Business Structure Analyzer

Choose the right legal structure for your business and understand the tax implications of each option.

Interactive Calculator

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Understanding Business Structures

Your business structure affects:

• Taxes: How much you pay and when
• Liability: Personal asset protection
• Fundraising: Investor preferences
• Complexity: Setup and ongoing compliance
• Costs: Formation and annual fees

The Four Main Structures

1. Sole Proprietorship

What it is: You and your business are the same legal entity.

Pros:

• Easiest and cheapest to set up (no filing needed)
• Complete control over all decisions
• Simple tax filing (Schedule C on personal return)
• No separate business tax return

Cons:

• Unlimited personal liability (biggest risk)
• Hard to raise capital from investors
• Business ends if you die or become incapacitated
• All profits taxed at personal rate + 15.3% self-employment tax

Best for:

• Solo freelancers and consultants
• Side hustles and testing business ideas
• Very low-risk businesses
• Annual profit under $20,000

Real example: A freelance graphic designer earning $35,000/year. They pay$5,355 in self-employment tax plus income tax. No filing fees, but personal assets (home, car, savings) are at risk if sued.

2. Limited Liability Company (LLC)

What it is: A legal entity separate from you, protecting personal assets.

Pros:

• Personal liability protection (your assets are safe)
• Flexible tax treatment (default pass-through, or elect S-Corp/C-Corp)
• Simpler than corporations (no board meetings, stock requirements)
• Can have multiple members with flexible profit sharing
• Credibility with clients and partners

Cons:

• Setup costs ($50-$500 depending on state)
• Annual fees and filing requirements
• Still pay 15.3% self-employment tax on all profits
• Some states have additional taxes (CA: $800/year minimum)

Best for:

• Small businesses with moderate income ($20k-$60k)
• Businesses with potential liability (rental properties, food service)
• Partnerships wanting flexibility
• Businesses not planning to raise VC funding

Tax treatment: By default, taxed like sole proprietorship (pass-through + SE tax). But can elect S-Corp or C-Corp taxation.

Real example: A web development agency with 2 partners earning $80,000 profit. They pay$12,240 in self-employment tax plus income tax. But their personal homes and savings are protected from business lawsuits. Setup cost: $300 in NY.

3. S Corporation

What it is: A corporation with special tax election allowing pass-through taxation.

Pros:

• Save on self-employment tax (only pay on salary portion)
• Pass-through taxation (no double tax like C-Corps)
• Personal liability protection
• Can deduct health insurance premiums
• More credible than LLC for some industries

Cons:

• Must pay yourself “reasonable salary” (IRS requirement)
• Payroll complexity and costs ($500-$2,000/year)
• More compliance (annual meetings, minutes, resolutions)
• Limited to 100 shareholders, all must be US citizens/residents
• One class of stock only
• Not ideal for raising venture capital

Tax advantage explained:

• LLC: Pay 15.3% SE tax on $100,000 profit =$15,300
• S-Corp: Pay yourself $60,000 salary (payroll tax$4,590) + $40,000 distribution (no SE tax) =$4,590 saved

Best for:

• Profitable businesses earning $60,000-$200,000
• Service businesses (consulting, agencies, practices)
• Businesses with 1-5 owners who are active in operations
• When you want tax savings without double taxation

When to convert from LLC: General rule is when profit exceeds $60,000-$80,000. Below that, payroll costs outweigh tax savings.

Real example: A marketing consultant earning $120,000 profit. As LLC, they'd pay$18,360 in SE tax. As S-Corp with $70,000 salary and$50,000 distribution, they pay $10,710 in payroll taxes. **Savings:$7,650/year.** Even after $1,500 in extra accounting costs, they net$6,150.

4. C Corporation

What it is: A completely separate legal entity that pays its own taxes.

Pros:

• Preferred by venture capitalists (required for most VC deals)
• Unlimited shareholders and share classes
• Easiest to sell or go public
• Can deduct employee benefits (including owner benefits)
• Lower corporate tax rate (21% federal)
• Can retain earnings for growth

Cons:

• Double taxation: Corporate profits taxed at 21%, then dividends taxed at 15%
• Most complex structure (board, bylaws, meetings, minutes)
• Highest compliance costs ($2,000-$5,000+/year)
• Cannot deduct losses on personal return
• Complex accounting requirements

Tax burden: Effective rate is 32.85% on distributed profits (21% + 15% of remaining 79%).

