Is Your Business Structure Costing You Thousands in Taxes?

Choosing the right legal structure for your business isn’t just a legal formality — it’s a critical tax strategy that can affect how much you keep versus what you owe the IRS.

Whether you’re a sole proprietor, LLC, S Corporation, or C Corporation, your business entity impacts:

• How you’re taxed

• What deductions you qualify for

• Your exposure to audit and liability

• How easily you can grow and reinvest

Making the right choice — and updating it as you grow — can mean the difference between average and optimal tax efficiency.

Why Your Entity Type Matters

Each entity type has a unique tax profile. Here’s how they compare:

• Sole Proprietorship: Easiest to set up but subject to full self-employment tax. All income passes through to your personal return.

• LLC: Flexible and can be taxed as a sole prop, partnership, or S Corp. Many start here but never optimize the tax treatment.

• S Corporation: Allows owners to take part of the income as distributions, avoiding self-employment tax. Requires reasonable salary and proper filings.

• C Corporation: Flat 21% federal tax rate, but income can be taxed twice if not managed carefully. Best for reinvesting profits or specific fringe benefits.

Most business owners set up an LLC and stop there — unaware that how the LLC is taxed may be hurting them.

Practical Example

Samantha, a marketing consultant, formed an LLC in 2020 and earned $180,000 last year. She didn’t elect S Corp status, so she paid self-employment tax (15.3%) on the full amount — that’s nearly $27,500 in payroll taxes alone.

Had she elected S Corp status and paid herself a reasonable salary of $80,000, she could’ve taken the remaining $100,000 as distributions, avoiding over $15,000 in unnecessary taxes.

Key Factors to Consider

Choosing the right entity isn’t just about taxes — but taxes are a big part of the equation. Consider:

• Net income level: Higher profits favor S Corp or C Corp strategies.

• Fringe benefits: C Corps offer broader benefits like medical reimbursement and retirement plans.

• Long-term goals: Do you plan to reinvest, raise capital, or eventually sell?

• Number of owners: S Corps have restrictions on ownership and stock classes.

When to Reevaluate Your Structure

If any of these are true, it’s time to revisit your setup:

• You’re earning over $75,000 from your business

• Your CPA never discussed S Corp or tax elections

• You’re planning to hire or expand

• You want to reduce your audit risk and optimize your retirement strategy

Final Thoughts

Your business structure is one of the most powerful levers for reducing your tax burden and protecting your wealth. But most entrepreneurs never get strategic advice — and leave money on the table.

Choosing the right structure (and getting it filed correctly) is one of the first steps we take in our client onboarding.

Want to find out if your current setup is costing you?

Book a free strategy call and let’s run the numbers together.