WHAT IS AN S CORPORATION?

If you’re considering filing for corporate status, you probably already know that not all corporations are the same. There are S corporations, C corporations, nonprofits, and—though it’s subject to some dispute—limited liability companies. Many businesses strive for S corporation status because of the tax advantages, but not every business is ideal or even eligible for this type of status. Before filing, it’s important to understand the specifics. 

What Is an S Corporation – An Overview 

In its simplest terms, an S corp is a corporation that’s exempt from paying corporate income tax. The term is short for “Subchapter S Corporation” or “Small Business Corporation.” Rather than paying a traditional corporate tax, this type of organization divides its profits and losses among its shareholders. The income, credits, and deductions are reported on the shareholders’ personal tax returns. 

“S corporation” is not a type of business entity, but rather a tax designation assigned by the Internal Revenue Service. To become an S corp, you must first file and structure your business as a C corporation or LLC and then apply for S corp status. C corp and LLC filings are handled at the state level; S corp applications are handled at the federal level. 

S-corp status is often attractive to small businesses because it eliminates the problem of double taxation. If your business and personal finances overlap, you don’t want to be taxed on the same money on both your personal and corporate tax returns. 

The Benefits of Becoming an S Corporation 

As noted before, S corporations don’t pay federal corporate tax. They pay employment tax on employee wages and sometimes state taxes. That’s why many small businesses favor this type of corporate structure. It only becomes a potential disadvantage if you’re both an employee and a shareholder. In those cases, you’re required to pay yourself a reasonable salary before qualifying for tax-free distribution. 

The IRS does not define what constitutes a reasonable salary, but it should be a wage that falls in line with the experience, responsibilities, and skill level required of the job. Look at it this way: If the IRS were to audit you, would you be able to adequately defend the salary you pay yourself? 

Aside from the tax benefits, there’s one other distinct advantage of electing for S-corp status. If you ever decide to sell your corporation, the taxes on an S-corp sale are far less than the taxes on a C-corp sale. 

Do You Qualify as an S Corporation 

Once your corporation is up and running, you have to determine if your business qualifies for S-corp status. Simply having a corporation isn’t enough. You have to meet a few specific criteria: 

• Your business must be registered with the state as either a C corporation or LLC with all filings and dues up to date.
• Your business must be based in the United States.
• Your business must consist of no more than 100 shareholders.
• All shareholders must consent to the S corp status.
• Your business must consist only of allowable shareholders—in other words, none of the shareholders can be non-residents, partnerships, or corporations unto themselves.
• Your business must have only one class of stock shares.
• Banks, insurance companies, and domestic international sales corporations are not eligible.

How to Become an S Corporation 

If your C corporation has been created and you’ve confirmed that it meets all of the IRS’s eligibility criteria, you’re ready to file for S corp tax status.

You’ll need to file IRS Form 2553, Election by a Small Business Corporation. This four-page application must be signed by all shareholders within your corporation, and it includes four parts:

• Election Information: You’ll need to provide your general company information as well as information about all of the shareholders in your company.
• Selection of Fiscal Tax Year: You’ll need to answer a few financial questions pertaining to the business’s tax year.
• Qualified Subchapter S Trust (QSST) Election: This section is specifically intended for trusts applying for S-corp status. It asks for the income beneficiary’s personal information as well as general information about the trust itself. If your operation doesn’t qualify as a trust, you can skip this section.
• Late Corporate Classification Election Representations: This section is intended for companies filing after the IRS deadline. In general, corporations are required to file no more than two months and 15 days after the start of their tax year if they wish to qualify for S-corp status in the same year.

If your business is an LLC, you’ll first need to file IRS Form 8832 and select your entity as “A domestic eligible entity electing to be classified as an association taxable as a corporation” (6a). Once you elect to be taxed as a corporation, you can then file Form 2553 to apply for S-corp status. 

Is an S Corporation Right for You? 

An S corp comes with many advantages, and it’s definitely worth the effort—for certain businesses. 

With that said, it’s not the ideal structure for everyone. For example, the requirements are very strict, and if your business fails to meet those requirements at any point, the IRS will immediately revoke your S-corp status and tax you as a C corp. This can be enormously painful and costly. So if, for example, your business is growing and you anticipate that you’ll exceed 100 shareholders at some point, the S corp status probably isn’t for you. 

