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Changing Tax status from sole proprietor to S-Corporation

I am a business counselor with the Small Business Development Centers (SBDC) and have a client that I think was given ba advice from their accountant and wanted to ask others opinions. I am somewhat familar with tax laws, but since I don't deal with it every day there is no way for me to keep up with all the rules.

He has been a sole proprietor for several years and in 2006 decided to setup an LLC for the liability protection. Rather than be tax as a sole proprietor his accountant suggested that he be taxed as S- corporation. First I don't know why, it is a landscaping business with only a few employees and not generating large revenue. Second, the accountant filed a IRS form 8832, but didnot file a 2553.

1) First do you see any reason why it would make sense to sqitch to a S-coporation? 2) If he does want to switch to be taxed as a S-Corporation, would you have to file a 8832 and a 2553, or neither, both, etc. 3) The accountant kept the same EIN as before, would they need to get a new EIN if they did decided to be taxed as a S-corporation.

Thanks for any assistance.

Reply to
TomT
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In the past, a major reason for forming an S Corp was for liabiliy protection. With LLCs becoming more and more common and with courts extending corporate liability protection to LLCs, that reason is fading.

Another reason to form S Corps is to shelter some income from self employment tax by labeling some of that income as dividends and not as salary. The IRS has proposed new rules which would impose SE tax on dividends received by those working for the S Corp, so that reason might fade soon as well.

In the meanwhile, the above two reasons are primarily why S corps form when LLCs might do. There is also an inheritence issue that might benefit holders or inheritors of S Corp stock.

Reply to
Arthur Kamlet

Depending on his income, he could avoid self-employment tax on some of what he brings in being taxed as an S-corp, but not if taxed as an individual.

Stu

Reply to
Stuart Bronstein

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