You have more influence over your tax liability than you might think — and that influence begins with the business entity you select. Let’s take a look at how these different structures affect you at tax time.
Remember this is not official legal advice. If you have any concerns, it’s best to consult an employment lawyer. 

Sole Proprietorship

A sole proprietorship is the smallest and simplest kind of business structure, ideal for one-person businesses with no salaried employees. Whatever money comes into the business goes directly to you, so it gets taxed as personal income. Independent contractors do have to pay a Self-Employment (SE) Tax on their 1040. This tax makes up the portions of Social Security and Medicaid than an employer would normally pay on your behalf.
One potential worry with a sole proprietorship is the fact that, since your personal and business liabilities are lumped together, the IRS can come after you, not just your business, if you fall behind in payments or commit other costly errors.


partnership operates something like a shared proprietorship as opposed to a sole proprietorship. You and one or more partners do your part to grow the company and help it thrive; in return, you all share equally in the profits (and losses) without actually being on the books as employees. The IRS taxes partnerships individually, as if they were sole proprietors, except that the tax burden is shared equally among the partners.

Full Corporation (C-Corp)

A C-Corp lies at the opposite end of the spectrum from a sole proprietorship. These structures off the ultimate protection against lawsuits and other liabilities which might be passed on to business owners or other team members. The corporation is designed as a “shell” that takes the brunt of such attacks. C-Corps have the added financial advantage of being able to put their stocks up for sale when they need or want additional capital.
Tax-wise, however, C-Corps suffer from a “double whammy” effect. Expect the IRS to tax your corporation, not once, but twice. In addition to the taxes you’ll have to pay on the corporation’s profits, you’ll also be hit with taxes on any shareholders dividends your team has enjoyed.

Subchapter S Corporation (S-Corp)

If your business has less than 100 shareholders and you don’t want to shoulder the burden of double taxation faced by C-Corp owners, you might give serious thought to structuring your company as an S-Corp. An S-Corp can pass substantial business income, losses, debits and deductions to its shareholders, freeing the entity from being taxed on them at the corporate level. The shareholders then pay taxes on this income, and on any “reasonable compensation” they receive through wages, on their individual tax returns.
As nice as this ability sounds, the “reasonable compensation” requirement can trip you up if you’re not careful. The IRS pay close attention to whether you’re just paying token wages or actually giving the members of your team what they should be receiving based on their experience, skills, and importance to the company. At the same time, salaries exceeding $500,000 must go through the extra step of being listed on Form 1125-E.

Limited Liability Corporation (LLC)

Technically, an LLC isn’t treated as a corporate business entity by the IRS. The term applies to a “membership” of top-level owners and team members who exist separately from their corporate entity.
While the IRS can tax an LLC as a sole proprietorship, partnership, C-Corp or S-Corp, LLC membership may grant you some interesting advantages over, say, a standard S-Corp formation. For example, LLCs aren’t pinned down by the “reasonable compensation” required of S-Corps, so you don’t necessarily have to pay high wages. On the other hand, since LLC members have to report all business revenue as personal income, they may have to pay hefty Medicare and Social Security taxes that S-Corps pay at the entity level.
Just as the right team management tools can keep your business running efficiently, the right business entity can help you keep your tax burden under control. Good luck!
Remember this is not official legal advice. If you have any concerns, it’s best to consult an employment lawyer.