· Tailored Investment Strategies: Recognizing that each client’s risk tolerance and financial goals are unique, we craft personalized investment strategies. These strategies are designed not just to preserve wealth but to generate income that supports your family’s lifestyle.
MANAGING INVESTMENTS FOR SUSTAINED INCOME
Post-sale, the income that once flowed from the business needs to be replaced to maintain the lifestyle John and his family are accustomed to. Our team Chartered Financial Analysts (CFA®’s) and Investment Committee at Gatewood Wealth Solutions manage investments utilizing our cash management and distribution strategy with a keen focus on generating reliable income distributions while remaining confidently invested in the market.
COMPREHENSIVE FINANCIAL PLANNING WITH FORECASTS & BENCHMARKS
To further instill confidence in the investment process, we develop a comprehensive financial plan for each client. This plan includes:
· Financial Forecasts: We project future growth and income based on current assets and investment strategies, allowing clients to see potential financial scenarios.
· Benchmarks: Regular benchmarks are set to monitor progress and make necessary adjustments. This helps our clients remain on track to meet their financial goals and can adapt to changes in the market or personal circumstances.
Our detailed financial plan with forecasts and benchmarks provides John with a clear vision of his family’s financial future, including potential growth and income from investments.
SCORING SYSTEM & CALL TO ACTION
To help you gauge your preparedness for selling your business, Gatewood Wealth Solutions offers a comprehensive readiness assessment. This assessment scores your readiness across several critical areas, helping you identify gaps and plan effectively.
WHY CHOOSE US?
Gatewood Wealth Solutions isn’t just a financial advisor; we’re a team of experienced credentialed professionals who care about you and your family. We want to be your partner in this pivotal transition. With our holistic approach, we work so no stone is left unturned in preparing you for a successful sale and a fulfilling transition into your next life’s chapter.
ARE YOU READY TO TAKE THE NEXT STEP?
Contact Gatewood Wealth Solutions today. Let us help you navigate the complexities of selling your business, ensuring you work towards accomplishing your financial goals and transition smoothly into the next phase of your life.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Business value estimates are not an official appraisal of a businessʼs value and may not be provided to a third party or used for lending or third party sales. A Business Value Estimate is intended to be used as part of the business planning or personal financial planning process. Business Value Estimates are provided by a third party such that LPL makes no representations regarding the accuracy of the illustrations. LPL does not independently verify the accuracy of the information you provide or of the illustrations presented (149-LPL).
LPL Tracking #577270
4 Business Lessons We Can Steal From the Grinch
It’s the most wonderful time of year. The holiday season is upon us, and no matter what festivity you participate in, there is a good chance that you might once again watch the timeless Dr. Seuss classic, The Grinch Who Stole Christmas. It is not just a fun Christmas story that has stolen our hearts since 1957; it is a story packed with life and business lessons that we can apply to our lives.
What makes this story so poignant is not just the antagonist (The Grinch) trying to ruin the hopes and joys of the protagonists (the Whos) but the transformation of good over evil, positivity over negativity, and the realization that it is the collection of small things you do in pursuit of a bigger goal. Here are five business lessons we can steal from the Grinch:
1. Creating goals and formulating a plan
The prickly and cranky Grinch lives in a cave on a mountain that looks down upon the town of Whoville, where the cheerful and fun-loving Whos live. Every Christmas, the Whos celebrate with songs, toys, and festivities. This Christmas Eve, the Grinch has finally had enough and decides that he is going to stop Christmas from coming. The Grinch has created a goal.
He then plans to disguise himself as Santa Claus, travel down the mountain to town, and steal the presents, food, and Christmas trees from each house in Whoville. The Grinch set a goal for himself, formulated a plan, and executed it. The same strategy applies to individuals in the business world. Setting goals and creating plans provides a direction and a map of how to work toward the end result.
2. Thinking while under pressure
While the Grinch is in one house, a young Who, Cindy Lou, interrupts him in the act cramming the Christmas tree up the chimney. The Grinch is forced to think on his feet and out of the box to escape the situation. Despite being caught red-handed, a moment that would leave some people frozen and tongue-tied, the wily Grinch is able to think on his feet, replying to the young Who that a bulb on the tree is broken.
He is taking the tree to fix the bulb, and then he will “return it right here.” In this case, the Grinch wasn’t being honest, but he could pursue his goal by thinking on his feet under pressure. In business, you have to be able to think on your feet and often under pressure. Just make sure to always be honest!
3. Attention to detail
The Grinch’s attention to detail in the story is quite remarkable. He takes literally everything representing Christmas for the Whos, going so far as to take a crumb off the floor. Attention to detail is a skill that helps with time management, accurate reporting, the management of workloads and day-to-day responsibilities, and other important aspects of business.
4. Don’t get tunnel vision
The Grinch had a big goal and a heart three times too small. He would steal Christmas this year so the Whos couldn’t enjoy the holiday. He formulated a plan and carried out a tremendous feat by sneaking into Whoville in the middle of the night and stealing all the presents, stockings, food, and toys from every house and took all the goodies on his sleigh to the top of Mount Crumpit to be thrown into the abyss. When the Whos woke up, they would find out that Christmas was gone.
The Grinch expected them to be as miserable as he was, but instead of crying over material things, they joined hands and sang joyful songs. In a remarkable transformation, the Grinch, hearing the Whos singing, realized that there was more to Christmas than what he stole, and his heart grew three times bigger.
Instead of being stuck in his tunnel vision of damage and destruction, he returned to Whoville and gave the Whos back their property. The Grinch changed from having a small cold heart to a large warm one. This significant moment of learning and growth shows us that we should never get too hung up on any one idea. Be willing to observe and evolve with the changing world around you.
The lessons we learn in business and out in the world that can be applied to business may influence our financial decision-making. We often think we are knowledgeable when it comes to our financial goals and what we need to do to align our actions to reach these goals. However, the business world is complex, regularly changing, and there are so many moving parts moving simultaneously. Getting the help from a financial professional can be very beneficial when it comes to making decisions that affect your business or financial strategy. Although he’s a mean one, even the Grinch would agree.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Sources:
This article was prepared by LPL Marketing Solutions
LPL Tracking # 492996