Understanding Business Entity Structures and Tax Filing Strategies

When you start a business, one of the first decisions you’ll need to make is how to structure the business. The structure type affects ownership, liability, taxation and regulatory requirements, so making an informed decision is essential.

Some structures keep matters simple: You and the business are legally the same. Other structures create a separate legal entity offering liability protection. Some setups allow profits to go directly to you, meaning you report them on your personal tax return, while others require the business to pay taxes, potentially leading to double taxation. No matter the business entity structure you choose (LLC vs. C-Corp vs. partnership vs. S-Corp), there are tax filing strategies that will allow for business tax optimization.  

Quick facts  

• Business owners can limit liability, lower taxes and plan for growth by using the correct business structure.  
• LLCs, S-Corps, C-Corps and some partnerships shield the owners’ personal assets from business debts and liabilities.  
• Pass-through entities – including sole proprietorships, partnerships, LLCs and S Corporations – are not subject to corporate taxes.  
• C Corporations pay corporate taxes, but they can retain and reinvest profits and issue unlimited stock, potentially making it easier to raise capital and grow the company.  

Understanding business entity structures

There are several common business entity structures, each with their own advantages and limitations.

• Sole proprietorship: A sole proprietorship is a simple structure in which one person owns and operates the business. There's no legal separation between you and the company, so you're personally liable for the debts and obligations of the business.  
• Partnership: A partnership is a simple way for two or more people to own a business together. Limited partnerships (LPs) have one general partner with unlimited liability and other partners with limited liability (and limited control over the company). Limited liability partnerships (LLPs) are like LPs but grant each partner limited liability.
• Limited liability company (LLC): An LLC balances simplicity and protection. LLC owners (called members) aren't personally liable for the company's debts and liabilities, so personal assets like your house, car and savings account are safe from business creditors.
• C Corporation (C-Corp): A C-Corp is a legal entity that's separate from its owners, so shareholders can't be sued personally for the debts and liabilities of the business. While C-Corps provide strong liability protection, they come with stricter operational, record-keeping and reporting requirements.
• S Corporation (S-Corp): An S-Corp is a special type of corporation that allows income to pass through to owners, avoiding the double taxation of a regular C corp. It provides personal asset protection like a corporation but has fewer record-keeping and reporting requirements.¹

Business entity types and use cases

Each type of business entity can be beneficial for a specific type of business.  

• Sole proprietorship: This type of entity can work well for businesses, freelancers and self-employed individuals who want minimal paperwork and legal formalities.
• Partnership: Partnerships often make sense for multi-owner businesses that prefer pass-through taxation.
• LLC: This type of structure can be ideal for small to medium-sized companies seeking liability protection without corporate formalities.
• C-Corp: C-Corps can be best for high-growth businesses planning to reinvest profits, attract investors and/or eventually issue stock.
• S-Corp: S-Corps can be ideal for small to medium-sized businesses that want corporate protection but prefer pass-through taxation.  

Differentiating entity structure from tax filing status

Your business entity type is your legal structure – it defines ownership, liability and how you operate. Your tax status determines how you (and your company) report and pay taxes.  

While some structures have default tax classifications, others let you choose. For example, an LLC is a legal entity, but you can elect to be taxed as a sole proprietorship, partnership, C-Corp or – if it's eligible – S-Corp. To qualify, the corporation must meet the following IRS requirements:²  

• Be a domestic corporation
• Shareholders must be U.S. citizens or legal residents
• Operate with no more than 100 shareholders, who can be individuals, certain trusts and estates
• Have only one class of stock
• Not be an ineligible corporation, such as an insurance company
• File Form 2553 with the IRS, which is a separate process from registering your business with the state.³

Note: In 2021, Congress enacted the Corporate Transparency Act to curb illicit finance. The law requires many companies doing business in the U.S. – including LLCs and S-Corps – to report information about their owners to the Financial Crimes Enforcement Network (FinCEN), a U.S. Department of the Treasury bureau. However, due to a recent federal court order, reporting companies aren't currently required to file this beneficial ownership information (BOI) with FinCEN.6 To learn more, visit fincen.gov/boi.

Tax filing options and when to use them

The business entity you choose impacts how you file taxes.

