When one of our clients has an S-corp, they are sometimes confused about the need for a Profit First tax account. To clear up any confusion here is some useful information about small business corporations (S-corps) and how taxes are allocated in the Profit First method.
To be an S corporation, a small business needs to elect to be taxed under Chapter 1, Subchapter S of the IRS code. This decision should be done with the advice and guidance of a qualified accounting firm, such as Exigo Business Solutions.
When this is accomplished, the corporation does not pay income taxes. Rather any profit or loss is passed through the corporation to the shareholders. This arrangement may be suitable for a closely held corporation, which is a private business with a small number of shareholders and which does not have public trading of its stock.
Likewise, an LLC or limited liability company, which combines aspects of a partnership with a corporation and limits individual liability, may choose to use an S corporation set up. And a business partnership may choose this route as well.
In all cases, it is wise to proceed with the advice and guidance of a qualified accounting firm.
Is There Any Problem Using the Profit First Method with an S-corp?
The Profit First method is applicable to virtually any business setup. As such, you should not have any problem adapting the bookkeeping, bank accounts, budgeting, and cash flow management of your S-corp to the Profit First system.
As with any change in your business operations, financial planning, and potential tax liability, consult with your bookkeeper or accountant before making changes. And, if you have an S-corp and want to learn about Profit First, contact us at your convenience.
To the degree that shareholders of an S-corp want to efficiently track finances, control their expenses, and maximize profits, the better route is the Profit First Advanced method.
There are taxes to be collected and paid with an S-corp but not directly by the corporation. The taxes will be paid by the owners or shareholders of the closely held corporation, LLC, or partnership. Because the whole point of Profit First is to keep track of what is going on with your finances, improve cash flow management, and optimize budgeting, you need a tax account for your S-corp too. In fact, if you have more than one owner or shareholder, you may need more than one tax account!
Money is allocated to the owner’s account and then re-allocated to the owner’s tax account on payday. This allows you to immediately see what money the business is allocating to owner’s pay, owner’s taxes, and all other Profit First accounts by simply looking at the bank balances. As with all aspects of Profit First, with or without an S-corp, ask the Profit First Professionals at Exigo Business Solutions how to set up Profit First in your business.
If you still have questions or are interested in implementing Profit First in your business, visit our website, ExigoBusiness.com, or contact us at (816) 394-6818.
Click here to watch the YouTube video about needing a tax account when you have an S-corp.