Additionally, the IRS applies heavy scrutiny to S corps. If the IRS has any concerns about the “reasonable salaries” that officers pay themselves, you may have an auditor at your door. This is an important factor to be aware of. 

Finally, it’s important to understand how corporations are governed in your state. State driven laws can be significantly different from state-to-state.. This could mean additional taxes that you don’t want to pay. 

So should you file as an S corp? If you live in a state or location that’s S-corp friendly, and you meet all of the criteria as a small business, this type of filing can be enormously advantageous. Weigh the pros and cons, and speak with a knowledgeable CPA firm if you need help deciding on the best structure for your business.

The Cost of Bookkeeping for Small Businesses

If you have just launched your business, there are several core things you’ll find yourself trying to figure out. Bookkeeping is one of the basic requirements for running a company, but it is also one of the most complex and challenging aspects of business ownership. Understanding your options for bookkeeping services and their costs will help you tremendously in ensuring the long-term growth of your company.

Bookkeeping vs Accounting

The first thing you need to do is determine your company’s needs. Just about every small business requires a basic form of bookkeeping in the beginning. In this initial stage of establishing your business, you will be primarily concerned with smaller responsibilities like recording transactions and paying bills.

As your business grows, you will need to focus more on detailed financial reporting and following state & federal regulations. This requires a more concerted effort and direct oversight by a qualified professional. You will need an advanced accountant to help you put together the financial intelligence to help you make sound business decisions.

Before looking to hire a full-time employee to maintain your books, you should first figure out what kind of responsibilities you need to have handled. A full-time accountant is an upgrade over a basic bookkeeper, as they require less oversight and provide greater expertise across the board.

As you may expect, salary requirements for an experienced accountant are typically higher, but investing in a great accountant is an ROI-positive step in growing your business as they can help you increase your company’s profitability with their ability to provide insights through financial analysis & reporting.

What Do Bookkeepers Do?

A small business bookkeeper has several basic responsibilities. They are in charge of maintaining your financial books by keeping track of expenditures and revenue. This is performed by entering data into an accounting software like QuickBooks.

Their job, in essence, is to make a record of financial transactions and collate information to make a general financial report that can be used by business owners to make financial decisions to further drive a company’s profitability & growth.

There are other smaller duties that bookkeepers may be asked to handle on a daily basis. These include:

• Data entry
• Bill pay
• Inventory management
• Invoicing
• Reconciling financials (bank accounts & credit cards)
• Maintaining vendor & client lists (accounts payable and accounts receivable)
• Preparing & organizing key financial documents
• Collecting past due payments

Bookkeeper Salaries & Cost of Outsourcing

A lot of newly-launched businesses choose to do bookkeeping themselves in the early stages, which is a cost-conscientious decision. Eventually, however, your business will demand more of your time and bookkeeping will need to be sourced to another person. The cost of bookkeeping will vary depending on many factors, including:

• The bookkeeper’s experience level
• Type of service (part-time employee, full-time employee, or an outsourced accounting service)
• The amount of work involved (hours required daily/monthly)
• The type of responsibilities involved on a regular basis
• Your company’s ability to support this service

Depending on the amount of work involved, you can hire either a full-time bookkeeper or a part-time bookkeeper. A business that doesn’t do a large volume of transactions and is cash-strapped may choose to hire a part-time bookkeeper, whereas an established company that has hundreds (or thousands) of transactions daily may require a full-time bookkeeper to keep up with the work.

The average salary for a bookkeeper in the United States in 2018 is around $14-$17 per hour (per Indeed) which is about $2,400 to $3,000 per month. The average annual salary for bookkeepers is between $37,000 to $47,000 (per Salary.com). In addition to the hourly charges, state & federal laws will also likely require you to pay for the employee’s benefits such as health insurance and vacation time. These benefits add a significant amount to the annual cost of an in-house bookkeeper.

The associated costs with in-house bookkeeping has led many companies to outsource their bookkeeping needs to an external agency. The fees are considerably lower than in-house bookkeepers (starting around $400/month on average) and go up depending on quantity and complexity of services involved.

Part-Time Bookkeeping

Part-time bookkeepers typically perform smaller tasks like inputting receipts and keeping tabs on employee timesheets. Companies will often choose to train an existing employee or office manager to take on the extra responsibilities of a part-time bookkeeper. While this may be a lucrative option on paper, any oversight or error in the sheets will come at your company’s expense.

