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When to elect for S-corporation treatment as an LLC

The big idea you had in your garage is finally a real business, and a successful one at that. Your business is operating at optimal efficiency and has been growing faster than you anticipated. When you were in the business formation phase, it made the most sense for your particular business to incorporate as an LLC, but now you are being advised by your friends who’ve founded their own businesses that you are missing out on big savings by not electing to be treated as an S-corporation. It is possible that now is the time to take this step, but beware -- electing for S-corporation treatment before your business is truly ready for it can result in costly consequences.

The good news about finding your business in this position is that it usually means the business is headed in a very good direction. However, this is a critical juncture that could mean either thousands of dollars in tax savings if S-corporation election is implemented at the right time, or possibly unintended additional tax liability if the company is still too small to take advantage of the change. If, for instance, the business is still run by a single owner-operator and lacks enough additional support staff to justify the complex corporate tax return and additional payroll taxes that an S-corporation is required to file, then it is probably too early for your business to elect for S-corporation status.

Seeing your dream business get off the ground and become profitable is one of the most exciting seasons in the life of a business, but, in this case, some patience and due diligence can pay major dividends in the long run. Qualified, savvy legal counsel can assist a business owner in knowing when is the right time to elect for S-corporation status, as well as help a business avoid many common and unique pitfalls on the path to success and longevity.

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