Choosing a business structure—sole proprietor, partnership, LLC, S‑corp, or C‑corp—does more than decide how you sign paperwork. It shapes your annual tax bill, personal liability and growth options. Here’s how each structure affects taxes and tips for picking the best fit.
1. Sole Proprietorship
- Tax View: Profits flow straight to your personal return (Schedule C).
- Pros: Simple setup, single layer of tax.
- Cons: Self‑employment tax on full profit and no liability shield.
2. Partnership
- Tax View: Pass‑through; each partner reports their share on a K‑1.
- Pros: Flexible profit splits, one level of tax.
- Cons: Partners pay self‑employment tax; joint liability risk unless structured as an LLP.
3. Limited Liability Company (LLC)
- Tax View: Default pass‑through, but can elect S‑corp or C‑corp status.
- Pros: Liability protection, admin flexibility.
- Cons: State fees vary; default self‑employment tax may be higher until profits grow.
4. S‑Corporation
- Tax View: Pass‑through; owners draw “reasonable salary” subject to payroll tax, with remaining profit as distributions exempt from self‑employment tax.
- Pros: Potential payroll‑tax savings, liability shield.
- Cons: Payroll setup needed; stricter ownership rules (U.S. individuals only, one class of stock).
5. C‑Corporation
- Tax View: Pays corporate tax on profits; dividends are taxed again on personal returns.
- Pros: Unlimited investors, multiple stock classes and easier venture funding.
- Cons: Double taxation unless earnings are reinvested; more reporting.
6. Matching Structure to Strategy
- Early‑Stage Freelancers: Sole prop keeps costs low—revisit as income grows.
- Side‑by‑Side Co‑Founders: Partnership or multi‑member LLC offers shared control.
- Growing Small Business: LLC electing S‑corp status can trim taxes once profits exceed a fair salary.
- Seeking Investors: C‑corp often required by venture funds for stock flexibility.
7. Don’t Forget State Taxes
Some states levy franchise or margin taxes on top of federal rules. Our team reviews local laws to prevent surprises.
The right structure balances tax savings, liability protection and growth plans. Before filing forms, talk with our tax advisors. We’ll run side‑by‑side projections so you can pick the setup that keeps more earnings in your pocket and your business poised for success.