The lesser cost of a part-time bookkeeper (as opposed to a full-time employee) is the biggest benefit for companies. A part-time bookkeeper will usually cost more per hour than full-time bookkeepers, but the total monthly cost will be less. The actual hourly fee of part-time bookkeeping can vary according to location, duration, and daily responsibilities.

To illustrate the cost efficiency of a part-time bookkeeper, consider the following example.

Hiring a part-time bookkeeper at 20 hours per week at a rate of $17 dollars an hour (the high end of the average hourly cost cited above) will cost you $340 total for the week.

Hiring a full-time bookkeeper at 40 hours per week at a rate of $14 dollar per hour (the low end of the average hourly cost cited above) will cost you $560 total for the week.

Below is a table to help see the difference:

Part-Time Bookkeeper Full-Time Bookkeeper Hourly Fee $17 $14 Weekly Hours  20 hours 40 hours  Total Cost for the Week  $340  $560 

One of the biggest disadvantages of hiring a part-time bookkeeper is that they provide only partial support in an area of business that requires a lot of attention and detail. You will need to dedicate some of your time to audit their work on an on-going basis, and you may still be required to do more of the high-level accounting work, such as projecting and reporting. This is an added burden to any company owner who is also responsible for many other key areas of the business.

In addition to the above, a business owner may also be wary of trusting a part-time bookkeeper with some of the critical financials and records of their customers and/or clients. Such nuances can make the division of labor and trust a real strain on the employer and their company.

Full-Time Bookkeeping

A full-time bookkeeper is typically expected to handle everyday accounts, keep account books in order, and take care of tasks that are small and large (invoicing, timesheets, generating reports, etc). If your company has a lot of employees, records a lot of transactions daily, or has complex financial systems, a full-time bookkeeper is a necessity rather than an option.

You may still have to audit a full-time bookkeeper’s work from time to time, but having them at the office every day allows you greater access to them and lets them learn your processes & systems more efficiently. Full-time employees also tend to be more involved with the company for which they work, and you should receive greater long-term benefit from working with someone who knows your business thoroughly.

As with any full-time employee, the biggest drawback of a full-time in-house bookkeeper tends to be the overall associated cost. The salary alone can easily exceed $50K annually for an experienced bookkeeper, and this is before you add the cost of benefits and other overhead that can add approximately 20% more to the total cost of a single employee.

Outsourced Bookkeeping

Perhaps the most cost-efficient option for bookkeeping for a small business is hiring a third-party firm that specializes in outsourced bookkeeping solutions. There is a number of key advantages to outsourcing your bookkeeping, including lesser costs, greater value for every dollar spent, and other tangible business-related factors.

One of the biggest advantages of outsourcing your bookkeeping is the cost. On average, a bookkeeping firm will charge anywhere between $300 to $2,000 per month depending on the amount and complexity of work required.

Using outside firms to handle your bookkeeping is similar to hiring an in-house bookkeeper to handle basic bookkeeping responsibilities without the added overhead cost of carrying employees on your payroll. This is highly beneficial to companies entering a growth stage without having to provide additional office space or pay salary benefits.

Another key benefit to outsourcing bookkeeping to a professional CPA firm is the level of expertise received. Small businesses and even mid-size companies don’t always hire the best talent to handle their daily and monthly bookkeeping responsibilities. Without significant prior experience in bookkeeping, it is impossible for a business owner to gauge the expertise level and capabilities of an in-house bookkeeper.

This is why accounting & bookkeeping service firms are so useful to businesses worldwide. They know how to hire the best talent to handle the workload efficiently and have a system of internal checks and balances to make sure clients receive the best possible service. This eliminates the need for interviewing and taking a chance on an individual who might end up being poorly-equipped to handle key finance-related activities at a company.

Firms offering outsourced bookkeeping services tend to also be flexible to make sure their solutions fit your specific needs. These firms specialize in bookkeeping and accounting, so their specialists will likely be more experienced and provide greater expertise than hiring an in-house bookkeeper.

The biggest disadvantages cited of using an outsourced bookkeeping firm include: lack of direct access to the person handling the books, lack of immediate visibility into daily activities, and inability to efficiently integrate your bookkeeping with other departments (such as sales, operations, etc). These are often the primary reasons for why larger companies use in-house accounting teams. However, outsourced bookkeeping remains a terrific option for cost-conscientious and/or small companies who are worried about the cost of having an in-house bookkeeper.

