Your Business Entity Structure Matters

Many business owners choose their business entity structure when they’re first starting out and rarely revisit this important decision. Yet as your business evolves, what made sense initially may no longer serve you, and we have seen where changing entity types can significantly impact your bottom line.

In our experience, sometimes the smallest changes can lead to the biggest financial wins. The following examples demonstrate how the right entity selection can make a substantive difference in tax savings, administrative simplicity, and long-term financial planning.

Finding Hidden Tax Savings

While reviewing tax returns for a professional services firm owner with fewer than a handful of employees, I noticed it was operating as a C corporation. This structure required the owner to take a large paycheck each December to "zero out" the business income to avoid double taxation. This yearly task created unnecessary complexity and concern about when personal distributions could be taken.

Additionally, as a C corporation in California, the owner could not take advantage of the pass-through entity (PTE) tax, which became effective on January 1, 2021 as a workaround to the 2017 tax code that limited state and local tax (SALT) deductions. After consulting with their CPA, we recommended changing the business structure to an S corporation.

The Result: By filing an S corporation election — which amounted to basically checking a different box on their tax return — our client enjoyed an estimated $30,000–$40,000 in annual federal tax savings while simplifying the owner’s distribution strategy. In wealth management, we often find the most powerful financial moves aren't necessarily the most complex.

Optimizing a Consulting Business

After selling their business, a client came to us for guidance on structuring a 5-year consulting agreement with the buyer, who wanted to retain them as a consultant.

While a sole proprietorship would have been the simplest option, our collaborative analysis with their CPA revealed significant advantages to using an S corporation structure instead. This structure would allow our client to save on payroll taxes and set money aside for retirement by taking part of their income as distributions instead of a salary. As I often tell clients, what looks good on paper isn't always what works best in real life — that's the benefit of professional experience and perspective.

The Result: The potential 15.3% savings on distribution amounts created considerable tax efficiency that a sole proprietorship couldn't while providing our client access to appropriate retirement planning options.

Key Considerations for Entity Selection

Both examples highlight an important principle I've seen throughout my career: the right business structure isn't one-size-fits-all — it's about finding what works for your specific situation. When evaluating options for your business, it’s a good idea to carefully weigh the advantages and disadvantages of each entity type. Here are some key considerations:

C Corporation

• Pros:

• Benefits businesses that reinvest a majority of profits

• Provides tax-advantaged fringe benefits to owner-employees (like health insurance and health savings accounts)[1]

• Offers liability protection to shareholders

• Cons:

• Creates potential for double taxation

• Requires extensive paperwork and compliance requirements (i.e., formal bylaws and meeting minutes)

• Involves higher startup and ongoing maintenance costs

S Corporation

• Pros:

• Combines pass-through taxation with corporate liability protection

• Allows for payroll tax savings on distribution income

• Enables state tax benefits in states with PTE

• Cons:

• Mandates reasonable compensation for owner-employees (even when there are no profits)

• Restricts the number and type of shareholders

• Taxes fringe benefits for owners who own more than 2%

LLC [2,3]

• Pros:

• Shields business owners with personal liability protection (in many instances)

• Maximizes PTE deductions where applicable

• Reduces administrative requirements while maintaining pass-through taxation

• Allows different tax treatment options while keeping the same legal structure

• Cons:

• Imposes substantial filing fees and tax complexities

• Risks automatic dissolution if a member leaves (unless the operating agreement specifies otherwise)

• Subjects members to self-employment tax on all income

Is It Time for a Business Entity Structure Check-Up?

The complexity of selecting your business entity extends beyond the above factors. The right choice depends on your individual circumstances, including:

• Expected income levels

• Tax considerations

• Multiple owners or single owner

• Retirement planning goals

• Risk management needs

• Future succession or exit plans

(To learn more about succession planning, read our 5 Questions You Should Ask ahead of making a transition.)

At Quantum, we leverage our decades of collective experience to collaborate with business owners and their CPAs to develop strategies that minimize taxes and maximize after-tax wealth. 

Even if you've operated under the same structure for years, it's worth examining whether your current business entity still serves your financial goals. As we’ve seen, a simple adjustment could lead to significant savings and ensure you are not leaving any money on the table.

Sources

[1] Emparion. “C-Corp. Fringe Benefits: The Complete Guide [Updated for 2025].” Emparion.com. Jan. 15, 2025.

[2] Investopedia. “Pros and Cons of a Limited Liability Company (LLC).” Investopedia.com. Mar. 4, 2025.

[3] upcounsel. “LLC Advantages and Disadvantages You Should Know.” upcounsel.com. Apr. 1, 2025.

DISCLOSURE: Quantum Financial Advisors, LLC (“Quantum”) is an SEC registered investment adviser with its principal place of business in the State of California. Quantum may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. The article is for educational purposes only; and contains the opinions of the author, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy or deemed to provide investment recommendations, and it should not be relied on as such. Any subsequent, direct communication by Quantum with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.  No advice may be rendered by Quantum unless a client service agreement is in place. This material is not intended to serve as personalized tax, legal, and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Quantum is not an accounting or legal firm. Please consult with your tax and/or legal professional regarding your specific tax and/or legal situation when determining if any of the mentioned strategies are right for you.

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