Choosing the Right Tax Structure for Your Business

Before you earn a single dollar as a business the IRS already has a plan for how to tax you. It's based on one thing. Your business structure. And that choice can save or cost tens of thousands. 4 main business structures in 2026: Sole Proprietorship: → default if you work for yourself → no separate business tax return → profits go straight on your personal return (Schedule C) → you pay income tax + full 15.3% self-employment tax → simple to set up, least protection, most exposure. Partnership / Multi-Member LLC: → two or more people running a business together → business files Form 1065, but pays no tax itself → each partner gets a K-1 and pays tax on their share personally → same SE tax exposure as a sole proprietor S-Corporation: → the structure many small business owners switch to — specifically to cut taxes → still a pass-through (no double tax) → you pay yourself a reasonable salary — that salary gets hit with payroll tax → remaining profit comes out as a distribution — no SE tax on that portion $150K net profit as a sole proprietor → $22,950 in SE tax $150K as S-Corp: $80K salary + $70K distribution → ~$12,240 in SE tax. Savings: over $10,000. Same income. Different structure. C-Corporation: → flat 21% federal corporate tax rate → popular with startups raising investment or planning to reinvest profits → downside: dividends paid to shareholders are taxed again (double taxation) → right structure for some — wrong for most small businesses 2026 bonus that applies to ALL pass-through structures. The 20% QBI deduction (Section 199A) is now permanent. What this means: → sole p, pships, s-corps: deduct 20% of nbi → full dedn available: ~$203,000 (single) / ~$406,000 (married) → minimum $400 deduction if your QBI >= $1,000 → wider phase-out range: more higher-income owners now qualify → c-corps do NOT get this deduction That 20% can be worth more than the SE tax savings from an S-Corp election alone. Run the numbers before assuming one structure wins. The most common mistake? Staying a sole p long after your income outgrows it. Once your net profit consistently hits $50,000–$80,000+, the S-Corp conversation is worth having with a CPA. The structure you start with doesn't have to be the one you keep. The IRS even lets you elect S-Corp status via Form 2553 mid-way — just file by March 15. Share this with someone who might be thinking of starting a new business. Follow me on Instagram @thetaxsaaab for more such posts.

Running a business can be one of the most powerful wealth building and tax planning tools available But only if you do it right I see the same early mistakes over and over, even from very successful business owners If you want to set yourself up correctly from Day 1 (or fix it before it gets expensive), here’s what matters most 👇 1. Get your entity election right This is foundational. The right structure can dramatically reduce taxes and expand planning opportunities The wrong one can mean: - Unnecessary self-employment taxes - No access to PTET - Reduced or eliminated QBID - Limited retirement contribution options - No QSBS - Less tax efficient for reinvesting and growing the business This decision should be proactive and can change as your business evolves 2. Keep business and personal finances completely separate Commingling accounts is one of the most common and costly mistakes It can: - Create audit risk - Destroy LLC liability protection - Turn tax prep into a nightmare - Cost you far more in professional fees and your time Clean separation from Day 1 saves money, time, and stress. 3. Track all your expenses Most business owners leave money on the table simply because they don’t track well Good tracking: - Maximizes legitimate deductions - Makes tax planning actually work - Gives you clarity on real cash flow The easiest time to do this is before the business gets “busy.” 4. Save for taxes monthly This is non-negotiable I see too many high-income business owners fall behind, then have to scramble to make things work Treat taxes like a fixed expense, not a surprise This is a huge reason we give clients new tax updates at every call 5. Understand safe harbor taxes and pay your estimates Underpayment penalties are completely avoidable. You need to Know: - Your safe harbor number - Your quarterly payment schedule - What you will get in from withholding - How income volatility affects estimates If you don’t know these numbers, you’re guessing And guessing is expensive 6. Do real tax planning 2–3x per year (not just in April) One of the biggest advantages of business ownership is tax flexibility But it only works if you plan: - Mid-year - Again in Q3 - Then finalize in December Tax planning is proactive. Tax prep is reactive 7. Setup the right retirement accounts Set up the right retirement accounts Not all retirement plans are created equal. In most cases: - Solo 401(k) > SEP IRA - 401(k) > SEP IRA and Simple's The wrong setup can cost you tens of thousands per year in missed contributions And limit Roth strategies Owning a business gives you incredible leverage... if it’s structured correctly But I see so many overpaying in taxes because they do not invest in tax planning