Picking the Right Bookkeeping Option for Your Business

Not every business has the same bookkeeping needs as others, and their needs will likely change as the company experiences growth. Part-time bookkeepers and outsourced bookkeeping firms are a sound solution for new businesses, while full-time bookkeepers tend to benefit more established companies more. It’s up to the decision makers in the company to determine the best appropriate solution to maximize their profitability and ensure their growth

CAN QUICKBOOKS REPLACE AN ACCOUNTANT

Research indicates that 64.4% of small-to-medium-sized-business owners use accounting software like QuickBooks on a regular basis, and some are even replacing human personnel with these virtual solutions. It’s true that QuickBooks has revolutionized bookkeeping for business, but is it actually sophisticated enough to replace professional accounting services? It’s understandable that, as a business owner, you want to save money wherever possible, but there are still quite a few financial processes that require the expertise of a knowledgeable human accountant. 

What QuickBooks Can Do

To understand the value of QuickBooks, it’s important to break down the differences between accounting and bookkeeping. QuickBooks is, at its core, a bookkeeping program. It can process your invoices, manage sales and expenses, track your employees’ time, and generate useful reports for budgeting and tax purposes. You can even pay bills and receive due date reminders.

While you might gain a lot of valuable accounting insights from QuickBooks’ balance sheets, profit-and-loss statements, and cash flow reports, the information you receive is still limited to raw data. And that’s the big distinction between bookkeeping and accounting. Bookkeeping helps you to keep your financial data in order; accounting takes things a step further, devising actionable recommendations and strategies based on historical data, missed opportunities, and sound financial principles. For that, you need the help of an accountant. 

What QuickBooks Cannot Do 

Accountants use QuickBooks. CPAs use QuickBooks. Payroll managers use QuickBooks. The software is trusted by millions because it’s powerful and versatile, but it’s only as good as the person pulling the strings. There are several important things it cannot do. 

KEEP YOU IN COMPLIANCE 

QuickBooks is an excellent piece of software, but relying on QB alone can land you in hot water. For instance, tax legislation is constantly changing, and the program is seldom updated as quickly as the laws. If QuickBooks miscalculates your refund based on outdated tax rates or adjusts for a deduction that you no longer qualify for, you may find yourself fined or audited by the IRS. That’s just one reason why it’s so important to work with an accounting professional who remains current on the guidelines and legislation.

GROW YOUR BUSINESS

More importantly, QuickBooks cannot guide the kinds of high-level financial decisions that will help you to grow your business. It can create some pretty impressive reports, like income statements that highlight correlations between revenue growth and specific expenditures. But without an informed expert to analyze and interpret those reports, you can only guess at how the information might be used to improve your bottom line. 

A knowledgeable accountant, and especially a certified public accountant (CPA), specializes in analyzing the minutiae. They identify the kinds of financial indicators that even the most intelligent software would miss, like the relationship between profits-and-losses and external market trends. 

SAVE YOU TIME 

Anyone can learn to use QuickBooks, but bookkeeping and financial analysis are time-consuming processes that demand a lot of attention. The more time you spend analyzing and breaking down financial reports, the less time you have to run your business. The process also takes considerably longer for a non-professional than for someone who specializes in finance, so it’s just not an efficient use of your time.

CORRECT YOUR MISTAKES 

Finally, QuickBooks is not error-proof. Even though it provides you with the tools to manage your finances and taxes, the onus is on the user to ensure that those tools are utilized properly and the data inputted correctly. This can be extremely difficult for someone without a financial background. Consider that 60% of business owners admit to having an average to below-average understanding of accounting—and those are just the ones willing to admit it. 

Account reconciliations are especially difficult to manage, and many businesses fail to maintain accurate, matching records—not because of fraud, but because of oversight and inexperience. 

QuickBooks and Accountants Go Hand-in-Hand

By combining sophisticated accounting software with the services of a trusted CPA firm, you can ensure that your business: 

• Remains in compliance with the IRS and other state and federal regulators 
• Remains profitable and experiences steady growth over time 
• Manages its income, expenses, payroll, and taxes as efficiently as possible 

By sharing software access with your CPA firm, you’re able to manage the simple day-to-day recording duties while your accountant takes care of the big-picture work. Cloud-based software systems have made it easy for CPAs and clients to share financial data in real time and ensure that all information remains current and accurate. Some CPAs even take things further, providing CFO and business management services to better serve their clients. 