Best for:

• High-growth startups planning to raise venture capital
• Businesses planning to IPO eventually
• Companies retaining significant earnings (not distributing)
• Businesses with multiple investors

The VC requirement: Most VCs require C-Corps because:

• Institutional investors (pension funds, endowments) can’t invest in pass-through entities
• Preferred stock structure for investor protections
• Stock option pools for employee compensation
• Easier exit strategies (acquisition, IPO)

Real example: A SaaS startup raising $2M Series A. VCs require C-Corp structure. Company keeps$500,000 profit to reinvest (pays $105,000 corporate tax). Founders don’t take dividends yet, so no second tax until exit. At exit, 15% long-term capital gains rate on sale.

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Decision Framework

The Progression Path

Most businesses follow this evolution:

Phase 1: Sole Proprietorship

• Just starting out
• Testing the market
• Under $20k revenue
• Low liability risk

Phase 2: LLC

• Business is real and growing
• $20k-$60k profit
• Need liability protection
• Multiple partners or higher-risk business

Phase 3: S-Corporation

• Profit exceeds $60k-$80k
• Active owner-operator
• Want tax savings
• Domestic focus, no VC plans

Phase 4: C-Corporation

• Raising venture capital
• Planning for IPO
• International expansion
• Retaining significant earnings

Quick Decision Tree

Are you planning to raise venture capital or go public?

• Yes → C-Corporation (required by most VCs)
• No → Continue…

Is your annual profit over $60,000?

• Yes → Continue…
• No → LLC or Sole Prop

Are you an active owner (working in the business daily)?

• Yes → S-Corporation (tax savings make sense)
• No → C-Corporation or LLC (S-Corp requires active participation)

Do you have foreign investors or want foreign investors?

• Yes → C-Corporation (S-Corps limited to US citizens/residents)
• No → S-Corporation

By Business Type

Freelancers & Consultants

• Under $40k: Sole Proprietorship
• $40k-$80k: LLC
• Over $80k: S-Corporation

E-Commerce & Retail

• Starting out: LLC (liability protection for products)
• Profitable: S-Corporation
• Raising capital: C-Corporation

SaaS & Tech Startups

• Pre-revenue: LLC (simpler initially)
• Raising seed round: Convert to C-Corporation
• Series A and beyond: C-Corporation (always)

Real Estate Investors

• Each property: Separate LLC (liability isolation)
• Holding company: LLC or S-Corporation
• REIT structure: C-Corporation

Restaurants & Food Service

• Always start with LLC minimum (liability protection critical)
• Profitable single location: S-Corporation
• Multiple locations/franchising: C-Corporation

Professional Services (doctors, lawyers, architects)

• Most states require PLLC or Professional Corporation
• Profitable practices: Elect S-Corp taxation
• Large multi-partner firms: May need C-Corp

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Tax Deep Dive

Self-Employment Tax Explained

What it is: Social Security (12.4%) + Medicare (2.9%) = 15.3%

Who pays it:

• Sole proprietors: On all profit
• LLC members: On all profit (by default)
• S-Corp owners: Only on salary portion
• C-Corp owners: None (it’s payroll tax instead)

Why it matters: On $100k profit, SE tax alone is$15,300 (before income tax).

The S-Corp advantage:

• LLC pays SE tax on $100k =$15,300
• S-Corp pays payroll tax on $60k salary =$9,180
• Savings: $6,120/year

Federal Income Tax Brackets (2024)

Personal income (sole prop, LLC, S-Corp pass-through):

• 10% up to $11,600
• 12% up to $47,150
• 22% up to $100,525
• 24% up to $191,950
• 32% up to $243,725
• 35% up to $609,350
• 37% above $609,350

Corporate income (C-Corp):

• Flat 21% on all profits

The “Reasonable Salary” Rule

IRS requirement for S-Corps: You must pay yourself a reasonable salary for the work you do.

What’s reasonable?

