Dear Sole Proprietor,
I’ve written these S-corp tips because two of my clients switched from sole proprietor to S-corp in the past year. Unfortunately, the CPAs who prepared the documents failed to impress upon my clients the importance of these tasks, and did absolutely NO follow up to make sure these things were completed.
Although I tried to get my clients to do these things, I was unable to persuade them until quite a long time after the corporation was formed. I’m now worried that if my clients get audited, their S-corp election will be jeopardized.
As wonderful as an S-corp is, don’t fall into the trap of thinking that, just because it’s been formed, it’s legitimate.
This is because there are important steps you MUST take immediately after the S-corp is formed. Otherwise the IRS might think you still run your business as a sole-proprietor, and remove your S-corp’s valuable tax benefits if you get audited.
Become an S-corp
when you are ready to do the following:
Along the same line, you need a professional to come in and convert your current QuickBooks file so it’s set up for a corporation. Do not continue to use your old, sole proprietor, QB file. It is unable to produce the correct balance sheet for taxes.
2. Open a Brand New Checking Account. As soon as your S-corp is official, open a new checking account with the new federal employer ID number.
- You want to be able to receive and make payments with the new corporation’s name.
- Continuing to use the old account is a signal that you have not really converted the business structure – and it jeopardizes your corporate status.
3. Put Yourself on Payroll. As an S-corp I’m sure your CPA told you that you must be on payroll – at least, I hope your CPA told you! If not, then let me tell you:
You MUST be on payroll – it’s not optional. It’s one of the requirements to maintain your valuable tax benefits of the corporation.
This is not a problem for those of you who already have employees. Just tell your payroll service that you are now an S corp. They’ll want your new FEIN and a new state ID number, and will take care of other important tasks on their end. Just add yourself as a new employee.
Should you do payroll yourself?
Be careful here, and go into it with your eyes open. Payroll taxes and payroll tax returns must be submitted on time. Did you know that late payments and late returns get stiff penalties that are not deductible? Ouch! Talk about hurting your cash flow SO unnecessarily.
I hope you enjoyed these S-corp tips – they’re based on my real-life experiences with real clients like you.
Let me know if you have any questions by clicking the link below.