The thrill of launching the business you’ve always dreamed of is incomparable. However, that high can quickly turn into a financial nightmare if you do not have a grasp on your tax planning. There are lots of ways to ethically and responsibly reduce your tax bill! Tencap’s position is that each of our clients should be paying no more taxes than is required by the 6.8k pages of tax code.
Inside of that many pages of tax complexity leaves a lot of opportunity to reduce your tax bill. However, our experience is most business owners are not clear on their tax plan. Many business owners are confused by the various ways a business can be structured and managed.
As a general rule, your business structure directly affects how much tax you pay, how you report income, what deductions you qualify for, and how exposed you are to audits or liabilities. If you manage significant wealth or multiple ventures, a single misstep can significantly impact your entire financial plan.
This guide outlines the most common types of business structures and their tax implications. Then, you can identify how each one affects legal risk, control, compliance load, and—most importantly—your bottom line.
Understanding the Major Types of Business Structures
Each business structure presents a unique combination of legal, administrative, and tax considerations. Some offer flexibility and minimal paperwork, while others demand more compliance in exchange for stronger liability protection or greater access to capital.
Sole proprietorship
The simplest way to start a business is through a sole proprietorship, but it is also the riskiest. You and your company are legally the same. As such, you report business income on your personal tax return, but you are also liable for all business debts and legal issues. It’s easy to set up and manage, but it offers zero protection for personal assets if things go wrong.
Partnership
Partnerships involve sharing a business with two or more people. Profits and losses pass directly through to each partner’s personal tax return, and you’ll file an informational return to report overall activity.
All partners share liability in a general partnership. By contrast, limited partnerships (LPs) and limited liability partnerships (LLPs) provide additional layers of protection.
LPs separate general partners (who manage and assume liability) from limited ones (who invest), while LLPs offer liability protection to each partner from the action of the others—which is especially helpful in professional practices like law or medicine.
Limited liability company (LLC)
An LLC blends the simplicity of pass-through taxation with the legal protection of a corporation. By default, single-member LLCs are taxed as sole proprietorships and multi-member LLCs as partnerships. LLCs can elect to be taxed as an S corporation or a C corporation.
LLCs are flexible, widely recognized, and shield personal assets from the same red tape that corporations often deal with. However, fees and compliance requirements can still be substantial in certain states.
C corp
Since it is a separate legal entity, a C corporation pays its own taxes and shields you from personal liability. It offers the most growth potential—think stock options, outside investors, and unlimited shareholders. On the downside, you’ll deal with double taxation: the first is at the corporate level, and the next is when dividends are paid to you.
It’s the most suitable setup if you plan to reinvest profits, raise external funding, or eventually go public.
However, running a C corp comes with more paperwork and formalities, such as board meetings, resolutions, and strict record-keeping. But if you’re building a company with big ambitions, this is the default for a reason.
S corp
An S corporation allows your business to pass income, losses, deductions, and credits directly to shareholders. Instead of paying corporate income tax, the company shifts the tax burden to its shareholders, who report the flow-through income on their personal tax returns.
This setup helps you avoid double taxation, which traditional C corporations can’t offer. But the IRS doesn’t hand out S corp status freely. To qualify, your corporation must meet strict requirements:
- Your company must be based and incorporated in the United States
- It can’t exceed 100 shareholders
- It can only have one class of stock
- Its shareholders must be individuals, certain trusts, estates, or qualified nonprofits
Even after approval, S corps may be subject to taxes on selected built-in gains and excessive passive income at the entity level, so you’re not entirely off the hook.
Benefit corporation (B corp)
A benefit corporation allows you to pursue both profit and a legally defined public benefit without compromising either. Unlike a nonprofit, you still have shareholders who expect returns, but your mission is legally built into your charter.
That means you can prioritize sustainability or social impact without risking lawsuits from investors who are focused solely on the bottom line.
As a benefit corporation, you can be taxed like a traditional C corp or elect S corp status, depending on IRS classification. However, it comes with added transparency requirements, such as biennial reports on your social or environmental goals.
It also offers more flexibility if you want to raise capital while staying mission-driven. This type of business structure is ideal if you don’t want to choose between purpose and profit.
