Becoming an S corp: What you need to know

January 4, 2023

Can changing your ecomm brand to an S corporation save you real cash? It's time to learn the truth.

Becoming an S corp: What you need to know

Your Shopify ecommerce store is finally in the black!

Exciting times. You feel powerful, accomplished, and proud. You tweet about how you scaled your brand and use hashtags like #adulting #winning....and then you have to pay your self-employment taxes.

The joy of entrepreneurship gets quickly replaced by reality, we get it.

Fear not my friend. There is a way to enjoy the benefits of running your own brand while saving a boatload on self-employment taxes. If your business is an LLC or LP, you may be able to save tens or hundreds of thousands of dollars by converting to an S corporation.

Made $500k in net income? → You can save about $50k/year.

Made $1m in net income?→ You can save over $100k+/year.

Here’s what you need to know.


Why an S corporation instead of an LLC or LP?

The answer is simple: self-employment tax savings.

If you want to save hassle and admin costs, it's better to convert now, in the beginning of the year.

Reasonable compensation

First, you need to pay yourself a reasonable salary. How much would you get paid to do the same work at someone else’s company?

As a rule of thumb, your income breakdown should look like:

- 25% salary

- 75% distribution

- Min. salary of $40k

Let's say...

The company has a Net Income (before the founder draws) of $800,000.

A reasonable salary might be 20% of profit, or $160k. That's a tax savings of close to $90k...per year!!

S corp payroll tax savings

Who can convert their company to an S corp?

You need to have:

- A single class of stock

-A US-based INC, LP, or LLC

- Only US individual owners (or certain trusts or estates)

But on the flip—who should NOT convert to an S corp?

Anyone with:

- >1 class of stock

- Foreign entities or owners

- Net Income of less than $40k

- Significant undistributed profits from year to year (A C corp might be better)

When do you need to convert?

Before March 15, 2023 for 2023 tax year. There are ways to convert after the due date but you'll need to have a reasonable cause.

Note: We don't recommend making it effective mid tax year. It splits the tax year resulting in expensive and complex compliance & admin.

Finally, how do you convert?

Send a completed and signed Form 2553 (Election by a Small Business Corporation) to the IRS.

You’ll usually get a response within 60 days if the election has been accepted but be prepared for is the IRS after all.

About Finaloop

We are a technology company providing automated end-to-end accounting service to ecommerce businesses. Our system connects to your apps, syncs all your data and reconciles your books in real-time, replacing your bookkeeper, your accounting software, and your ecomm integrations. We offer reconciled books available 24/7, tax-saving insights, and a single place for all your financial data.

*The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.*

Finaloop logo
Excited to do your bookkeeping? Didn't think so.

That’s what we’re here for.
Accurate ecommerce books, done for you.

100% accurate ecommerce books, available 24/7.

Finally, you can focus on everything else.

Get started
14-Day Free Trial
No Credit Card Required