Tax Structuring: Choosing the Right Entity Structure for Your Business

June 05, 2025 | by Atherton & Associates, LLP

Tax Structuring: Entity Choices

June 5, 2025
From the Office of Rodney Prasad, Tax Associate

Choosing the right entity structure for your business is a crucial step in tax planning, as it directly impacts your tax liability, legal obligations, and overall financial success. Here is an overview of common business structures and their tax implications:

Sole Proprietorship:

• Structure: Owned and operated by a single individual.
• Taxation: The business is not taxed separately; profits and losses are reported on the owner’s personal tax return (Schedule C).
• Tax Implications:
• Pros: Simple and inexpensive to set up, minimal reporting requirements, no corporate business taxes.
• Cons: Unlimited personal liability (owner is personally responsible for business debts and obligations), difficulty in obtaining business financing, no perpetual existence.
• Self-Employment Tax: Sole proprietors pay self-employment tax (Social Security and Medicare taxes) on their net earnings.

Partnership

• Structure: Owned and operated by two or more individuals.
• Taxation: Partnerships are “pass-through” entities where partners report their share of profits and losses on their individual tax returns.
• Tax Implications:
• Pros: Partnerships offer pass-through taxation and are relatively easy to set up.
• Cons: General partners have unlimited personal liability, and a partnership agreement is required.
• Self-Employment Tax: General partners are also subject to self-employment taxes.

Limited Liability Company (LLC)

• Structure: A hybrid structure.
• Taxation: LLCs can choose their tax structure. By default, they are taxed as sole proprietorships or partnerships but can elect to be taxed as corporations.
• Tax Implications:
• Pros: LLCs provide limited personal liability and flexible management and tax structures, while avoiding corporate business taxes (unless elected as a C Corporation).
• Cons: They are not federally recognized and may not be recognized outside of the U.S.
• Self-Employment Tax: Members generally pay self-employment tax on their share of income.

C Corporation

• Structure: A separate legal entity from its owners.
• Taxation: C Corporations pay corporate income tax, and dividends are taxed again at the individual level (double taxation).
• Tax Implications:
• Pros: C Corporations offer strong liability protection, have no limit on the number of shareholders, are preferred for raising capital, and have perpetual existence. 
• Cons: They face double taxation and are more complex and expensive to maintain. 

S Corporation

• Structure: A type of corporation that avoids the double taxation of a C Corporation.
• Taxation: S Corporations are “pass-through” entities, passing profits and losses to owners’ personal income.
• Tax Implications:
• Pros: S Corporations provide limited liability, pass-through taxation, perpetual existence, and avoid corporate  business taxes.
• Cons: They have restrictions on the number and type of shareholders and stricter qualification standards.

Action Item
When deciding which to choose from, it is important to look at tax obligations and the advantages and disadvantages of each business form. Please reach out to your tax advisor to discuss which business entity would be the best fit for you.