So while software has become an essential part of the bookkeeping and accounting process, it will never replace the invaluable insight and discernment of an experienced accountant. The software is just the paintbrush and canvas; the accountant is the artist who brings the canvas to life.

If you’re a high-income earner, you have a number of unique tax considerations that can impact your annual burden by hundreds-of-thousands or even millions of dollars. As a trusted Los Angeles CPA firm that deals largely with high-income clients, we see a lot of common mistakes and oversights from affluent individuals preparing their taxes. By employing just a few basic tax strategies for high-income earners, you can save a fortune when April 15th rolls around.

Structure a Business–Even if You’re Not a Traditional Entrepreneur 

If you’re already a business owner, this point may be moot. However, if you’re still operating as a sole proprietor or high-income employee with no formalized business structure in place, you may be missing out on some major tax benefits. If you set up an LLC to manage your personal investments and assets, you can start writing off any applicable business expenses—potentially saving thousands of dollars a year on your tax burden. 

In addition to expense write-offs, there are deductions (some fairly new) that all business owners should be aware of. For example, the section 199A deduction (introduced in 2018) allows you to deduct as much as 20% of your small business or rental real estate profit. 

Note that eligible expenses and deductions vary depending on the type of business you establish. We recommend working with a reputable CPA company if you plan to pursue this route, as the specific tax requirements and eligible deductions can get complicated. 

Invest Money in a Health Savings Account 

Even if you have excellent health insurance, a health savings account can offer numerous benefits for high-income earners. It allows you to set aside money for medical expenses while also reducing your tax burden. All contributions that you make are tax-deductible. As of 2020, you can contribute up to $3,500 per year as an individual or up to $7,100 on behalf of your family. If you’re over 55, you can contribute an additional $1,000. 

Even if you don’t have a health savings account, be sure to keep close track of any major medical expenses. As of 2020, medical expenses exceeding more than 10% of your adjusted gross income can be deducted as an itemized expense. 

Be Generous With Charitable Donations

Charitable donations can make a big difference for organizations and causes you care about. It’s also one of the easiest ways to reduce your tax burden as a high-income earner. What many people don’t realize is just how much you can deduct—up to 60 percent of your gross adjusted income. Just make sure you have the receipts to back up those charitable donations. 

Consider a Defined-Benefit Plan 

If you own your own business, a defined benefit plan can save you a lot of money at tax time while also helping you to contribute toward your retirement. It works like a pension, and it gives you the opportunity to set aside tens of thousands of tax-deferred dollars separate from your 401(k). Another benefit is that it reduces your total taxable income. So if you earn too much to qualify for the qualified business income deduction (which caps at $157,500), you can set aside a defined benefit plan to reduce your taxable income and qualify for the QBI. 

Note that defined-benefit plans aren’t right for every high-income individual. Depending on your retirement goals, and if your income threshold already qualifies you for the QBI, you may only need an IRA or 401(k) to achieve the maximum tax benefit. 

Opt for a SEP-IRA

Speaking of retirement benefits, a Simplified Employee Pension IRA (or SEP-IRA) may be an excellent option for certain business owners. This type of plan is designed to make it easier and more cost-effective for employers of small businesses to offer retirement savings options for their employees. If you’re self-employed, you can also contribute up to 25% of your earnings or $57,000 (whichever is less) to your own SEP-IRA as of 2020, thus reducing your taxable income.

Deduct Mortgage Interest Expenses 

We can’t talk about tax strategies for high-income earners without mentioning real estate. Now may be an excellent time to purchase a home or opt for a cash-out refinance. In 2020, you can deduct the mortgage interest paid on as much as $750,000 of a home’s principal. Just note that when you take this and other itemized deductions, you forgo the standard tax deduction (which usually isn’t an issue for high-income earners). 

Look Into Cash Value Life Insurance Options 

Cash value life insurance has higher investment limits than standard life insurance plans. High-income earners favor these types of accounts not only because of the higher caps but also because the cash value can be withdrawn similar to a savings account. 

In addition, all accumulated cash value remains tax-free and you never have to pay taxes if you borrow against the policy. And because your beneficiaries don’t have to pay taxes on the death benefits, the tax advantages continue even after you’re gone. 

Manage Your Stocks and Bonds Like a Pro 

Stocks, bonds, mutual funds, and other tradable assets can be beneficial for anyone trying to limit their tax burden. Tax-exempt bonds, for instance, are exempted from both Medicare surtax and federal income tax, and most capital gains are taxed at rates far below standard income. 