• General guideline: 50-70% of profit
• Industry standards: Look at what similar employees earn
• Hours worked: Part-time vs. full-time affects reasonableness

Common approaches:

• 60/40 rule: 60% salary, 40% distributions (conservative)
• Industry match: Pay yourself what similar roles earn
• 50% rule: Split profit evenly (minimum safe approach)

IRS audit risk: Paying yourself $20k salary with$200k distributions will trigger audit. They’ll reclassify distributions as salary and assess penalties plus back taxes.

Real case: A dentist with $300k profit paid herself$50k salary. IRS reclassified $100k in distributions as salary, costing$15,300 in additional SE tax plus penalties.

Safe harbor: Pay yourself at or above industry average for your role and hours.

State Taxes Matter

Some states have additional considerations:

High-tax states (CA, NY, NJ):

• State income tax: 5-13%
• S-Corp may have entity-level tax
• Consider in total tax calculation

No income tax states (TX, FL, WA, NV, TN):

• No state income tax benefit from any structure
• May have franchise tax or gross receipts tax
• LLC often sufficient

Franchise tax states:

• Delaware: $300/year for C-Corps (popular for incorporation)
• California: $800/year minimum for LLCs (plus gross receipts tax over$250k)
• Texas: 0.375% on revenue over $2.47M

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Making the Transition

From Sole Prop to LLC

When: Revenue consistent, some liability risk, making $20k+/year

Process:

1. File Articles of Organization with your state ($50-$500)
2. Get EIN from IRS (free, online)
3. Create Operating Agreement
4. Update business licenses and permits
5. Open business bank account
6. Update contracts and agreements

Cost: $300-$800 depending on state (DIY) or $500-$1,500 with lawyer

Timeline: 1-4 weeks

Tax change: None by default (still Schedule C, still SE tax)

From LLC to S-Corporation

When: Profit consistently exceeds $60k-$80k, you’re actively working in the business

Process:

1. File Form 2553 with IRS (S-Corp election)
2. Set up payroll system
3. Determine reasonable salary
4. File payroll taxes quarterly
5. Annual W-2 and corporate return (Form 1120S)

Cost:

• Payroll service: $50-$150/month ($600-$1,800/year)
• Accountant: $1,000-$2,500/year
• Total ongoing: $1,600-$4,300/year

Timeline: Election must be filed by March 15 for current year, or within 2.5 months of forming LLC

**Tax savings at $100k profit**: ~$6,000-$8,000/year

Break-even: Need ~$60k-$80k profit for savings to exceed costs

From LLC/S-Corp to C-Corporation

When: Raising venture capital, planning IPO, or significant international operations

Process:

1. File Articles of Incorporation (or convert existing LLC)
2. Create bylaws and appoint board of directors
3. Issue stock certificates
4. Hold organizational meeting
5. File Form 8832 to revoke S-election (if applicable)
6. Set up corporate governance (meetings, minutes, resolutions)

Cost:

• Formation: $500-$2,000
• Legal fees: $2,000-$10,000+ (especially for VC-ready structure)
• Ongoing compliance: $2,000-$5,000+/year

Timeline: 2-8 weeks for formation, ongoing governance requirements

Point of no return: Once you have outside investors expecting C-Corp, very hard to switch back

Common in fundraising: Most startups incorporate in Delaware as C-Corp before raising institutional money

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Common Scenarios & Examples

Scenario 1: The Freelance Developer

Situation: Sarah is a freelance web developer. She made $45,000 in Year 1,$75,000 in Year 2, and expects $95,000 in Year 3.

Year 1 ($45,000):

• Structure: Sole Proprietorship
• Self-employment tax: $6,885
• Income tax: ~$5,400 (12% bracket)
• Total tax: ~$12,285
• Reasoning: Just starting, not worth LLC costs yet

Year 2 ($75,000):

• Structure: Form an LLC
• Self-employment tax: $11,475
• Income tax: ~$10,200
• Total tax: ~$21,675
• Reasoning: Consistent income, want liability protection

Year 3 ($95,000):

• Structure: Elect S-Corporation
• Salary: $57,000 (60% of profit)
• Distributions: $38,000
• Payroll tax: $8,721 (on salary only)
• Income tax: ~$13,500
• Total tax: ~$22,221
• LLC tax would have been: $27,750
• Savings: $5,529/year
• After payroll costs ($1,500): **Net savings$4,029**

Scenario 2: The E-Commerce Business

Situation: Mike and Jenny start a Shopify store selling outdoor gear. Year 1: $120k revenue,$30k profit. Year 2: $400k revenue,$100k profit.

