The Most Costly Mistake You Can Make Right When You’re Getting Started: Part 2

In the last article, we started talking about the five different business structures you can use for your service business and the advantages and disadvantages of each.

Let’s go over the five types again and then we’ll dive into the final three.

The five types of business entity are:

  1. Sole Proprietorship
  2. Partnership
  3. S Corporation
  4. C Corporation
  5. Limited Liability Corporation (LLC)

Sole Proprietorships and Partnerships are some of the most common business entities due to their ease of formation and low cost, but for many businesses they quickly become expensive in terms of taxation and liabilities.

This time we’re going to talk about the S and C Corporations, as well as the Limited Liability Corporation, and figure out which business entity is likely the best for your service business.

First up is the S Corporation.

S Corporations are limited to 100 owners and they must be US persons. This means that unlike the following two business types other corporations, trusts, and foreign individuals are excluded as owners of an S Corporation.

S Corporations enjoy the same liability protection as the C Corporation and LLC and in terms of taxes it’s treated very similarly to a Partnership. There is one major difference between an S Corporation and a Partnership that has to do with basis so it’s important to consult a tax professional on whether a S Corporation makes sense for your business.


  • Limited liability.
  • Corporate profits and distributions to the owners are not subject to self-employment taxes like Partnerships are.


  • Non-US persons or entities can’t be owners of an S Corporation.
  • Not all states recognize S Corporations.
  • In exchange for not paying Self-Employment tax, the IRS requires S Corporation owners to pay themselves a “reasonable” salary, which can vary depending on the industry and other factors.

Next up is the close cousin of the S Corporation, the C Corporation.

C Corporations can have more than one hundred owners and are treated as separate entities just like S Corporations are. Owners of a C Corporation experience the same limited liability as well.

There is a primary difference between an S Corporation and a C Corporation in the areas of filing and paying taxes. A C Corporation files its tax return and the tax is paid on that tax return at the corporate level instead of the shareholder level.

This can result in what’s called double-taxation.


  • Limited liability.
  • C Corporations have the ability to deduct fringe benefits, such as health insurance, long-term-care insurance, and medical expenses. C Corporations are generally the best entity for these types of write-offs.


  • Double taxation on dividends can be an issue.

Lastly, we have the Limited Liability Corporation.

An LLC is one of the most flexible business structures and comes in two flavors: a single-member LLC and a multi-member LLC. Single-member LLCs have a slightly lower level of liability compared to other corporate structures and a multi-member LLC is typically treated as a General Partnership.


  • More limited liability than a Sole Proprietorship or Partnership.
  • The IRS allows a multi-member LLC to elect to be treated as an S Corporation or a C Corporation for income tax purposes. This may provide some tax savings and/or allow for the deduction of various types of fringe benefits.
  • The IRS allows a multi-member LLC to elect to be treated as an S Corporation or a C Corporation for income tax purposes. This may provide some tax savings and/or allow for the deduction of various types of fringe benefits.


  • LLCs are not recognized by every state and may not be an option where you are.
  • Additional paperwork is required at the formation and also requires upkeep and record-keeping throughout the life of the corporation.

For most service business owners, an LLC may be the best option in terms of business structure. It gives you the flexibility and initial tax savings and limited liability that you need to get started on the right foot and can, later on, be adjusted to fit your business needs.

If you want some help understanding your options when it comes to taxes and business structure we can help! 

Connect with us to schedule your consultation and we’ll walk you through the process of setting up the right business entity and accounting practices that have saved our clients thousands of dollars on their taxes.

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