You must be very strategic, though, in how you manage these assets. The timing at which you buy and sell shares can significantly impact your tax burden. Unless you have a background in finance, this will require some assistance from a knowledgeable financial planner.

For example, short-term investments are taxed at a higher rate than long-term investments, and long-term annual dividend payments have less of a tax burden than short-term distributions. If you precisely time the selling of an unprofitable asset, you can recoup some of the loss by deducting up to $3,000 against your income. This is part of a strategy known as tax-loss harvesting. 

Get Yourself a CPA 

This last point ties back to everything we’ve covered so far. Tax laws are complicated and ever-changing. We could go on and on with effective tax strategies for high-income earners, but the most important thing we can recommend is to get in touch with a certified public accountant (CPA) with a background in tax law. 

CPAs are the most aggressively educated and vetted tax experts, adept at managing the complexities of a high-income tax return. Whether you need help with tax-loss harvesting, establishing an LLC, or just maximizing your deductions over the course of the year, a CPA is the best partner you can have at your side. 

If you’re looking for a knowledgeable CPA to help you, contact the experts at C&A Accounting and Tax Group. We work with high-income earners and would be happy to help you minimize your burden at tax time and throughout the year.

If you want to convert an LLC to an S corporation in California, the process is pretty straightforward. There are pros and cons to this decision, though, so it’s important to first understand how your business will change when you opt for that S-corp tax status. 

LLC vs S Corp in California 

A Limited Liability Company, or LLC, is a type of business entity whereas an S corporation is a type of tax classification. In other words, if you convert an LLC into an S corp, you’re maintaining the same basic entity structure (albeit with some modifications) but asking the IRS to tax your business as a Subchapter S Corporation rather than an LLC. C corporations can also request to be taxed as S corps if they meet certain eligibility requirements. 

To break it down a bit more, a single member LLC operates similarly to a sole proprietorship by default. It benefits from pass-through taxation, meaning that all business profits are automatically “passed through” to the owner’s personal tax return in the form of self-employment tax. Since there’s no corporate tax rate, there’s no threat of double taxation. It’s important to note, however, that both LLCs and S corporations are still subject to California’s $800 minimum franchise tax, so you still have some corporate tax liability.

While the tax benefits of an S corp conversion can be significant, there are also a lot more legal requirements that come with an S corp status. 

Should You Convert an LLC to an S Corp in California? 

The decision of whether or not to convert to an S corp rests on the size, structure, and goals of your business. By default, LLCs and S corps share many of the same features: 

• Both benefit from pass-through taxation in California (though not in all states).
• Both offer limited liability protection, meaning that business owners, employees, and shareholders are not personally responsible for the company’s debts or liabilities (there are a few legal exceptions to this rule).
• Both have strict filing requirements, although the filing requirements for an S corp are much more stringent
• Both can add legitimacy and credibility to a small business operation. .

Criteria for Establishing S Corp Status in California 

In order to establish an S corporation in California, your LLC must meet all of the following criteria: 

• An S corp can have no more than 100 shareholders
• An S corp can carry only one class of stock
• All S corp shareholders must be legal U.S. citizens or residents
• All S corp shareholders must be individuals, estates, or eligible trusts; other corporations and partnerships do not qualify as shareholders

In addition, certain types of LLCs do not qualify for an S-corp tax structure. These include certain financial institutions, insurance companies, and international sales corporations. 

How to Convert Your LLC Into an S Corp in California 

California has streamlined the statutory conversion process. So while some states will require you to establish a separate corporate entity and then convert your LLC assets, California makes it easy to transfer all of your assets and liabilities with just a statement of conversion and new Articles of Incorporation.

