When buying your first business, choosing the right entity structure—whether it’s an S Corporation, C Corporation, or LLC—can have a major impact on your tax savings and liability protection. Each structure offers unique benefits, and understanding how they work can help you make the best decision for tax efficiency, liability management, and future growth.
An S Corporation (S Corp), defined under IRC §1361, is a popular choice for small business owners due to its tax savings on self-employment tax. In an S Corp, owners can take part of their income as salary (subject to payroll taxes) and the rest as distributions, which are not subject to self-employment tax. However, the IRS requires that S Corp owners take a “reasonable salary,” so this strategy needs careful handling. Unlike a C Corp, profits from an S Corp aren’t taxed at the corporate level, providing a “pass-through” benefit that can simplify taxation.
A C Corporation (C Corp) is different in that it faces “double taxation.” Profits are taxed first at the corporate level and then again at the shareholder level if dividends are distributed. While this may seem like a drawback, C Corps can offer advantages for companies looking to raise capital or retain profits for growth without immediate distribution. C Corps also allow greater flexibility in structuring ownership and issuing shares, which can make them attractive for businesses seeking outside investors.
An LLC (Limited Liability Company), by default, is considered a “pass-through” entity. This means it does not pay taxes at the entity level, and instead, income “passes through” to owners who pay tax individually, either as a sole proprietor (if single-member) or as a partnership (if multi-member). LLCs offer flexibility in how they’re taxed, as they can choose to be taxed as an S Corp or C Corp if it aligns better with the business’s financial goals. This flexibility, combined with strong liability protection, makes LLCs a versatile option, especially for small businesses expecting fluctuating income or evolving ownership.
Choosing between an S Corp, C Corp, and LLC depends on your tax and growth strategy. S Corps can save on self-employment taxes, C Corps provide structure for larger capital growth, and LLCs offer flexible tax treatment with pass-through benefits. By evaluating each option’s impact on tax efficiency, liability protection, and scalability, you’ll set up your new business for the most beneficial structure from day one.