Pass-through taxation  

Sole proprietorships, partnerships, LLCs and S Corporations are pass-through entities, which aren't subject to the corporate income tax.⁴ Instead, their profits and losses "pass through" to owners or members, who report their share of the company's net income on their individual income tax returns. Some pass-through owners are also subject to self-employment taxes and state and local taxes.⁵  

C-Corp taxation

Unlike pass-through entities, a C-Corp pays corporate income tax on its income (after losses, deductions and credits) – and shareholders pay personal income taxes on dividends – a situation known as double taxation.6 C-Corp taxation can be advantageous when a business wants to retain and reinvest profits, as corporate tax rates are often lower than individual tax rates. Unlike pass-through entities, where owners pay taxes on all profits, a C-Corp is only taxed on what it distributes as dividends.

S-Corp election

S-Corps pass income, losses, deductions and credits directly to shareholders without paying any federal corporate tax, avoiding the double taxation that regular corporations face.² S-Corps also enjoy significant self-employment tax savings: Shareholders can classify some income as salary and some as distributions, with only the salary portion subject to self-employment taxes.  

Using entity structures to reduce tax burdens

Choosing the right business entity structures can help lower your tax bill. Consider the following when choosing the best option for you and your business:  

• Electing S-Corp status: If you own an LLC or corporation, electing S-Corp status allows you to take a reasonable salary (subject to payroll taxes) and withdraw the rest as distributions, which aren't subject to self-employment tax. This can significantly lower tax liabilities for profitable businesses.
• Using a C-Corp for reinvestment: A C-Corp can retain earnings and reinvest them at the corporate tax rate, which may be lower than personal income tax rates. This can benefit businesses that don't need to distribute all profits immediately.
• Leveraging pass-through taxation: Sole proprietorships, partnerships and LLCs avoid corporate-level taxation, meaning profits pass directly to owners, who report them on individual tax returns. This prevents double taxation and can be helpful if individual tax rates are lower than corporate rates.
• Maximizing business deductions: Regardless of entity type, you can lower taxable income by deducting business expenses like salaries, healthcare, equipment, travel and retirement contributions.  

Real-world examples of strategic entity structuring

Your ideal entity structure might change over time as your company evolves. Here are some examples of what this could look like:  

• Sole proprietor to LLC: A freelance marketing consultant starts as a sole proprietor, reporting all income on their personal tax return. As the business grows, they switch to an LLC to protect personal assets from business lawsuits and debts. The LLC maintains pass-through taxation, avoiding corporate taxes, but it's subject to self-employment taxes.  
• LLC electing S-Corp: Later, the consultant elects S-Corp status. This move allows them to split their income between salary and distributions, reducing self-employment taxes. However, they must pay themselves "reasonable" compensation to avoid trouble with the IRS.  
• Converting to a C-Corp: Eventually, the consultant hires employees, expands their services and starts landing big accounts. To attract investors and scale, they convert the business into a C Corporation, allowing it to issue stock and retain earnings at corporate tax rates. Structured for long-term growth, the company evolves into a full-fledged agency, ready for national expansion.

Bottom line

Business owners have several choices when it comes to entity structures. An LLC protects your personal assets from business liabilities, while an S-Corp election also helps you save on self-employment taxes. C-Corps are subject to double taxation, but they can issue unlimited stock, making it easier to raise capital from investors, venture capitalists and everyday investors if the company goes public. Corporations also retain and reinvest their profits at corporate tax rates, which may be lower than individual tax rates.  

Choosing the best entity structure for your business can be tricky. A financial advisor can provide customized advice and guidance so you can stay focused on running your business and reaching your goals. To find the right advisor for your specific needs, reach out to the Conway Wealth team at info@conwaywealthgroup.com or call 973.285.3640.

Investment advisory and financial planning services offered through Summit Financial, LLC, an SEC Registered Investment Adviser, doing business as Conway Wealth Group (4 Campus Drive, Parsippany NJ 07054. Tel. 973-285-3600). Neither Summit Financial nor Conway Wealth Group provide tax or legal advice. 7690828.1

1. U.S. Small Business Administration. “Choose a business structure.” (January 2025)
2. Internal Revenue Service, “S corporations.” (February 2025)
3. Internal Revenue Service, “About From 2553, Election by a Small Business Corporation.” (February 2025) \Tax Policy Center. “What are pass-through businesses?” (January 2024)
4. Tax Policy Center. “What are pass-through businesses?” (January 2024)
5. Tax Foundation. “Pass-through business.”  
6. Internal Revenue Service, “Forming a corporation.” (January 2025)

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