If you meet the qualifications, here’s how to convert your California LLC into an S corp: 

• Fulfill the requirements of incorporation:
  • Draft a set of corporate bylaws (you can use the bylaws from your original LLC Operating Agreement if they’re applicable).
  • Elect corporate officers and appoint corporate directors
  • Issue stock certificates
  • Conduct your initial board meeting
• Establish a plan of conversion according to the stipulations of CA Code Section 17540.3. The plan should include:
  • The name of your new S corp
  • The terms and conditions of your conversion (including how you intend to convert your LLC membership interests)
  • The provisions in the Articles of Incorporation to which shareholders will be bound
  • The place of the organization (for both the LLC and newly established S corp)
  • Any other agreements or provisions that are required for your business or agreed upon by all members therein
• Have the existing members of the LLC sign the plan of conversion (if the LLC has multiple members). California law usually requires the plan to be approved by a majority of members, though there are exceptions to the rule.
• File new Articles of Incorporation along with a statement of conversion. You can file your own articles with the California Secretary of State, or you can use Form CONV LLC-GS.
• Pay the $150 filing fee when submitting your new Articles of Incorporation. If you’re submitting the paperwork in person, a separate $15 counter drop-off fee also applies. If you need to fast-track your application, you can request expedited service for an additional fee.
• File a Statement of Information within 90 days of submitting your Articles of Incorporation. This is submitted to the Secretary of State and includes your basic corporate info including your members, officers, directors, address, and contact information. You’ll need to submit a new Statement of Information every year.
• Complete IRS Form 2553, Election by a Small Business Corporation. Submit this form to the Internal Revenue Service for federal tax purposes.

Once the conversion process is complete, your business must adhere to all general rules and requirements that apply to a California corporation. These include: 

• Holding annual shareholders’ meetings and directors’ meetings.
• Maintaining a record of minutes of all major decisions from directors and shareholders.
• Submitting a new Statement of Information every year (instead of every two years as you would with an LLC).

Important note: If you want the tax implications to be valid for the same calendar year, you’ll need to complete the state and federal filing process by March 15th of that year. Otherwise, the change will take effect the following year. 

S-Corporation Status Is Within Reach for Your LLC

Converting an LLC to an S corp isn’t the right solution for everyone, but it can be an excellent choice if you’re looking to grow your corporate membership or take advantage of the unique tax benefits. 

Our Los Angeles CPA firm specializes in assisting businesses through this transition. If you do decide to make the switch, we recommend working with tax and legal professionals who can equip you with financial and legal advice and help you to navigate the complexities of statutory conversion. 

This will make the process move much faster and more smoothly while ensuring that your corporation is legally sound and poised for maximum success. 

Outsourced Accounting VS In-house Accountant

There are many pros & cons to outsourced accounting services when comparing to in-house accountants. Most businesses have traditionally relied on an in-house accountant to fulfill their bookkeeping and accounting needs. However, with the advances in technology and a growing economy, businesses now have many cost-effective options to outsource their accounting and bookkeeping.

One of the common challenges that many businesses face is selecting the best option for their accounting needs. The process of finding the best in-house accountant or an outsourced accounting firm can be daunting. Accounting is quite complex even for a small business and anyone delivering work that is short of “exceptional” could mean catastrophic complications for the company.

The main differences between outsourced accounting and an in-house accountant come down to training, control, reporting, and cost. It is critical for a business to understand these pros & cons in order to find the right solution to your accounting and bookkeeping needs.

Sourcing & Training

When you get down to the actual work, it’s important that the people performing accounting tasks (whether in-house or sourced out to an external firm) know their jobs well. The following are the differences in hiring and training people to do the job when you get it done in-house versus when you outsource it.

HIRING & TRAINING IN-HOUSE ACCOUNTANTS

Depending on the complexity of your accounting needs, you will be looking for who has at least a few years of hands-on relevant experience. One of the biggest challenges for business owners is properly evaluating someone’s accounting skills without having a deep knowledge of accounting themselves.

Interviewing for an internal accounting position means you have to be able to understand each candidate’s qualifications and whether they are the right fit for the job. While references from previous employers may help, it’s not always enough, as accounting needs may differ from one company to another.

Ideally, you would like the candidates to require minimal training and be able to do their job well from the get go. Even experienced accountants will need time to be onboarded to existing systems and processes so hiring someone who will need minimal supervision and catches on quickly is a priority.

HIRING & TRAINING OUTSOURCED ACCOUNTING FIRMS

Accounting firms that specialize in outsourcing their services to clients eliminate the challenge of going through dozens (and sometimes hundreds) of applicants, while making sure that whoever works on your accounting is a qualified expert.

Outsourced accounting firms are already staffed with knowledgeable and experienced professionals who specialize in high-level accounting, eliminating most training needs. While an onboarding process will still be required for even the best outsourced accounting firms, this time period is minimized by their experience with being a professional vendor of services.

Expert outsourced accounting companies also ensure their accountants are highly-qualified individuals who undergo continual training to stay up-to-date on their knowledge in order to provide the best level of service. This is not usually the case with internal accounting employees/teams.