Closed corporation
If you want more control over your business but prefer less formality than a regular corporation, consider this business structure. In many states, closed corporations are exempt from certain formalities, such as annual meetings; however, requirements vary depending on state law.
Ownership also stays among a few individuals—usually founders, managers, or even family members—which means less outside interference but also less access to outside capital. Shares aren’t publicly traded, and if an owner wants out, the business or remaining shareholders typically buy back their shares.
You still get limited liability, and if you elect S Corp status, you can benefit from pass-through taxation. Note that liquidity is limited, and you’ll trade growth potential for tighter control.
Nonprofit corporation
Do you strongly advocate for a cause but need to operate like a business to make an impact? A nonprofit corporation lets you do just that. Its goal is to serve a public or social mission rather than generating profit for owners or shareholders.
If you qualify under IRS rules, you gain federal income tax exemption and can accept tax-deductible donations, which helps build public trust and funding opportunities. You must then reinvest any surplus revenue in support of your mission rather than distributing it to founders, board members, or employees.
Most states require nonprofits to maintain a board of directors and follow transparent financial practices. The administrative burden can be heavy, but it safeguards your nonprofit’s legitimacy and eligibility for grants and donations.
Nonprofit corporations are ideal for educational, charitable, religious, advocacy, or environmental organizations focused on public benefit rather than financial gain. You accept a higher level of scrutiny and paperwork, but in return, you gain tax advantages and credibility that fuel your impact.
Cooperative
A cooperative is a business owned and controlled by its members, who work together to meet their everyday needs and share the benefits of their efforts. Each member—regardless of their investment amount—is entitled to one vote in a democratic governance structure. This equal control can slow down decision-making, but it ensures a fair and balanced distribution of power.
Cooperatives reinvest profits into the business or distribute them to members, keeping economic gains within the community. Tax treatment varies, but many qualify for pass-through taxation. They thrive in sectors like agriculture, retail, and housing, where shared ownership drives sustainable growth and mutual success.
How Business Structure Affects Taxes
Your business structure directly influences your tax treatment—from what returns you file to what deductions you’re eligible for. Here’s a breakdown of key tax concepts, their application, and how to utilize them strategically.
| Tax Consideration | What It Means | Who It Applies To | Strategic Takeaway |
| Pass-through taxation | Your business profits go straight to your personal taxes—no extra business tax. | Sole proprietorships, partnerships, LLCs, S corps | Utilize this strategy to avoid federal double taxation and simplify your reporting; however, be aware of state-level exceptions that may apply. |
| Corporate (entity-level) taxation | The business pays taxes, and owners pay taxes again on profits. | C corps | This is suitable for reinvesting profits and using corporate tax rates. |
| Self-employment tax | You pay 15.3% for Social Security and Medicare because you’re both the employer and the employee. | Sole proprietorships, partnerships, and LLCs taxed as sole proprietorships or partnerships | Consider an S corp election or limited partner structure to reduce the payroll tax burden. |
| S corp payroll tax strategy | You and other owners split income into salary and dividends to lower taxes. | LLCs and those electing S corp status | Pay a reasonable salary to avoid IRS scrutiny, and take the rest as distributions to minimize tax liability. |
| Qualified business income (QBI) deduction | You can deduct 20% of qualifying business income to reduce taxable income. | Sole proprietorships, partnerships, S corps, trusts and estates | Take advantage of this deduction to enjoy significant savings, especially if you’re under the income limits or outside a specified service business. |
| Capital gains on business equity | You pay tax on the profit when you sell your share of the business for more than what you paid for it. | Any entity with ownership shares or interest (C corps, S corps, LLCs (with membership interests), partnerships, and cooperatives | Plan sales to reduce taxes and explore exclusions like Section 1202 for qualified small business stock (QSBS). |
| Benefit and fringe deductions | You can deduct employee benefits, such as health insurance and retirement contributions. | C corps, S corps, LLCs with employees | C corps offer the most favorable tax treatment for owner-employee benefits, as the owner is considered a separate employee of the corporation. |
Choosing the Right Business Entity Structure for Tax Efficiency
The structure you choose for your business plays a major role in how you’re taxed, how much paperwork you’ll handle, and how easily you can grow. There’s no one-size-fits-all option—your ideal setup depends on your goals, income, and long-term plans. Consider these factors before deciding on a business structure.
