How to Slash Your Tax Bill by Changing Your Business Structure

Opinions expressed by Entrepreneur contributors are their own.

Key Takeaways

- Tax season provides entrepreneurs the opportunity to reassess their business structure to ensure alignment with current goals and future growth.

- Flexibility and adaptability in business entities can make a significant difference, enabling quick decisions amid rapid change.

- Understanding the distinctions between sole proprietorships, LLCs, C-Corporations and S-Corporations is crucial for strategic planning and tax efficiency.

It’s that time of year when news articles start to pop up on your news feed about taxes. While I’m sure you’ve seen your share of advice about how to file your taxes, I think about things a little differently.

Since 1997, my husband and I have helped over 1 million entrepreneurs set up and operate their businesses, and there is one common issue that I regularly see among entrepreneurs. Once a business entity is created, it’s often left untouched. Not that I blame them — an entrepreneur’s plate is always full with sales, training and finances. There are a million decisions to make, fires to put out and customers to satisfy. Why change something unless you absolutely have to?

But tax season, I find, is a good time to look at whether your business structure is still serving you. After all, if you’ve been running your business for a year or two or several, then both you and your business have changed and evolved.

Here are some things to consider when reviewing your business entity.

- Do your business goals still align with your entity?

- Is your company still growing in a way that makes sense for your business entity?

- What do you foresee the next 3-5 years looking like?

Answering these three simple questions will help you decide whether your business structure should stay the same or change.

Flexibility is the key to success

Most entrepreneurs recognize that change is happening at an unprecedented rate. The uncomfortable truth is that stability is no longer a guarantee of success, even for companies that appear established and resilient. I’ve seen seemingly unshakeable companies fall into a slump while others seized opportunities that didn’t exist just a few years earlier.

You need a business entity that allows you to accelerate or put the brakes on before it’s too late. You may need to hire quickly, change direction, launch new offers, restructure entire divisions or enter into new markets just to stay competitive. The right business entity gives you structure and flexibility so you can make quick decisions while still providing you and your stakeholders with the confidence, clarity and protection you need. So what is the right business entity for your company?

The most common structures

I’ll start with a sole proprietorship, which, in some ways, offers the most flexibility. You aren’t beholden to shareholders, employees or anybody else. The downside is, of course, that you cannot grow in a tax-efficient way. At a minimum, the tax rate of a sole proprietor is 15.3%, which includes a 12.4% Social Security tax and a 2.9% Medicare tax. However, as your earnings go up, so do your taxes, which means it’s not necessarily the best structure for high-growth companies.

Next, we have the Limited Liability Company (LLC), which is one of the most popular structures for many small business owners because it offers protection, simplicity and is still flexible enough for growth. Your business entity can have a single owner or multiple so you can easily bring on investors or experienced partners. And structured correctly, you can pay people in a way that doesn’t necessarily match the ownership percentage. Another big advantage is that an LLC has some flexibility in how it’s taxed, but profits are generally subject to the same taxes as a sole proprietorship.

Next, we have a C-Corporation, a common business entity designed for scalability and robustness. It’s uniquely positioned for large-scale growth, outside investment and various forms of ownership, perfect for high-growth companies. Owners hold shares, and the company is governed by a board of directors, providing a clear governance structure.

While this type of structure offers a high level of flexibility, it can also introduce added complexity that may not be ideal for smaller business owners. And although it may seem like the most adaptable option at first, having many stakeholders often slows down decision-making, which can reduce agility and make it harder to respond quickly to changing conditions — not something many entrepreneurs consider when thinking about their business structure.

There is also the S-Corporation, which is essentially a subset of an LLC or a C-Corp. While LLCs and C-Corps are legal business structures, an S Corporation is a tax classification that the IRS allows certain businesses to “elect.” This changes how business entit