These co-owners just saved $20,000 using a tax structure most CPAs have never heard of. One partner lives in California, the other in New York. The California-based owner wanted S-Corp tax treatment for payroll tax savings. But the New York owner wanted to stay as an LLC to avoid NYC's additional S-Corp taxes. Most advisors would force them into the same structure. And someone loses. So here's what we did instead: Set up the operating company as a partnership. Each owner holds their interest through their own LLC. California LLC elects S-Corp status. New York LLC doesn't. The result: • California gets payroll tax savings • New York avoids extra city taxes • Both set up solo 401(k)s • Both optimize for their specific situation The partnership distributes profits normally. Each owner's LLC handles their preferred tax treatment. Most CPAs know about S-Corps. They know about partnerships. But they don't know you can stack them this way. If you’re in a tricky situation like this one, let’s chat!

The fastest way most business owners overpay in taxes is staying in the wrong entity for too long. “S Corp is only for big businesses” is one of the most expensive myths still circulating. Income level is not the question. Structure is. An S Corp is not a badge of success. It’s a tool. Used correctly, it changes how income is classified. Not how hard it’s earned. Instead of all profits being hit with self-employment tax, compensation is split. Salary on one side. Distributions on the other. ➞ Same revenue. ➞ Same business. ➞ Different tax outcome. This is why owners making far less often keep more than owners making far more. And no, waiting until “someday” is not conservative. It’s costly. The right time to think about structure is when income becomes consistent. Not when taxes already hurt. Entity strategy is not about loopholes. It’s about alignment. When the business grows, the structure must evolve with it. Otherwise the IRS becomes the silent partner taking the largest cut every year. Smart owners do not chase write-offs first. They fix the foundation. Structure first. Income second. Taxes last. That order changes everything.

At 32, earning $650,000 annually from small bay industrial sales, one Oregon-based broker had done just about everything right—except for choosing the right business structure. Despite his income level, he was stuck with a CPA who only filed tax forms, offering zero proactive guidance.   This is a common—and costly—mistake. Sole proprietors often pay more than they should in federal, state, and self-employment taxes, simply because no one ever showed them how an S Corporation can shift the strategy and unlock significant savings. Here's what the difference looks like:   Sole Proprietor (Before S Corp)   Federal Income Tax: $188,532   Self-Employment Tax: $39,244   Oregon State Tax: $60,357   Total Tax Burden: $288,133   QBI Deduction: None (income too high)   Salary: None – 100% subject to SE tax   After S Corp Setup   Federal Income Tax: $150,120   Payroll (and related) Taxes: $31,325   Oregon State Tax: $60,860   Total Tax Burden: $242,305   QBI Deduction: $69,909 (newly available)   Salary: $250,000 (reasonable comp, balance is distribution)   Strategic Add-ons:   Solo 401(k) Contributions: $70,000 (employee + employer)   Additional Tax Savings from 401(k): $28,175   By converting to an S Corporation and layering in retirement contributions, the broker reduced total taxes by $74,003. That’s enough to max out a Solo 401(k) and accelerate retirement goals.   The right structure doesn’t just save money—it creates strategy.

"I'm scaling to $2M in revenue. Should I stay an LLC or convert to an S-Corp?" If you're asking this question, you're probably leaving money on the table every year. Here's the issue most entrepreneurs miss: LLCs are simple, but every dollar of profit gets hit with self-employment tax... That's 15.3% up to the Social Security wage base ($184,500 in 2026), then 2.9% Medicare tax after that. So if your LLC nets $400K and you're taking it all as distributions, you're paying roughly $33K in self-employment tax alone. An S-Corp lets you split income into salary and distributions. You only pay self-employment tax on the salary portion. The distributions? Just income tax. Run the same $400K through an S-Corp with a reasonable $150K salary, and you're paying self-employment tax on $150K instead of $400K. That's roughly $10K in payroll tax savings. But here's where people mess it up: They either pay themselves too little salary (IRS red flag) or they don't account for the added complexity. S-Corps require payroll, quarterly filings, stricter bookkeeping, and additional compliance costs that can run $4K-$8K+ annually. If your business isn't consistently netting $100K+, the savings don't justify the operational lift. The structure isn't the strategy. Knowing when to switch and how to optimize inside that structure is. Most business owners wait too long to make the switch because they think "I'll do it when I'm bigger." Meanwhile, they're leaving real savings on the table. If you're netting six figures and still running as a single-member LLC, we should talk. #TaxStrategy #SCorpVsLLC #BusinessStructure #EntrepreneurTax #SmartScaling