Income expectations
If you anticipate high profits, you can benefit from a C corp’s flat 21% rate, especially if you plan to reinvest the earnings. For smaller ventures, pass-through entities such as LLCs or S corps offer simplicity and potential tax deductions.
Desire to reinvest profits vs. distribute
Do you plan to scale aggressively? A C corp allows you to retain profits within the business. But if you want to take out profits regularly, pass-throughs may be more tax-efficient, especially with the QBI deduction.
Type of business and level of risk
Some structures offer more protection or flexibility than others. If you face high liability or need flexible profit-sharing arrangements, structures like LLCs or LLPs can be effective. If your goal is rapid growth or attracting investors, a corporation might serve you better. Align your choice with how you operate and what risks you’re willing to take.
Administrative capacity
S corps and C corps require board meetings, formalities, and paperwork. If you’re not ready for those, an LLC or sole proprietorship may be a better starting point. Just be aware of the trade-offs in liability and tax treatment.
Ownership and expansion plans
Want to raise capital, issue shares, or go public? Start with a C corp. If it is family-owned and will remain that way, a closed corp or LLC may give you more control with fewer administrative burdens.
Common Mistakes to Avoid When Choosing a Business Entity Structure
While no business setup is perfect, some mistakes can lead to higher tax bills or missed opportunities. Steer clear of these mistakes:
Defaulting to a sole proprietorship without assessing risks
Yes, it’s the easiest to start—but also the riskiest. You assume full personal liability and miss out on valuable tax-saving strategies. Instead, compare structures based on your risk level, income potential, and long-term goals.
Missing the S-corp election deadline (Form 2553)
If you want S corp benefits, file Form 2553 within 75 days of forming or by March 15 of the tax year. Missing the window means defaulting to standard tax treatment, which may result in higher taxes.
Combining personal and business expenses
Using one account for both invites IRS scrutiny and can destroy your liability shield. Therefore, open dedicated bank accounts and credit cards while maintaining clean records from the outset.
Misclassifying workers (contractors vs. employees)
Labeling employees as “contractors” to avoid payroll taxes is a costly mistake. If audited, you’ll owe back taxes, penalties, and interest. This mistake is widespread among small businesses and startups trying to minimize overhead.
However, cutting corners here can undermine your entire business—especially if you’re trying to maintain limited liability or S-corp tax treatment. If you’re unsure, it’s best to consult with a CPA or tax advisor to classify workers correctly and stay compliant.
Overlooking state-specific rules and franchise taxes
Franchise taxes, publication rules, and LLC fees vary by state. Don’t just look at federal benefits—check your state’s regulations before you register.
Not consulting with a financial advisor
Just as you wouldn’t diagnose yourself in a medical emergency, you shouldn’t manage complex tax decisions alone. A qualified financial advisor, working together with a CPA, can identify issues before they become costly. Look for one with the proper credentials and experience to focus on growing your business rather than amending mistakes.
Wealth Starts with Structure
Your chosen business structure is a crucial tax decision that can significantly impact profitability, growth, and long-term success. Understanding the tax impact of each entity type provides clarity for developing smarter, more flexible strategies for your business in the long term.
Just remember, you don’t have to figure it all out alone. Tencap Wealth Coaching’s tax planning services and business entity planning services are available to each of our clients! Tencap is proud to cater to high-net-worth individuals like you who have complex needs and ambitious goals. Let’s make your business structure work for you. Contact our financial planning team to get started, today!
Contact us today to set your business and tax liability on the proper track.
Disclaimer: The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Utah or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Purchases are subject to suitability. This requires a review of an investor’s objective, risk tolerance, and time horizons. Investing always involves risk and possible loss of capital.
Greg Black is the owner and founder of Tencap Wealth Coaching, an independent investment advisory firm founded on academic investing principles. As a Certified Financial Planner, Greg takes an educational approach to helping his clients be settled and responsible with their financial circumstances. Greg specializes in helping his clients create a proactive plan to minimize the exposure of market conditions while still harnessing the incredible power of global financial markets.
Greg specializes in "complexity" and is skilled at turning a complicated situation into an organized strategy for the families he serves. Greg, and each advisor of Tencap, is a stated fiduciary. You never have to wonder if your best interest is being served. Greg has been transforming the investor experience since 2012.