Year 1:

• Structure: LLC with 2 members
• Profit: $30,000 ($15k each)
• Each pays SE tax: $2,295
• Reasoning: Need liability protection (products), not profitable enough for S-Corp

Year 2:

• Structure: Elect S-Corporation
• Profit: $100,000 ($50k each)
• Each takes salary: $30,000
• Each takes distribution: $20,000
• Tax savings per person: ~$2,000
• Combined savings: $4,000/year
• Reasoning: Profit high enough to justify complexity

Year 3 (planning):

• Revenue: $1.5M, profit$300k
• Considering: C-Corporation to raise growth capital
• Seeking: $500k Series A from investors
• Will convert before fundraising (VC requirement)

Scenario 3: The SaaS Startup

Situation: Alex and Jordan build a B2B SaaS product. Pre-revenue, planning to raise $1-2M seed round.

Launch (Pre-revenue):

• Structure: LLC (both members)
• Reasoning: Simple, flexible, no tax burden yet

6 months later (Meeting with VCs):

• Structure: Convert to Delaware C-Corporation
• Reasoning:
  • VCs require C-Corp (can’t invest in pass-through)
  • Need preferred stock for investor protections
  • Need option pool for employees (10-20%)
  • Planning for Series A, B, eventual exit
• Cost: $5,000 in legal fees (includes stock structure, bylaws, subscription agreements)

Post-funding:

• $1.5M in bank, burning$100k/month
• Paying founders modest salaries ($80k each)
• Not profitable yet (no tax burden)
• Corporate tax won’t matter until profitable

Exit scenario (5 years later):

• Acquired for $50M
• Each founder owns 30% (diluted from 50% due to fundraising)
• Sale proceeds: $15M each
• Tax: 15% long-term capital gains = $2.25M
• Net: $12.75M each

Scenario 4: The Real Estate Investor

Situation: Maria buys rental properties. Currently has 3 properties generating $45,000/year cash flow.

Structure:

• Property 1: Single-member LLC (liability isolation)
• Property 2: Single-member LLC
• Property 3: Single-member LLC
• Holding company: S-Corporation (owns all 3 LLCs)

Why this structure?:

• Each property in separate LLC: If one property has lawsuit, others protected
• S-Corp at top: Tax savings on $45k profit (~$3,500/year)
• Could use Series LLC in some states (one entity, separate series per property)

Tax treatment:

• Each property LLC: Disregarded entity (pass-through to S-Corp)
• S-Corp: Pays reasonable salary ($25k), takes$20k distribution
• Saves on SE tax compared to regular LLC structure

Scenario 5: The Restaurant Owner

Situation: Carlos opens a restaurant. High liability risk, moderate profit potential.

Day 1:

• Structure: LLC (liability protection is CRITICAL)
• Reasoning: Food service has significant liability risk (food poisoning, accidents, alcohol service)
• Cost: $500 to form +$2M liability insurance

Year 1:

• Revenue: $600k
• Profit: $40k (8% margin is typical)
• Structure: Keep LLC
• Reasoning: Not profitable enough for S-Corp yet

Year 3 (Successful):

• Revenue: $1.2M
• Profit: $120k
• Structure: Elect S-Corporation
• Salary: $70k
• Distribution: $50k
• Tax savings: ~$7,000/year

Year 5 (Expansion):

• Opening 2nd location
• Need $300k funding
• Structure: May need C-Corp if seeking institutional investors
• Alternative: Keep S-Corp, use SBA loan instead of equity

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State-Specific Considerations

Delaware

Why it’s popular:

• Business-friendly Court of Chancery (specialized business courts)
• Well-established corporate law
• No state income tax for out-of-state businesses
• Privacy (owners not in public record)

Who should incorporate there:

• Startups raising VC funding (VC firms prefer Delaware)
• Businesses planning to go public
• Companies with complex stock structures

Who shouldn’t:

• Small businesses operating in one state (register in home state)
• Sole proprietors and simple LLCs
• Anyone wanting to save costs (still pay home state taxes + Delaware franchise tax)

Costs: $300/year franchise tax minimum + registered agent fee

California

Notable rules:

