Becoming an S corp: What you need to know

All about S corps

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.

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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, how to determine reasonable compensation for S corps should have your income breakdown look like this:

- 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!! For a more detailed article on how reasonable compensation should be calculated, read this blog.

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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 17, 2025 for 2025 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 delays...it is the IRS after all.

What is the best S Corp Accounting Software?

Finaloop

• Overview: Finaloop is an accounting software and service designed specifically for ecommerce businesses, including S Corps. It automates bookkeeping and financial management by integrating with platforms like Shopify, Amazon, and others.
• Key Features:
  • Real-time syncing of sales, expenses, and fees
  • Automated and real time financial report generation
  • Integration with major ecommerce platforms
  • Easy management of shareholder distributions and payroll
• Why It's Suitable for S Corps: Finaloop is particularly effective for S Corps involved in ecommerce, helping to automate real time bookkeeping, track distributions, and ensure compliance with IRS requirements.