Question 1

What is the best business entity for tax purposes?

Accepted Answer

The best entity depends on your income level, business type, and goals. S-Corps are often best for self-employed individuals earning $60,000+ due to self-employment tax savings. LLCs offer flexibility with pass-through taxation. C-Corps may benefit from the 21% flat rate for retained earnings. Use our calculator to compare your specific situation.

Question 2

How does an S-Corp save on self-employment tax?

Accepted Answer

S-Corp owners pay themselves a reasonable salary (subject to payroll taxes) and take remaining profits as distributions (not subject to self-employment tax). For example, with $150,000 profit, paying $80,000 salary and $70,000 distribution saves roughly $10,000 in SE tax compared to a sole proprietorship where all $150,000 is subject to SE tax.

Question 3

What is the QBI deduction and who qualifies?

Accepted Answer

The Qualified Business Income (QBI) deduction allows eligible pass-through entities (sole props, LLCs, S-Corps, partnerships) to deduct up to 20% of qualified business income. Income limits apply: $191,950 for single filers, $383,900 for married filing jointly (2025). Specified service businesses (law, accounting, consulting) have additional restrictions above these thresholds.

Question 4

When should I switch from sole proprietor to S-Corp?

Accepted Answer

Consider S-Corp election when your net self-employment income consistently exceeds $50,000-$60,000 annually. The self-employment tax savings at this level typically outweigh the additional costs of S-Corp compliance (payroll, separate tax return, bookkeeping). Also consider your growth trajectory and administrative capacity.

Question 5

What are the disadvantages of a C-Corporation?

Accepted Answer

C-Corps face double taxation: profits taxed at 21% corporate rate, then dividends taxed again at shareholder level (up to 23.8%). Other disadvantages include more complex compliance, required formalities (board meetings, minutes), and no pass-through of losses. However, C-Corps can retain earnings at lower rates and offer tax-advantaged benefits.

Question 6

How is a partnership taxed differently than an LLC?

Accepted Answer

Multi-member LLCs are taxed as partnerships by default. Both are pass-through entities where profits flow to owners' personal returns. The main difference is legal liability protection - LLCs provide liability protection while general partnerships do not. LLCs can also elect S-Corp or C-Corp taxation if beneficial.

Question 7

What is a reasonable salary for S-Corp owners?

Accepted Answer

A reasonable salary should reflect what you'd pay someone to do your job in the open market. Factors include industry standards, geographic location, experience, and time worked. Generally, salary should be at least 40-60% of net business income. The IRS scrutinizes unreasonably low salaries, so err on the side of paying yourself fairly.

Question 8

Can I change my business entity type?

Accepted Answer

Yes, but the process and tax implications vary. Sole props can elect S-Corp status by filing Form 2553 (deadline: March 15 for calendar year). Converting C-Corp to S-Corp may trigger built-in gains tax. LLC to S-Corp is straightforward. Always consult a tax professional before converting, as some conversions trigger taxable events.

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