Quality Control

Internal control is the amount of involvement you have with the bookkeeping and accounting process. It involves putting multiple layers of checks and balances in place to increase accountability.

QUALITY CONTROL FOR IN-HOUSE ACCOUNTANTS

Most small businesses will employ no more than one or two accountants to handle internal accounting needs. One of the key issues with this is a greater chance for honest mistakes as well as intentional fraud.

Most business owners operate based on trust but 80% of embezzlement cases occur at small businesses. The reason is simple: when one person controls your entire financial flow of information, they are in direct control of your banking and reporting. When more people are involved, the risk is significantly reduced as multiple layers of checks and division of labor makes everyone more accountable.

QUALITY CONTROLLING OUTSOURCED ACCOUNTING

With outsourced accounting and bookkeeping, the accountability lies entirely with the agency you have hired. Their only job is to ensure your books are accounted for and that the math adds up.

Since the agency’s professional reputation relies on their ability to properly and honestly service their clients, it’s completely counterproductive for them to commit fraud or engage in any other illegal activity. Most outsourced accounting firms divvy up specified duties, streamline responsibilities, and put at least two sets of eyes checking the work before the financial statements are finalized.

Financial Reporting

Financial reporting is the generation of statements which declare the company’s financial status, and it can include dozens (if not hundreds) of different items based on what is important for review & decision making.

FINANCIAL REPORTING BY IN-HOUSE ACCOUNTANTS

While your employees can provide the details of financial statements and keep track of expenses, finances and investments, they may also get embroiled in other responsibilities related to accounting. For example, human resources may pull them away from their main accounting responsibilities and they may have to focus on everyday things like data entry and clearing bills.

While these may be equally important tasks for the company overall, the final financial reporting may be neglected and even inaccurate. Considering that these reports are vital for driving business forward, this can be a costly downfall.

FINANCIAL REPORTING BY OUTSOURCED ACCOUNTANTS

Outsourced agencies allow you to retain your in-house bookkeeping staff but also provide them with more support. While your internal team members help out with important responsibilities that fall outside of financial reporting, the outsourced firm’s agents can collate relevant information about financial statements and status.

Hiring an external agency has shown to better the performance of existing employees by providing them with greater support, supervision and guidance. It also helps to increase your internal team members’ output and ensure that your business gets the best results by providing a friendly competition that sets the bar higher than before.

Cost of In-House VS Outsourced Accounting

Any business will be concerned with the cost of doing business. Accounting needs come at a cost, and internal vs outsourced accounting costs are very different.

COST OF IN-HOUSE ACCOUNTING

When you hire a bookkeeper and an accountant, you need to hire two full-time employees. You need to pay for not only their services but also added employee benefits.

The average salary of a full-time bookkeeper can start at $17 dollars per hour and go up significantly based on their qualifications. Salary is not the only consideration, as there are other overhead costs which usually include:

• Payroll taxes
• Health insurance
• Paid time off
• Cost of interviewing, hiring, and training
• Retirement plans, 401k, etc.

COST OF OUTSOURCED ACCOUNTING FIRMS

When you outsource accounting needs, you will need to pay for the services but all of the overhead costs are left out of the equation. The monthly cost of hiring an external accounting agency can start as low as a few hundred dollars per month.

Cost of outsourced accounting services usually goes up based on complexity, but it is usually still far more affordable for small businesses to outsource accounting than it is to hire a full-time accountant internally.

Productivity & Efficiency

Time is of the essence in a business. Every second spent on activities that don’t move your company forward is a second you will never get back.

PRODUCTIVITY OF IN-HOUSE ACCOUNTANTS

As mentioned above, your in-house employees may have other responsibilities too that may be overwhelming them and keeping them from providing full attention to the task at hand.

There may be some payment to a freelancer that is taking too long to be cleared, an invoice format that needs to be corrected, or simply too much paperwork for one or two people to handle. Time crunch and pressure is a real issue and eats into productivity.

PRODUCTIVITY OF OUTSOURCED ACCOUNTING FIRMS

When you outsource bookkeeping and accounting, it frees up your own employees to carry out other responsibilities and tasks to perfection. Once your bookkeeping and accounting responsibilities have been taken care of, you can use the extra time to introduce new aspects to your business. This is especially helpful for small or medium businesses that have fewer hands on deck.