Hi,
If you run a small business or are about to start one, the structure you pick decides if you lose tens of thousands of dollars or stay optimized with the best option from the start. Here’s how five common structures compare, and where the money leaks.
Here are the five structures and what each one actually costs you.
- Sole Proprietorship. The default when you start earning without setting anything up. Simple to run, but every dollar of profit gets hit with 15.3% self-employment tax on top of income tax. No liability protection and way higher audit risk. Fine for negligible side income, expensive once revenue climbs.
- Single-Member LLC. For tax purposes, this is a sole proprietorship. Same Schedule C, same 15.3% SE tax on all profit. What it adds is a legal wall between your business and your personal assets. It changes your legal liability, not your tax. The real value shows up when you elect to be taxed as an S-corp, which the LLC lets you do.
- Partnership. The default when two or more people own the business. Income passes through to the partners, who each pay tax on their share, and active partners pay the same 15.3% SE tax on it. Special allocations and deductions give you flexibility, but there’s no way to shield income from SE tax the way an S-corp can.
- S-Corporation. The workhorse for profitable owner-operators. You split income into a reasonable salary and distributions. The salary carries payroll tax, the distributions do not. That’s how you legally avoid the 15.3% SE tax base. The catch: you must run payroll and pay yourself a defensible salary. Below a certain profit level the payroll cost outweighs the savings, so this is a numbers decision, not a default.
- C-Corporation. A separate taxpayer, flat 21% federal rate. The downside is double taxation: the company pays tax, then you pay again on dividends. No QBI deduction. But for founders reinvesting profit, planning a sale under QSBS, or building serious fringe benefit and retirement structures, the C-corp does things no pass-through can. Right for a specific plan, wrong as a default.
Timing is everything here. The S-corp election runs on a clock (Form 2553, generally within the first 2.5 months of the year). Salary has to be documented, and books have to be clean before the return, not after. Miss the window and the right entity saves you nothing.
How We Handle It: We don’t just tell you which box to check. We build and run the structure end to end under one roof:
- Entity Formation and Election. We form the entity, file the S-corp or C-corp election on time, and set the reasonable-salary framework so it holds up.
- Monthly bookkeeping (dedicated bookkeeper, full financial discussion each month)
- Sales Tax. Registration, nexus review, and filings handled, so multi-state exposure doesn’t turn into a back-tax problem.
- Payroll (full-service, multi-state, contractor 1099s)
- CFO-Level Advisory. Cash flow, owner compensation, distributions, and tax projections reviewed with you throughout the year, so the structure keeps paying off as the business changes.
- Personal and business income tax return preparation completed by the same team
If you’re not sure your current structure is the right one, reply to this email by Monday next week. We’ll schedule a free 15-minute diagnostic call with our COO and Tax Strategist, Liliya Maksimov, to run the numbers on your structure and show you what the right one is worth this year.
Sincerely,
—
George Dimov, CPA
Licensed and Insured
(833) 829-1120 toll free
(212) 994-8081 Fax
www.dimovtax.com