Structure

Selecting the appropriate business structure is crucial for liability protection, tax efficiency, and operational flexibility.

Limited Liability (LLC)

First, there are no tax advantages (or disadvantages) to forming an LLC. In fact, forming an LLC
won’t change a thing for Federal income tax purposes. Single-owner LLCs are taxed just like sole
proprietorships, and multiple-owner LLCs are taxed just like partnerships.

You should, however, be aware that forming an LLC might subject your business to additional
state taxes. Certain states (California for instance) subject LLCs to “franchise taxes” in addition
to a typical income tax.

S Corporation (S Corp)

S-Corporations have the ability to provide some tax savings as a result of the fact that profits
from an S-Corp are not subject to self-employment tax. However, before you’re allowed to
distribute any profits, you are required to pay any owner-employees a “reasonable salary.” This
salary will be subject to Social Security and Medicare taxes (which total the same amount as the self-employment tax). As such, the tax savings only take effect once the business has a pretty
sizable income.

Also, you should be aware that S-corporations are significantly more complicated from a tax
and legal standpoint than LLCs. So if you form an S-corp, know that you’re going to be spending
a great many more billable hours with your accountant/attorney.

S Corp Election

An S Corporation (S-Corp) election allows an LLC to be taxed as an S-Corp rather than the default sole proprietorship or partnership structure. By electing S-Corp status with the IRS (using Form 2553), LLC owners can potentially reduce their self-employment tax liability. This is achieved by splitting income into two parts: a reasonable salary paid to the owner (which is subject to payroll taxes), and remaining profits distributed as dividends, which are not subject to self-employment tax.

This structure can result in significant tax savings, especially for businesses generating consistent profits. Additionally, an S-Corp still provides the limited liability protection of an LLC while offering a more favorable tax structure for growing businesses.

What's Best For You?

Want a detailed comparison for Sole Proprietorship, Limited Liability, and S Corporation?

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Donna King
Director Customer Care

Donna is the Director of Customer Care at Myriad, where she leads the Client Project/Success Team to deliver exceptional customer experience for Myriad’s end-users. With a focus on continuous improvement, Donna manages the day-to-day activities of the team, supporting each member’s professional growth while ensuring optimal performance in client interactions and order processing.

In this role, she is responsible for identifying and implementing process improvements to enhance the overall client experience. Collaborating across departments, Donna ensures that policies and practices set forth by the VP of Strategy and Business Development are effectively executed, particularly in customer service and project management.

Donna brings a wealth of experience in client management and team leadership, with a strong commitment to creating a positive, results-driven environment that fosters collaboration and growth for both the team and Myriad’s clients.

An entity name can protect the name of your business at a state level. Depending on your business structure and location, the state may require you to register a legal entity name.