Choosing the right business structure is one of the most impactful decisions a business owner can make. Your entity determines how you pay taxes, how profits are distributed, your level of personal liability, and even how appealing your business looks to lenders and investors. While many owners start as an LLC because of its simplicity, your structure should evolve as your business grows. Below is a clear breakdown of the main entity types and the signs it may be time for a change.
LLC (Limited Liability Company)
An LLC is often the starting point for business owners because of its flexibility and liability protection. By default, single-member LLCs are taxed like sole proprietors and multi-member LLCs are taxed like partnerships. Income passes through to the owners and is taxed on their personal returns. While this is simple and beneficial during early stages, LLC owners pay self-employment tax on their full profit—which becomes expensive as earnings increase.
Key points:
- Pass-through taxation keeps filing simple and avoids corporate-level tax
- Owners pay self-employment tax on all profits
- Offers liability protection without heavy compliance requirements
- Works well for smaller or newer businesses with fluctuating profits
S-Corporation (S-Corp)
An S-Corp is not a separate entity, but a tax election available to LLCs and corporations. This structure is popular for profitable businesses because it allows owners to classify income as both salary and distributions. Only the salary portion is subject to payroll taxes, creating significant tax savings. However, S-Corps have stricter rules, including required payroll, reasonable compensation, and shareholder limitations.
Key points:
- Saves money by avoiding payroll taxes on distributions
- Owners must take a reasonable salary to remain compliant
- Requires additional payroll filings and bookkeeping accuracy
- Limited to 100 shareholders who must be U.S. citizens or residents
C-Corporation (C-Corp)
A C-Corp is often chosen by companies planning to reinvest profits or eventually seek investors. C-Corps pay a corporate tax on their profits, and shareholders pay tax again on dividends—known as double taxation. Despite this, they offer the most flexibility for ownership structures and high-value employee benefits, making them useful for businesses with growth ambitions or those needing formal investment channels.
Key points:
- Flat corporate tax rate may benefit companies reinvesting profits
- Allows broader ownership structures and attracts investors
- Ideal for offering robust fringe benefits and retirement plans
- Subject to double taxation when dividends are distributed
When You Should Reevaluate Your Structure
Many business owners set up their entity once and never revisit it, even as revenue, goals, and risk exposure change. Reviewing your structure every one to two years ensures you are not overpaying taxes or limiting your growth potential. Shifting from an LLC to an S-Corp or from an S-Corp to a C-Corp can often create meaningful financial advantages when timed correctly.
Key signs it’s time to reconsider:
- Profits have increased and self-employment taxes are rising
- You plan to bring on new partners or investors
- You want stronger liability protection as operations expand
- Your business has outgrown the simplicity of its original structure
Final Thoughts
Your business structure should support—not restrict—your long-term goals. The right entity can reduce taxes, minimize risk, and provide a strong foundation for growth. If you’re unsure whether your current structure is still the best fit, a yearly review with your accountant can help ensure your business is positioned for success.
Need help choosing the right business struture? Reach out—we’re just a call or email away.