• $800/year minimum franchise tax for LLCs and corporations
• Additional gross receipts tax on LLCs over $250k revenue
• Must register foreign entities if doing business in CA
• Community property state (affects ownership)

LLC gross receipts tax:

• $250k-$500k: +$900
• $500k-$1M: +$2,500
• $1M-$5M: +$6,000
• Over $5M: +$11,790

Strategy: Some choose S-Corp over LLC to avoid gross receipts tax

Wyoming & Nevada

Benefits:

• No state income tax
• Strong privacy protections
• Low annual fees

Myths:

• Won’t save you taxes if you live elsewhere (you still pay home state taxes)
• Privacy protection limited (IRS still knows, and you’re public in home state)

Good for:

• Residents of those states
• Holding companies not operating in other states
• Asset protection trusts

Texas

Notable rules:

• No personal income tax (big benefit)
• Franchise tax: 0.375% on revenue over $2.47M (most small businesses exempt)
• Simple LLC formation

Best structure: LLC or S-Corp (both avoid franchise tax under $2.47M revenue)

New York

Notable rules:

• LLC publication requirement (costly in NYC: $1,500-$2,000)
• Progressive state income tax (4%-10.9%)
• Higher formation costs

Consideration: S-Corp doesn’t have publication requirement, may be cheaper than LLC

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Red Flags & Common Mistakes

❌ Mistake 1: Waiting too long to form an LLC

Problem: Operating as sole prop with significant revenue/assets at risk

Case: A contractor did $200k in business as sole proprietor. Client sued over defect, won$150k judgment. Contractor lost his house because personal assets weren’t protected.

Solution: Form LLC once business is real (consistently making money, has clients, has assets/equipment)

❌ Mistake 2: Electing S-Corp too early

Problem: Payroll costs exceed tax savings at low profit levels

Case: A designer earning $35k formed S-Corp immediately. Payroll service cost$1,200/year. Tax savings were only $800. Net loss:$400/year plus complexity.

Solution: Wait until profit exceeds $60k-$80k before S-Corp election

❌ Mistake 3: Paying yourself $0 salary in S-Corp

Problem: IRS will reclassify distributions as salary with penalties

Case: Business owner took $150k in distributions,$0 salary. IRS audit reclassified $100k as salary, assessed$15,300 in back SE taxes plus penalties and interest. Total cost: $22,000+.

Solution: Always pay reasonable salary (50-70% of profit minimum)

❌ Mistake 4: Starting VC-backed startup as LLC

Problem: Conversion to C-Corp creates tax complications

Case: Startup raised angel round as LLC. When converting to C-Corp for Series A, had to deal with:

• Recalculating basis for early investors
• Potential tax event for founders
• Legal fees: $15,000 to clean up
• 2-month delay in funding

Solution: If you’re raising institutional money, start as C-Corp from day 1

❌ Mistake 5: Mixing personal and business finances

Problem: “Piercing the corporate veil” - losing liability protection

Case: LLC owner paid personal expenses from business account. In lawsuit, court ruled LLC was owner’s “alter ego” and allowed personal assets to be seized.

Solution:

• Separate bank accounts
• Proper bookkeeping
• Don’t pay personal expenses from business account
• Follow corporate formalities (meetings, minutes, resolutions)

❌ Mistake 6: Ignoring state taxes

Problem: Focusing only on federal taxes, missing state-level costs

Case: California LLC earning $300k paid$800 minimum + $2,500 gross receipts tax =$3,300/year. Could have saved by using S-Corp structure instead.

Solution: Research your specific state’s rules before choosing structure

❌ Mistake 7: DIY incorporation for complex situations

Problem: Missing critical provisions for fundraising or partner situations

Case: Two partners formed LLC with online service, didn’t address:

• What happens if one partner leaves
• How profits are split (50/50 but one works full-time, other part-time)
• How to handle new partners Ended in dispute, cost $30,000 in legal fees to unwind

Solution:

• Simple solo LLC: DIY is fine
• Partners or planning to raise money: Use lawyer ($1,500-$5,000 well spent)

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Action Steps

If you’re just starting:

1. Under $20k expected: Start as sole proprietor, focus on revenue
2. **Over $20k or liability risk**: Form LLC ($300-$800)
3. Get proper insurance: $1M general liability minimum
4. Open business bank account: Keep finances separate
5. Track everything: Use accounting software (QuickBooks, Xero, Wave)

