Why Business Structure Matters
Your business entity affects:
- Personal liability protection
- Tax treatment and rates
- Administrative requirements
- Growth and investment potential
Sole Proprietorship
The simplest business structure. You and your business are one.
Pros:
- Easiest to set up and maintain
- No separate tax return (Schedule C)
- Full control over decisions
Cons:
- Unlimited personal liability
- Self-employment tax on all profits
- Limited fundraising options
Best For:
- Side hustles and small freelance operations
- Testing a business idea
- Very low-risk businesses
Limited Liability Company (LLC)
Combines liability protection with tax flexibility.
Tax Options:
Disregarded Entity (default for single-member)
- Taxed as sole proprietorship
- Schedule C on personal return
Partnership (default for multi-member)
- Form 1065 partnership return
- K-1s to members
S-Corporation Election
- Potential SE tax savings
- Salary + distribution structure
C-Corporation Election
- Corporate tax rates
- Rarely beneficial for small LLCs
Pros:
- Limited liability protection
- Tax flexibility
- Relatively simple to maintain
Cons:
- Self-employment tax (unless S-Corp)
- State-specific rules vary
- Less attractive to investors
S-Corporation
Pass-through taxation with employment tax benefits.
How It Works:
- Corporation does not pay income tax
- Profits pass through to shareholders
- Shareholders report on personal returns
Tax Advantages:
- Only reasonable salary subject to payroll tax
- Distributions not subject to SE tax
- Can provide significant savings
Example Savings:
| Item | LLC | S-Corp |
|---|---|---|
| Net Profit | $150,000 | $150,000 |
| Reasonable Salary | - | $75,000 |
| SE Tax | $21,195 | - |
| Payroll Tax (7.65%) | - | $5,738 |
| Tax Savings | - | $15,457 |
Requirements:
- U.S. citizens or resident shareholders only
- Maximum 100 shareholders
- One class of stock
- Reasonable salary requirement
Best For:
- Profitable businesses ($60K+ net income)
- Single-owner operations
- Businesses not seeking venture capital
C-Corporation
Separate legal entity with corporate taxation.
How It Works:
- Corporation pays tax on profits (21% flat rate)
- Dividends taxed again to shareholders
- Known as double taxation
When C-Corp Makes Sense:
- Seeking venture capital investment
- Planning to go public
- Retaining significant profits in business
- Taking advantage of corporate benefits
Tax Planning Opportunities:
- Qualified Small Business Stock (QSBS) exclusion
- Retention of earnings at 21% rate
- Corporate fringe benefits
Decision Framework
Consider S-Corp if:
- Net profits exceed $60,000-$80,000
- You are the primary worker in the business
- You do not need outside investors
- You can handle additional payroll requirements
Consider C-Corp if:
- Seeking venture capital
- Planning significant retained earnings
- Want corporate fringe benefits
- Business will have many shareholders
Stay as LLC if:
- Business is just starting out
- Profits are modest
- You value simplicity
- Tax savings do not justify complexity
Making the Change
LLC to S-Corp Election:
- File Form 2553 with IRS
- Must elect by March 15 (or within 75 days of formation)
- Late election relief available
Entity Change Considerations:
- State filing requirements
- EIN changes (sometimes required)
- Account and contract updates
- Professional guidance recommended
Need Help Deciding?
The right entity choice depends on your specific situation. Tax Genius LLC can help you analyze your options and make the best decision for your business.