What Is Your Current Business Structure and How Does It Impact Your Tax Obligations?

Financial Horizons: Insights for Building Wealth and Securing Your Legacy 

By Dr. Jose G. Cardenas, Chief Tax Strategist at The C & R Group, LLC

When it comes to running a business, your structure isn’t just a legal formality—it directly influences how much you pay in taxes, your personal liability, and even how you grow in the future. Many business owners don’t realize how important their choice of entity is until tax season comes around. Let’s break it down:

Sole Proprietorship

A sole proprietorship is the simplest and most common business structure. It’s easy to set up, and you report income and expenses on your personal tax return (Schedule C).

✅ Pros: Easy to start, minimal paperwork
⚠️ Cons: No separation between personal and business liability, self-employment taxes can be high

Partnership

A partnership is owned by two or more people, with income and expenses passing through to each partner’s personal return.

✅ Pros: Shared responsibility, pass-through taxation
⚠️ Cons: Each partner is personally liable for debts, and disputes can complicate operations

Limited Liability Company (LLC)

An LLC blends the simplicity of a sole proprietorship or partnership with the legal protection of a corporation. Income can be taxed as a sole proprietorship, partnership, or even an S-Corp if elected.

✅ Pros: Liability protection, flexible taxation options
⚠️ Cons: More administrative requirements, may face self-employment taxes unless taxed as an S-Corp

S Corporation

An S-Corp allows profits (and some losses) to pass directly to owners’ personal returns, avoiding double taxation. Owners may also save on self-employment taxes by paying themselves a “reasonable salary” and taking the rest as distributions.

✅ Pros: Tax savings on self-employment tax, limited liability
⚠️ Cons: Stricter IRS rules, additional paperwork, must pay reasonable salaries

C Corporation

A C-Corp is a separate tax-paying entity. Unlike pass-through entities, C-Corps face double taxation: once on corporate profits and again on dividends paid to shareholders. However, they offer significant benefits for larger businesses and those seeking investment.

✅ Pros: Strong liability protection, potential for growth and outside investment
⚠️ Cons: Double taxation, complex compliance requirements

Choosing the Right Structure

The right business structure depends on your goals, size, and financial situation. For example:

• A freelancer may stick with a sole proprietorship or single-member LLC.
• A growing business may benefit from electing S-Corp status for tax savings.
• A company seeking investors may need a C-Corp for flexibility.

Final Thoughts

Your business structure is more than paperwork—it’s a tax strategy. The good news is that business structures can often be changed as your company grows. A tax professional can help you evaluate whether your current setup is helping—or hurting—your bottom line.

💡 Tax Pro Tips (Always at the End)

• Consider an LLC with S-Corp election if you’re paying too much in self-employment taxes.
• Keep business and personal expenses separate to protect your liability status.
• Revisit your business structure every few years or when your income grows significantly.

👉 Want to ensure your business structure is working in your favor?
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