Business Tax Strategy
Tax · Entity Selection
Choosing the Right Entity —
Sole Prop, LLC, S-Corp, C-Corp
Your entity is the foundation of every tax strategy. Get it wrong and you bleed money to self-employment taxes, miss deductions, or expose personal assets. Get it right and you unlock retirement plans, family employment, and significant tax savings.
The four common entities
Sole Proprietorship
Best for: Side hustles, businesses earning under $40K/year
Pros: Simplest. No paperwork. All income flows through to your personal return.
Cons: Pays full 15.3% self-employment tax on ALL profit. No asset protection. Hard to scale.
LLC (Single or Multi-Member)
Best for: Most small businesses earning $30K-$80K profit
Pros: Asset protection. Flexible taxation. Can be taxed as sole prop, partnership, S-Corp, or C-Corp.
Cons: By default still pays full self-employment tax. Election needed to change tax treatment.
S-Corporation (or LLC taxed as S-Corp)
Best for: Businesses earning $80K+ in profit
Pros: Pay yourself a reasonable salary (subject to SE tax). Take rest as distributions (NOT subject to SE tax). Massive savings.
Cons: More compliance — payroll, reasonable salary documentation, separate return. Owner must be paid a W-2 salary.
C-Corporation
Best for: Businesses planning major reinvestment or seeking outside investors
Pros: Flat 21% federal rate. Best for retained earnings. Can offer Qualified Small Business Stock (QSBS) — potentially tax-free exit on first $10M.
Cons: Double taxation on dividends. Less flexibility for owner draws. Rarely best for small/mid-sized businesses.
The decision rule of thumb
Under $40K profit — sole prop is fine. $40K-$80K — LLC for asset protection. $80K+ — strongly consider S-Corp election. $500K+ retained earnings or seeking investors — discuss C-Corp with your team. These are starting points; the right answer depends on industry, state, retirement goals, and exit plans.
Model the entity switch
We'll model your current entity vs. the alternative — show the tax savings, compliance cost, and break-even.
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Sources
Educational content only. Always consult a licensed CPA or tax attorney for entity decisions.