A worked example
The structure the business is taxed under
Dani, 42, married, runs a profitable LLC throwing off $400k a year. Nobody ever elected anything else, so it is taxed as a sole proprietorship and self-employment tax applies to all of it.
“What would electing S-corp change, and if I incorporate to a C-corp before an exit, does it matter whether I do it now or in three years?”
What the projection shows
The same $400k under three structures: self-employment tax on all of it as a sole proprietor, payroll tax only on a stated salary as an S-corp, or 21% at the company level plus a second tax on whatever it pays out as a C-corp. Then the conversion timing question. Converting later means a shorter §1202 holding clock and appreciation that happened before the conversion falls permanently outside the exclusion.
What the projection also found
Nothing was missing from the inputs. These follow directly from the numbers above, under the assumptions this example uses.
- The sale makes $19,990,000 of gain and §1202 excludes $7,000,000 of it, leaving $12,990,000 taxable and $3,661,794 of tax.
The planner opens with this household already filled in. Change the balances, the ages or the assumptions to match your own situation, then run it.
A projection based on stated assumptions. Not financial or tax advice.