Choosing the Right Business Structure: How Your Entity Impacts Your Taxes

As a business owner, one of the most important decisions you'll make is choosing the right business structure. Whether you're forming an LLC, electing S Corporation status, or opting for a C Corporation, the decision can have a significant impact on your tax obligations. But is there a straightforward answer? Not exactly.

LLC: Will It Increase Your Taxes?

If you’re wondering whether forming an LLC will increase your taxes, the answer is: it depends. The tax implications vary based on how your LLC is classified for tax purposes. Here’s a look at some common business structures and how they affect your tax situation:

S Corporations: A Solid Tax Strategy

S Corporations (S Corps) are a popular option because they can help save on taxes. With an S Corp, you avoid double taxation (where income is taxed at both the corporate and individual level), and you may also be able to take advantage of lower self-employment taxes. Many business owners find this structure to be a good fit for their tax strategy.

For real estate investors, it’s essential to be cautious when it comes to S Corps. While they offer tax savings for certain types of businesses, owning appreciating assets like real estate inside an S Corp might not be the best move. It can create complexities and limitations that may hurt your long-term investment strategy.

C Corporations: A 21% Tax Rate with Double Taxation

C Corporations (C Corps) are taxed at a flat rate of 21%. While this sounds appealing, there’s a catch—double taxation. When you pay yourself through dividends, those payments are taxed again at the individual level, which can push your total tax rate up to 30% or more. This structure might make sense for some businesses but could result in higher overall tax liability for others.

Disregarded Entities: Don’t Expect Major Tax Savings

If you operate as a single-member LLC, the IRS classifies you as a disregarded entity. This means your business income is reported on your personal tax return. While it simplifies filing, don’t expect significant tax savings here. You’ll still be subject to self-employment taxes on your earnings.

Your choice of business structure plays a crucial role in your tax situation. Whether you opt for an LLC, S Corp, or C Corp, the decision can either save you money or lead to higher taxes. There’s no one-size-fits-all answer, so it’s important to evaluate your specific situation and consult with a tax professional.

At TrueBooks, we specialize in helping business owners and real estate investors navigate complex tax issues and make informed decisions about their entity structure. Have questions about your business structure or tax strategy? Let’s talk!