Figuring out the right legal structure for a new business is one of the most important early decisions, with big implications for taxes, payroll, and long‑term exit planning. 𝐂 𝐜𝐨𝐫𝐩𝐨𝐫𝐚𝐭𝐢𝐨𝐧 (𝐂‑𝐂𝐨𝐫𝐩) ● Subject to a flat 21% federal corporate tax, with a second layer of tax when profits are distributed as dividends or wages to owners. ● Often best when founders plan to reinvest most profits back into growth and take relatively low personal cash out. ● Very attractive for companies planning an eventual sale, because Qualified Small Business Stock (QSBS) can potentially exclude up to 100% of federal gain under Section 1202 if requirements are met. 𝐒 𝐜𝐨𝐫𝐩𝐨𝐫𝐚𝐭𝐢𝐨𝐧 (𝐒‑𝐂𝐨𝐫𝐩) ● Pass‑through taxation with potential to reduce employment taxes for active owners in higher‑income, steady‑profit businesses. ● Limited to one class of stock and generally requires pro‑rata distributions, which can constrain complex cap tables and waterfall structures. ● Does not allow debt basis to take losses (unless shareholder loan), cannot create depreciable/amortizable assets when one shareholder buys from another ● Appreciated assets distributed out can trigger taxable gain without corresponding cash, and there is no “inside” debt basis for shareholders, which can limit loss utilization in leveraged, asset‑heavy structures. 𝐏𝐚𝐫𝐭𝐧𝐞𝐫𝐬𝐡𝐢𝐩𝐬 (𝐢𝐧𝐜𝐥𝐮𝐝𝐢𝐧𝐠 𝐦𝐮𝐥𝐭𝐢‑𝐦𝐞𝐦𝐛𝐞𝐫 𝐋𝐋𝐂𝐬) ● Default tax classification for multi‑member LLCs, with highly flexible allocation and distribution rules compared to S‑Corps. ● Pass‑through taxation with the ability to use both “inside” and “outside” basis, which can make partnerships powerful for real estate, leveraged deals, and businesses with appreciating assets. ● 754 elections and related 743b/734b adjustments are a big plus ● Attractive if one or multiple partner(s) plans on buying out the other(s) in the future ● Often better suited for deals with multiple partners, preferred returns, special allocations, and complex waterfall/promote structures. 𝐒𝐢𝐧𝐠𝐥𝐞‑𝐦𝐞𝐦𝐛𝐞𝐫 𝐋𝐋𝐂𝐬 (𝐝𝐢𝐬𝐫𝐞𝐠𝐚𝐫𝐝𝐞𝐝 𝐞𝐧𝐭𝐢𝐭𝐢𝐞𝐬) ● Default treatment is a disregarded entity: income and losses are reported directly on the owner’s individual return (or the parent entity’s return) with no separate federal income tax filing. Reported on Schedule C or Schedule E, page 1 ● Simple to administer and very flexible, often ideal for side businesses, single‑asset real estate entities, and holding companies. ● Liability protection is provided under state law, but for tax purposes the entity is ignored unless an election is made to be taxed as a corporation (and potentially as an S‑Corp). Keep in mind - that depending on the state you live in and future goals, you can hit every check mark under one of these and it STILL not be a good fit. Consult your tax advisor or - if you are the tax advisor - make sure you understand your clients future goals for the business.

One of the most consequential decisions a founder makes  has nothing to do with product, hiring, or marketing. It is choosing the right business structure. And most founders make that decision once early without fully understanding the long-term tax, ownership, and strategic implications. Here is what the decision actually looks like from a CFO's perspective: C-Corporation → Built for venture capital and public markets → Maximum flexibility for multiple stock classes and investors → Faces double taxation but that is often the price of access to institutional capital S-Corporation → Avoids double taxation and can reduce FICA taxes → Better fit for small, profitable businesses → Comes with strict ownership restrictions maximum 100 US shareholders LLC / Partnership → Unmatched flexibility for partners → Allows special profit allocations → Active partners pay self-employment tax on earnings The LLC as a "Chameleon" → The most versatile structure available → Can elect to be taxed like a C-Corp, S-Corp, or partnership → Useful when the business needs flexibility to evolve The right structure is not the same for every business. It depends on where you are, where you  are going, and how you plan to get there. Choosing the wrong one early can cost significantly more  to fix later than it would have cost to get right from the start. #FractionalCFO #BusinessStructure #FinancialLeadership #FounderFinance #MidMarket