If you’re currently a sole proprietor making money:

1. Over $20k/year: Form LLC this quarter
2. Set up bookkeeping: Separate personal and business
3. Get insurance: General liability + professional liability if applicable
4. Plan for taxes: Set aside 30-40% of profit for taxes

If you’re an LLC and profitable:

1. Calculate profit: If consistently over $60k, consider S-Corp
2. Math check: Will tax savings ($6k-$10k) exceed costs ($1,500-$3,000)?
3. Elect S-Corp: File Form 2553 before March 15 or within 2.5 months of forming
4. Set up payroll: Use Gusto, ADP, or similar ($50-$150/month)
5. Get accountant: Worth it for S-Corp compliance ($1,000-$2,000/year)

If you’re planning to raise VC funding:

1. Form C-Corp now: Delaware C-Corp is standard
2. Hire startup lawyer: $5k-$15k for proper stock structure
3. Set up option pool: 10-20% for future employees
4. Create board: Start with founders, add investors later
5. Plan for dilution: Each round dilutes ownership 15-30%

If you’re evaluating a change:

1. Use the calculator above: Input your real numbers
2. Consider total cost: Formation + ongoing + complexity
3. Talk to accountant: Get professional advice for your situation
4. Plan timing: S-Corp elections have deadlines, C-Corp conversions take time
5. Don’t overthink it: You can always change later as business evolves

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Resources

Government Resources

• IRS S-Corporation information: IRS.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporations
• IRS C-Corporation information: IRS.gov/Corporations
• State business formation: Search “[Your State] Secretary of State business filing”
• Form 2553 (S-Corp election): Download from IRS.gov

Online Formation Services

• LegalZoom: Full-service, more expensive ($500-$1,500)
• Incfile: Mid-range pricing ($0-$300 + state fees)
• Northwest Registered Agent: Good privacy protection
• Stripe Atlas: Great for tech startups ($500, includes bank account)

Tools & Services

• Payroll: Gusto, ADP, Paychex
• Accounting: QuickBooks Online, Xero, FreshBooks
• Tax preparation: TurboTax Business, H&R Block, or CPA
• Legal docs: Rocket Lawyer, LegalZoom, Nolo

Finding Professional Help

• Accountant/CPA: Essential for S-Corp and C-Corp

  • Cost: $1,000-$5,000/year depending on complexity
  • Ask about: Experience with your structure, proactive tax planning

• Business Lawyer: Critical for partnerships, fundraising, complex situations

  • Cost: $2,000-$15,000 depending on scope
  • Ask about: Startup vs. small business experience, what’s included

• Business Coach/Consultant: For strategic decisions

  • Cost: $100-$500/hour or monthly retainer
  • Value: Helps you see the big picture, avoid costly mistakes

Benchmarks by Industry

Consulting/Professional Services:

• Typical structure: LLC → S-Corp at $60k+ profit
• S-Corp conversion point: $60,000 profit
• Reasonable salary: 50-60% of profit

E-Commerce:

• Typical structure: LLC → S-Corp at $100k+ profit → C-Corp if raising capital
• S-Corp conversion point: $80,000 profit
• Reasonable salary: 40-50% of profit (lower due to inventory/overhead)

SaaS/Tech:

• Typical structure: C-Corp from start (if VC-backed) or LLC → C-Corp
• C-Corp timing: Before first institutional funding round
• Focus: Stock structure, option pool, 409A valuations

Real Estate:

• Typical structure: LLC per property, S-Corp holding company
• S-Corp conversion: When total cash flow exceeds $50k
• Special: Series LLC in some states (WY, NV, UT, DE, IL)

Retail/Restaurants:

• Typical structure: LLC minimum (high liability), S-Corp when profitable
• S-Corp conversion point: $70,000 profit
• Critical: Liability insurance + umbrella policy

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Frequently Asked Questions

Q: Can I change my business structure later?
A: Yes! Most changes are possible:

• Sole prop → LLC: Easy, just form LLC
• LLC → S-Corp: Easy, file Form 2553
• S-Corp → C-Corp: Moderate complexity
• C-Corp → S-Corp: Possible but complex, must meet requirements
• C-Corp → LLC: Very difficult, usually not worth it

Q: Do I need a lawyer to form an LLC?
A: Not always. Simple single-member LLCs can be DIY with online services ($300-$500 total). Use a lawyer ($1,500-$5,000) if:

• Multiple partners (need solid operating agreement)
• Complex ownership structure
• Planning to raise money soon
• High-value assets or high liability risk

Q: What’s the minimum profit for S-Corp to make sense?
A: Generally $60,000-$80,000 in profit. Below that, the payroll costs and complexity exceed the tax savings.

