Do you know how to advise your clients through the process of becoming an S corporation?
The S corp tax status can improve the profitability of eligible small businesses. As an accountant, you’re in a unique position to help your clients expand their businesses by educating them about S corps. When you assist your clients through the S corp process, you can also position yourself to support them in an advisory capacity.
Gusto, along with our partners at CPA Academy, presented an informative webinar all about S corporations and how you can step into an advisory role for your clients. We presented our webinar titled, “How to Increase Advisory Opportunities Through S Corp (Form 2553) Conversions” and youou can watch the full presentation here.
In addition to this article, Part One, you can also read Part Two and Part Three of this webinar article series. Part Two discusses the advantages and disadvantages of S corps, and Part Three describes how to increase your advisory opportunities by assisting S corporations. All three parts feature the accounting and advisory expertise of Will Lopez, founder of AdvisorFi and head of Gusto’s accountant community.
This article will inform you about critical insights from Will’s presentation, including the importance of promoting S corps to advise your clients, the difference between LLCs and S corps, and helping your clients through S corp election.
Advising your clients by promoting S corporation status
You can offer your clients advisory services to help their businesses while also creating a new revenue stream for your accounting firm. You can begin advising your clients by assisting them in gaining S corp status from the IRS:
“The ultimate agenda at my practice was to empower our clients. … [We help] them unlock that opportunity by championing the S corp status, … a status that could save them money. We put money in their pockets so that they could turn around and engage us and learn how to run their business.”– Will Lopez
When you help your small business clients earn S corporation status, they will save money and are highly likely to continue utilizing your accounting and advisory services.
The IRS defines S corporations as, “corporations that elect to pass corporate income, losses, deductions, and credits to their shareholders for tax purposes.” Some of the basic requirements for earning S corp status include having individual shareholders, having under 100 shareholders, and having a single class of stock.
You need to create a professional relationship with your clients that extends beyond traditional accounting to help them become S corps:
“When you … [take a] holistic approach to advising [your clients], it makes sense when you tell them, ‘I can save you money [by helping you gain S corp status], and when you save that money, you can turn around and engage me.’ And that impact between our relationship is less aggressive because we’re taking money, [and] we’re throwing money on the table for you. You’re turning that around, and you’re investing into your future. … We want to make sure that … you have a good [return on investment] with that as a business owner.”– Will Lopez
When assisting businesses through the process of gaining S corporation status, it’s important to note that your primary goal is to help them earn a high return-on-investment (ROI) when using your advisory services. Your clients will save more money long-term through gaining S corporation status and will ultimately gain back a favorable ROI from utilizing your services. Small businesses can then invest more money in their companies and continue using you as a trusted advisor.
The difference between LLCs and S corps
Although gaining S corporation tax status can help small businesses save a great deal of money, many business owners have never heard of it. Will noted that a great majority of his past clients were unaware of S corporations:
“We had clients [in] over 35 states. I would say 99.9% of the people we spoke to that ran small businesses had no idea what the S corp status was, or they said, ‘Yes, my LLC is an S corp,’ as if they were the same thing.”– Will Lopez
When advising your clients, it’s important to inform them that LLCs are not synonymous with S corps.
“There’s obviously a difference between legal entities and tax classifications. … When you set up an LLC, … it’s an entirely different thing than the tax status.”– Will Lopez
Setting up an LLC or another entity does not mean that you receive an S corp tax classification. Your small business clients need to take additional steps to become S corporations.
Will further described the difference between LLCs and S corps by comparing them to cars and their interiors:
“If you want to drive a car, … it’ll get you from point A to point B, but the problem is that sometimes the interior of this car that you’re getting [into can be damaged]. … [It] puts you in bad spots and can cost you a lot more money in the long run. … We want you to go and opt-in and upgrade the interior … to the special [tax] election, which is called the S corp.”– Will Lopez
In Will’s analogy, a vehicle is an LLC, while the interior is the tax classification. When a client starts a business, they don’t start in the most optimal tax classification. They need to seek S corporation status from the IRS.
S corp status election
In order to gain an S corp tax status, your clients need to submit Form 2553 Election by a Small Business Corporation. You can advise your clients to take this critical step for their business by explaining their current tax position. Will noted that small businesses often begin in a disadvantageous tax position because it’s easier for the IRS to manage:
“Getting yourself into the optimal position is not by default. … The IRS is not in the business of making sure that people save money. … That’s not their game. Their game, in my interpretation of the code, is to default you into the worst tax position possible because it’s the easiest to manage.”– Will Lopez
You can potentially save your clients money by helping them become S corporations. While helping them through the process, you can also package your advisory services so that you have a substantial role in advising their companies:
“[You can tell your clients,] ‘By default, you’re in a bad spot. We have to elect a better spot for you, and I can assist you in that election. … So what I’m going to try to do is help you make that election and then bundle in with that election the things that I believe as a practitioner, as a business owner, as an entrepreneur—things you need to be successful in the S corporation status.”– Will Lopez
In addition to assisting your clients obtain S corp status, you can help them through future business processes so they can thrive as an S corporation.
“Education is really key here in trying to unlock this advisory opportunity, but … obviously LLC corps have to make this special election in order to get [S corp status]. … And so we … bundle this election along with our bundling of the advisory services. … It comes in conjunction with this package because we tell this greater story of business success.”– Will Lopez
When you help a business become an S corp, you can use it as a jumping-off point for helping your client in an advisory role. You can initially save them money by assisting them to become an S corporation, and you can continue advising them in the future:
“What they want to do is save more money so they can pour back into their team … or pour back into their advisors, like you, because they want to invest into the future of the business. And the only way you can do that is by upgrading [their business].”– Will Lopez
Helping your clients through the S corporation process lays the foundation for your advisory services. As your clients’ businesses grow, they’ll continue investing in your advisory services, which will generate new revenue streams and ultimately help you expand your accounting firm.
Learn more about S corporations
You can use your accounting expertise in an advisory capacity for your clients, and a great way to begin offering advisory services is by packaging it with S corp election. You help your clients through the process of becoming an S corporation and continue advising them as they become more profitable and expand.
If you want to learn more about S corporations and how you can shift into an advisory role for your clients, read Part Two and Part Three of this webinar article series. You can also watch the full webinar here!
Stepping into an advisory role for your clients can be challenging. Fortunately, Gusto offers an exceptional People Advisory Certification program. You’ll learn everything you need to know about advising your clients about payroll, benefits, and HR. Additionally, when you partner with Gusto, you’ll gain access to integrated softwares that can automate tasks and improve your workflow. If you want to learn more about how Gusto can help you advise your clients and improve your firm, visit our Gusto for accountants page.