How to Structure Your Business to Reduce Taxes
Posted On: Wednesday, October 15, 2025
Every small business owner regularly asks themselves how they can save more money. Often, when reviewing their expenses, they overlook the potential for their business structure to reduce their tax liability and save them money. At Rakatansky CPA, we help small business owners find the business structure that best suits their needs while minimizing their expenses. While there are millions of Limited Liability Companies (LLCs) in the United States, relatively few choose to file as S corporations (S-corps), potentially missing out on significant savings.
What Is an LLC
An LLC is a legal business structure intended to protect business owners from personal liability in the event of a lawsuit. In fact, the LLC structure determines legal liability more than tax liability.
Most LLCs are classified as disregarded entities, meaning that the IRS taxes the business and the business owner as a single entity. By default, LLCs are taxed as sole proprietorships if a single person owns them, and as partnerships if more than one person owns them.
What Is an S-Corp
An S-corp is a tax classification available to LLCs and corporations. LLCs electing to file as an S-corp separates the business and the owner into separate entities each with their own tax filing requirements.
S-corp status is established by filing an election with the IRS. S-corps are subject to more stringent regulations than disregarded entities.
LLC Tax Benefits
LLCs filing as sole proprietors and partnerships are subject to pass-through taxation, meaning that their income is only taxed on the owner’s individual tax return.
LLCs are easy to establish and maintain. They are subject to fewer regulations than other business structures, which makes their taxation relatively simple.
S-Corp Tax Benefits
Electing to file taxes as an S-corp may reduce your tax liability. Members and general partners of most LLCs are required to pay a 15.3% self-employment tax on the company’s entire income. As an S-corp, employees pay ½ of employment taxes, which is matched by their employer, for a total of 15.3%. Owners of S-corps are required to pay themselves a salary and, therefore, are employees. Under this structure, the owner’s salary is still subject to 15.3% employment taxes, but any remaining profits of the company are not. In short, owners of S-corps pay the same employment tax rate, but on a potentially smaller portion of their income.
S-Corp Drawbacks
While S-corps may seem like a cut-and-dry way to lower tax liability, they aren’t right for every business.
The S-corp status itself is more expensive to maintain than a disregarded entity. S-corp tax filing can cost more than other returns. S-corps will likely need to pay for a payroll service, may be subject to additional state taxes, and can be time-consuming to maintain.
S-corps are also subject to stricter rules. To maintain an S-corp, an owner must set up a payroll system, hold an annual board meeting for shareholders (with minutes), limit the number of shareholders to one hundred or fewer, and file an S-corp tax return in addition to personal taxes.
Filing as an S-corp may also limit available tax deductions, especially those that are income-based.
Which Structure Is Right for You?
Every small business is unique. The simple answer is that the best business structure for your business is the one that best suits your business. To determine what that is, you need to take a close look at all the options.
Many people think that S-corp status becomes the better choice once a business reaches a certain level of income, but even that threshold is debatable. And if a business structure creates more practical challenges than benefits, is it worth the tax benefits?
For help determining which business structure is the best fit for your needs, always consult a tax professional, such as the experts at Rakatansky CPA. We review your books, assess your company’s unique needs, and provide personalized recommendations. Then, when you’re confident you’ve found the right business structure, we help you get set up.
To find out if switching your LLC to an S-corp could lower your tax liability, contact Rakatansky CPA today.