Q: Can I have an LLC taxed as an S-Corp?
A: Yes! You can have:

• LLC taxed as sole prop (default for single-member)
• LLC taxed as partnership (default for multi-member)
• LLC taxed as S-Corp (file Form 2553)
• LLC taxed as C-Corp (file Form 8832)

You get LLC liability protection with your choice of tax treatment.

Q: Do I need a C-Corp to raise money?
A: Depends on the investor:

• Angel investors: Can invest in anything (LLC, S-Corp, C-Corp)
• Venture capital funds: Almost always require C-Corp
• Crowdfunding: Usually okay with LLC or C-Corp
• SBA loans: Any structure works

Q: What’s a “reasonable salary” for S-Corp owners?
A: IRS doesn’t give exact numbers, but guidelines:

• 50-70% of total profit (common starting point)
• Match industry standards for your role
• Consider hours worked (part-time vs. full-time)
• Document your reasoning

Audits usually happen when salary is under 40% of profit.

Q: Can I be an S-Corp if I’m not a US citizen?
A: No. S-Corp shareholders must be:

• US citizens or residents
• Individuals (not other corporations)
• Under 100 shareholders
• One class of stock only

Foreign nationals should use LLC or C-Corp.

Q: Should I incorporate in Delaware if I live elsewhere?
A: Only if:

• Raising venture capital (VCs prefer Delaware)
• Planning to go public eventually
• Complex stock structure

Don’t incorporate in Delaware if you’re a small business operating in one state. You’ll pay taxes in your home state anyway, plus Delaware fees, plus registered agent fees. Just incorporate in your home state.

Q: How much does it cost to maintain an S-Corp?
A: Annual costs:

• Payroll service: $600-$1,800/year
• Accountant/bookkeeper: $1,000-$3,000/year
• State fees: $0-$800/year (varies by state)
• Total: $1,600-$5,600/year

Needs to save at least this much in taxes to be worthwhile.

Q: What happens if I don’t follow corporate formalities?
A: Risk “piercing the corporate veil”:

• Liability protection goes away
• Personal assets can be seized
• Court treats business as your “alter ego”

Maintain protection by:

• Separate bank accounts
• Proper bookkeeping
• Annual meetings (even if solo)
• Meeting minutes
• Don’t pay personal expenses from business account

Q: Can I deduct my home office?
A: Yes, in all structures:

• Sole prop/LLC: Schedule C deduction
• S-Corp: Accountable plan or rent to yourself
• C-Corp: Accountable plan reimbursement

Requirements:

• Exclusive business use (dedicated space)
• Regular basis (not occasional)
• Principal place of business or client meeting space

Q: Should I get a business credit card?
A: Yes, absolutely:

• Builds business credit
• Keeps expenses separate (critical for LLC protection)
• Simplifies bookkeeping
• May offer better rewards/benefits

Get one even as sole proprietor to start building business credit history.

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Summary

Choosing your business structure is one of the most important decisions you’ll make. Here’s the short version:

Start simple: Most businesses should start as sole proprietor or LLC.

Protect yourself: Form an LLC once you’re making real money or have liability risk.

Optimize taxes: Convert to S-Corp when profit exceeds $60k-$80k and you’re an active owner.

Think ahead: If raising VC money, start as C-Corp from day 1.

Don’t overthink it: You can always change structures as your business grows and evolves.

Get help: Use the calculator above, but talk to a CPA for your specific situation. The $200-$500 consultation is worth it to avoid $10,000+ mistakes.

The best structure is the one that:

1. Protects your personal assets
2. Minimizes taxes (without IRS risk)
3. Matches your growth plans
4. Doesn’t cost more in complexity than it saves in taxes

Use the calculator above to run your numbers and see which structure makes sense for your situation!