Every entity type pays taxes differently. The right structure unlocks everything else — the wrong one caps your growth.
Entity structure is the third piece of the puzzle for a specific reason: you can't evaluate whether your structure is right until you know your goals (Step 1) and understand your actual financial position (Step 2). Structure isn't a standalone decision — it's a fit test that depends on everything that came before it. Our entity structuring service is built around this evaluation.
Every different entity structure has different tax obligations and pays taxes a different way. How you're set up dictates what sort of taxes you're paying, where, when, and at what rate. It dictates what lending products you can access. It dictates how your owner compensation works. It dictates whether you can bring on outside investors. And it dictates how efficiently you can exit.
Most business owners chose their entity structure when they formed their company — often on the advice of a lawyer who was thinking about liability, not taxes, and certainly not about where the business would be five years later. The structure that made sense at $200K in revenue may be actively harmful at $2M.
The core principle: We want to know where you're going, not just where you're at. The right structure for today should also be the right structure for where your business is headed — or at minimum, it should be straightforward to transition when the time comes. We build infrastructure for the $10 million version of your business while you're still at $1 million.
There are four primary entity structures for small and mid-size businesses, and each one creates a different tax profile.
| Entity Type | Tax Treatment | Self-Employment Tax | Bank Lending | Best For |
|---|---|---|---|---|
| Sole Proprietorship | All profit taxed as personal income | On all business profit | No business loans | Very early stage, minimal revenue |
| Partnership | Pass-through via K-1 to each partner | On each partner's share of profit | Yes — clear agreements required | Multi-owner businesses with individual-level tax strategies |
| S-Corporation | Pass-through via K-1; salary via W-2 | Only on reasonable salary — distributions exempt | Strong — clean reporting, familiar format | Individual operators, small businesses seeking SE tax savings |
| C-Corporation | Flat 21% corporate rate; double tax on dividends | Not applicable — owner paid as employee | Strong — corporate financials preferred at scale | Outside investors, VC-backed, high-scale operations |
Sole Proprietorship. Everything is on you individually. You pay federal income tax plus self-employment tax on all business profit. There is no separation between you and the business in the eyes of the IRS or your bank. This is the simplest structure and the most limited. Critical limitation: banks will not fund sole proprietorships for business loans. You may get a home loan as self-employed, but you will not get business credit or lending. If you're still operating as a sole proprietor and you need capital to grow, the entity structure itself is the bottleneck.
Partnership. The partnership itself doesn't pay income tax. Instead, each partner receives a K-1 and pays federal income tax plus self-employment tax on their share of the profit. Some businesses doing $5 million or more remain in a traditional partnership because the individual owners have their own tax strategies at the personal level that benefit them — there's no need to change the entity when the individual-level planning is more efficient. Banks will fund partnerships. The key is whether the partnership agreement and profit allocation align with both the business goals and each partner's personal goals.
S-Corporation. This is the most common and most incentivized structure for individual operators and small businesses. The primary benefit: it limits self-employment taxes. The stipulation: you must pay yourself a reasonable salary, which means you pay federal and state payroll taxes on that salary amount. But any profit above your salary flows through as distributions — which are not subject to self-employment tax. The S-Corp itself doesn't pay income tax; the owner pays on their K-1 income. Banks like S-Corps. The structure provides clean financial reporting, clear owner compensation, and a familiar format for lenders.
C-Corporation. Think of this as the "big money" structure. C-Corps pay a flat 21% corporate tax rate. Venture capital firms and accredited investors want to invest in C-Corps — they want dividends, interest on their money, and at worst a 20% tax rate on gains. If you go on Shark Tank, they're going to ask you to operate as a C-Corp. Banks like C-Corps. The downside is double taxation: the corporation pays tax on profit, and then shareholders pay tax again on dividends. For most owner-operators, the S-Corp is more efficient — but if you're positioning for outside investment or operating at a scale where the corporate rate is advantageous, the C-Corp becomes the right choice.
For businesses that have grown beyond a single location or a single revenue stream, single-entity structures often become insufficient. This is where multi-entity architecture comes in.
This isn't about complexity for complexity's sake. Each entity in the structure should serve a specific purpose: liability containment, tax efficiency, financial clarity, or lending leverage. If it doesn't serve one of those four purposes, it probably shouldn't exist.
Entity structure is one of the areas where business owners most frequently hurt themselves — usually by acting on advice from the internet without understanding the implications.
"I saw this on the internet — I need to become an S-Corporation and set up a holding company." Without understanding the rules, the compliance requirements, and the actual tax math, premature complexity creates more problems than it solves. If you don't need a holding company yet, creating one just adds accounting costs, filing requirements, and administrative burden.
This is surprisingly common: someone forms an S-Corp but then operates it exactly like a sole proprietorship — transferring money to themselves whenever they want, using the business account for personal expenses, and not paying themselves a salary. The IRS will find this. When they do, you're not just paying the self-employment tax you were trying to avoid — you're paying it plus penalties. You've made your situation worse.
If you're an S-Corp, the IRS requires you to pay yourself reasonable compensation. "Reasonable" means what you'd pay someone else to do your job. Taking all your income as distributions to avoid payroll taxes is the exact strategy the IRS is looking for when they audit S-Corps. We model compensation to find the right balance between take-home, tax efficiency, and compliance.
You started as a sole proprietor. Hit $500K in revenue and maybe someone suggested an LLC. Now you're at $2M with 10-15 employees and the structure hasn't changed since day one. Your entity needs to grow with you. The infrastructure that was fine when it was just you is now limiting your tax efficiency, lending capacity, and operational clarity.
The infrastructure that was fine when it was just you is now limiting your tax efficiency, lending capacity, and operational clarity.
When the answer is "don't change": Sometimes the best recommendation is to leave the structure alone. We've seen $5 million partnerships where the individual owners' personal tax strategies are so well-optimized that restructuring the entity would actually create a net negative. The goal isn't to use the trendiest structure — it's to use the one that fits your goals, your data, and your trajectory. If the current structure does that, we'll tell you.
Your entity structure directly affects your access to capital. Banks have different appetites and different products for different structures:
Banks will not fund your business with a business loan. Full stop. You may get a home loan as self-employed, but business credit and lending are off the table.
Banks will fund, but want to see clear partnership agreements and consistent allocation of income across partners.
Banks are very comfortable here. Clean W-2 for the owner, clear K-1 distributions, familiar financial statements — the format lenders prefer.
Banks are comfortable, especially at scale. Corporate financials are the format they understand best and prefer for larger credit facilities.
Requires consolidated financials that tell a clear story. Done well, this actually increases lending capacity because banks can see individual unit performance and overall portfolio health.
If any of these sound familiar, your entity structure is likely misaligned with your goals:
When the entity structure evaluation is complete, we have either confirmed that your current structure fits your goals — or we've mapped a transition plan. That plan includes:
With goals defined, data cleaned, and structure optimized, we're ready for the final step: identifying every available tax opportunity and building a prioritized plan to capture them.
What you should do right now: Look at your entity formation documents, your most recent tax return, and ask yourself: does my structure match where my business is today, or where it was three years ago? If you have employees, multiple revenue streams, or ambitions to borrow — and you're still in the same structure you started with — that's a conversation worth having sooner rather than later. Book a quick call and we'll walk through whether your current structure still fits.
Understanding the framework is the first step. Let us run it against your actual numbers and show you exactly what you can save.
Evaluate Your Structure →Tell us about your business and we'll identify every savings opportunity available to you.