Business Structure

Entity Structure Optimization: Choose the Right Business Structure

S-Corp, LLC, or C-Corp?

The right entity structure can save $50K+ annually in taxes while protecting your assets. Learn S-Corp, LLC, and C-Corp strategies for business owners.

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$15K-$50K+

Annual SE Tax Savings with S-Corp

21%

C-Corp Federal Tax Rate

$10M+

Potential QSBS Exclusion Per Shareholder

15.3%

Self-Employment Tax Rate Avoided on Distributions

Quick Answer

S-Corp election saves $15K-$50K+ annually in self-employment taxes for owners earning $100K+ net income
LLCs offer maximum flexibility - choose sole proprietor, partnership, S-Corp, or C-Corp tax treatment
C-Corps enable QSBS exclusion: potentially $10M+ in tax-free capital gains per shareholder on exit
Multi-entity structures isolate liability and optimize taxes - separate operating, holding, and real estate entities
Set S-Corp salary at defensible "reasonable compensation" level - too low invites IRS audit and penalties

The Opportunity

Why Entity Structure Matters

S-Corporation: The Tax Savings Workhorse

S-Corps allow business owners to split income between reasonable salary (subject to payroll taxes) and distributions (not subject to self-employment tax). For owners earning $200K+, this typically saves $15K-$50K annually in self-employment taxes while maintaining liability protection.

LLC Flexibility: Choose Your Tax Treatment

LLCs offer unmatched flexibility - default partnership taxation, or elect S-Corp or C-Corp treatment. Single-member LLCs can be disregarded entities for simplicity. Multi-member LLCs provide partnership taxation with liability protection. The LLC structure can evolve as your business grows.

C-Corporation: Strategic Benefits for Growth

C-Corps face double taxation but offer advantages: unlimited shareholders for raising capital, QSBS (Qualified Small Business Stock) exclusion potentially eliminating $10M+ in capital gains, and retained earnings taxed at flat 21% corporate rate rather than individual rates up to 37%.

Multi-Entity Strategies: Asset Protection + Tax Optimization

Sophisticated business owners often use multiple entities: operating company (S-Corp for tax savings), holding company (LLC for asset protection), real estate company (separate LLC for liability isolation). This structure maximizes both tax efficiency and creditor protection.

Implementation

Proven Strategies

S-Corp Election for Self-Employment Tax Savings

If you operate as a sole proprietor or single-member LLC and earn over $80K net, S-Corp election typically makes sense. Pay yourself a reasonable salary (subject to 15.3% payroll tax), take remaining profits as distributions (no self-employment tax). The sweet spot is usually 40-60% salary, 40-60% distributions.

Best for: Business owners with $80K+ net income who can justify a reasonable salary and handle S-Corp administrative requirements.

Example:

$300K business income. Sole proprietor: $300K x 15.3% = $45.9K SE tax. S-Corp with $150K salary: $150K x 15.3% = $22.95K payroll tax. Annual savings: $22.95K. Over 10 years: $230K+ saved.

QSBS Planning for C-Corporation Exit

Qualified Small Business Stock (Section 1202) allows exclusion of up to $10M or 10x your basis in capital gains when selling C-Corp stock held over 5 years. Stack multiple shareholders (each spouse, trusts, family members) to multiply the exclusion. Requires original issuance of stock in a qualified C-Corp.

Best for: High-growth businesses with potential $10M+ exit value who can plan 5+ years ahead and tolerate C-Corp structure.

Example:

Founders with $500K basis each ($1M total). Sell company for $25M. Each founder excludes $10M (10x basis limit). Total exclusion: $20M. At 23.8% capital gains rate: $4.76M in federal tax savings.

Multi-Entity Structure for Asset Protection

Create separate legal entities for different business functions and risks. Operating company (active business, highest liability), holding company (owns IP, equipment, real estate), management company (employs staff, provides services). Liabilities in one entity cannot reach assets in others.

Best for: Business owners with significant assets to protect, multiple business lines, or high-liability operations.

Example:

Restaurant group: Each location is separate LLC (liability isolation). One LLC owns all real estate (protected from restaurant liability). Management company employs all staff and provides services. Lawsuit at Location A cannot reach Location B assets or real estate.

Avoid These Pitfalls

Common Mistakes

Remaining as Sole Proprietor Too Long

Every dollar earned as a sole proprietor is subject to 15.3% self-employment tax. Above $80K-$100K net income, S-Corp election typically saves thousands annually. Waiting costs you money every year you delay. The administrative burden is minimal compared to tax savings.

Setting S-Corp Salary Too Low

The IRS requires reasonable compensation for S-Corp owner-employees. Setting salary at $30K when comparable employees earn $150K invites audits and penalties. Research comparable salaries in your industry and document your rationale. Too aggressive = audit risk and back taxes.

Ignoring State Tax Implications

Entity choice affects state taxes significantly. Some states have franchise taxes on LLCs, others have minimum corporate taxes. California charges $800+ annually for every LLC. New York has additional S-Corp taxes. Model your TOTAL tax burden including state before choosing entity type.

Questions

Common Questions

Here are the most common questions we receive about this topic.

Ask Your Question

Generally when net self-employment income exceeds $80K-$100K annually. At this point, SE tax savings typically exceed S-Corp administrative costs (payroll processing, tax filings, state fees). Factor in your state's specific rules - some states have additional S-Corp taxes or LLC fees that affect the break-even point.

Yes - you don't need to form a new entity. Simply file Form 2553 to elect S-Corp tax treatment while keeping your LLC legal structure. This gives you LLC liability protection with S-Corp tax treatment. File by March 15 to be effective for the current tax year, or within 75 days of formation for new businesses.

LLC is a legal entity type providing liability protection. S-Corp is a tax election that can apply to LLCs or corporations. An LLC can be taxed as a sole proprietorship, partnership, S-Corp, or C-Corp. The S-Corp election provides self-employment tax savings but requires reasonable salary to owner-employees.

C-Corp makes sense if: (1) you are raising venture capital (VCs require it), (2) you anticipate $10M+ exit within 5+ years (QSBS benefits), (3) you want to retain earnings at 21% corporate rate, or (4) you need multiple classes of stock. Otherwise, S-Corp or LLC is usually more tax-efficient for most businesses.

Research comparable salaries for similar positions in your industry and geography using salary surveys, job postings, and BLS data. Consider your hours, responsibilities, and company size. Document your methodology. A common approach: what would you pay someone else to do your job? Most accountants suggest 40-60% of net profits as a starting point.

Ready to Optimize Your Business Structure?

The right entity structure depends on your specific situation. Let us help you analyze your options and implement the most tax-efficient structure.

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