Business Entity Selection: Tax Implications for Startups and Growing Businesses
So you’ve got a hot new idea (cue confetti) and you’re ready to conquer the market. Great! But first, let’s pick the right business entity—because ignoring this can lead to an unwanted “surprise” at tax time.
Compare Entity Types: Sole proprietorship, partnership, LLC, S-corporation, or C-corporation. Each has its own vibe. (Fun fact: C-corps are taxed twice. Ouch.)
Self-Employment Tax Drama: LLC members pay self-employment tax on profits, while S-corps can split profits into salary + distributions. That might cut employment taxes. Score!
QBI Deduction: Owners might get a 20% deduction of qualified business income. Love a good discount, right?
State Tax Issues: Some states are friendlier than others (looking at you, Delaware). Factor in franchise taxes, too.
Changing Entities: If you outgrow your entity, you can switch, but brace for possible tax consequences. (It’s like changing apartments—some fees are inevitable.)
Bottom Line: Your entity choice shapes your tax bill and legal liability. Think it through before you blow up on TikTok.