Forming an S Corporation Allows Franchisees to Save on Payroll
Whether you’re buying an existing franchise or taking your own business and turning it into one,
franchisees know that it’s a requirement to incorporate
a franchise. While LLCs and Corporation tend to be the most common entities
chosen, S Corporations have also risen in popularity thanks to the wide variety
of benefits that this “pass-through” entity offers entrepreneurs.
If you’re thinking about
incorporating as an S Corp, but still want more information about what this
legal structure can do for a franchise, let’s break the ins and outs of this
formation down for you.
What’s an S Corporation?
S Corporations begin as C
Corporations or LLCs, which makes it a C Corp with an S Corp tax election. That
S Corp election tells the federal government to tax the entity as a partnership
and not as a corporation, even though S Corp structures tend to operate in the
same manner as corporations. Being taxed as a partnership allows the business
to avoid double taxation at the corporate level.
Instead, S Corps elect to have
profits, losses, deductions, and credits “pass-through” the entity level and taxed
only at the shareholder level. Only the wages of S Corp shareholders, who are
also employees of the business, are subject to employment tax.
What else do franchises need to know about S Corporations?
- Paying yourself a salary matters. Let’s go back to that bit about
the S Corp shareholders and their wages for a moment. Since wages are subject
to employment tax, it’s important that employees of franchises pay themselves a
salary or “reasonable compensation.” By doing so, this keeps the IRS from reclassifying
corporate earnings as wages.
- Incorporating as an S Corp provides the franchise with plenty of
benefits. A few of the most common ones include providing protection for
personal assets, saving money on FICA payroll taxes, and allowing businesses to
gain credibility with consumers.
- It doesn’t need to be an expensive, or difficult, process. Not
incorporating means your franchise could be subject to legal issues later on or
struggle to establish credibility with consumers. Once you’ve invested your
initial franchise fee payment, selected your franchise, reviewed the Franchise
Disclosure Document, and signed the Franchise Agreement, you’ll need to
pick a legal structure to incorporate your franchise business. If you’re not
sure which entity to choose, we recommend working with a team of incorporation
experts for assistance in filing your documents and streamlining the process of
incorporating your franchise.
Wait, what about the new tax reform law?
If you’ve heard about the Tax
Cuts and Jobs Act (TCJA), AKA the new tax reform law
that gives S Corporations and other pass-through legal entities a 20 percent
deduction for qualified business income, you might wonder how it will affect filing
your taxes as an S Corp. The good news is that changes, while scheduled to take
effect in January 2018, will not affect tax returned filed for 2017. For
franchisees in need of extra filing assistance, I recommend meeting with a tax
professional as soon as possible to review and determine which changes apply to
your specific situation.
About the author:Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @deborahsweeney and @mycorporation.