Summary of What This Blog Covers:
- Understand how your business entity impacts your taxes, liability, and growth potential — This blog breaks down the differences between sole proprietorships, LLCs, and S-Corps so you can choose the right structure for your financial goals and compliance needs.
- Learn when and why to switch from a sole proprietor or LLC to an S-Corp — Discover the tax savings potential of an S-Corp, how the IRS treats distributions vs. salary, and how to legally reduce self-employment tax with guidance from a licensed CPA.
- Explore real-world examples, requirements, and compliance responsibilities for each structure — From Form 2553 filing and payroll setup to W-2s, 1099 NECs, and FBAR, this blog walks through everything you need to stay compliant and profitable.
- See how Insogna CPA simplifies entity selection, tax planning, and ongoing support — As a top-rated CPA firm in Austin, Texas, we provide full-service strategy and compliance to help business owners save thousands and scale with confidence.
If Your Business Structure Isn’t Working for You, It’s Probably Working Against You
Let’s have a real talk. The kind you’d expect from a longtime business-savvy friend who’s also your go-to certified public accountant.
You’re working hard, landing clients, sending invoices, and chasing down leads. You’re doing everything you should be doing as a business owner. But here’s the part that catches most entrepreneurs off guard: your business entity—that box you checked when you registered your company—might be quietly draining your profit.
And if you haven’t reviewed it recently, there’s a good chance it’s outdated, inefficient, or not aligned with your current growth stage.
At Insogna CPA, a top-rated CPA firm in Austin, Texas, we’ve helped business owners across every industry re-evaluate their entity structure and dramatically reduce their tax burden. All without changing a single thing about their products or services.
Because when it comes to keeping more of what you earn, structure matters.
What’s a Business Entity, Really and Why Does It Matter So Much?
Your business entity is more than a legal label. It shapes how you:
- Get taxed by the IRS
- Pay yourself and your contractors
- Handle liability if you’re ever sued
- Comply with payroll, state reporting, and federal filing
- Qualify for small business loans, investments, and grants
This one decision affects your self-employment tax, your ability to scale, and your exposure to financial and legal risks.
Yet many business owners:
- Start as sole proprietors without realizing the limitations
- Form LLCs assuming they’ll get automatic tax breaks
- Hear about S-Corp elections but never take action
Let’s clear the confusion and walk through the big three: Sole Proprietorship, LLC, and S-Corp. Then we’ll help you figure out what’s best for your business right now and as you grow.
Sole Proprietor: The “Start Fast, Pay Later” Structure
A sole proprietorship is the default structure for anyone who begins operating a business without filing formation paperwork with their state. If you invoice clients, sell products, or earn side income without an LLC or corporation, this is you.
Pros:
- Easiest to start
- No fees, registration, or paperwork
- You report all business income and expenses on Schedule C of your personal 1040
Cons:
- No legal separation between you and the business
- 100% of your profit is subject to self-employment tax (currently 15.3%)
- No access to corporate tax planning strategies
- You bear all legal and financial liability personally
When it works:
- You’re testing a business idea or freelance gig
- Your annual income is under $30,000
- You have no employees, no major contracts, and no physical assets at risk
But here’s the risk:
If something goes wrong (a client sues, a vendor demands unpaid invoices, or your laptop with client data is stolen), you’re personally on the hook. That includes your savings, car, and possibly your home.
LLC: The Middle Ground With Major Flexibility
An LLC (Limited Liability Company) adds structure and protection without forcing you into rigid compliance obligations. It creates a legal separation between you and your business, which is key for risk management.
Pros:
- Provides personal liability protection
- Flexible tax treatment (can be taxed as a sole proprietor, partnership, or S-Corp)
- Adds credibility with banks, clients, and vendors
- Simplified annual maintenance in most states (including Texas)
Tax treatment:
By default, a single-member LLC is taxed like a sole proprietorship. That means you still pay self-employment tax on 100% of your net income unless you elect S-Corp status.
You’ll still file a Schedule C, but with the option to restructure later.
When it’s ideal:
- You’re earning $30,000–$80,000 annually
- You want basic protection and a scalable structure
- You plan to grow but want to keep admin requirements low for now
We recommend every full-time self-employed business owner consider forming an LLC as soon as they generate meaningful income. It’s a foundational step in leveling up.
S-Corporation: The Tax-Saving Engine
An S-Corp isn’t a separate business entity. It’s a tax election you can make by filing Form 2553 with the IRS. You can have an LLC or C-Corp taxed as an S-Corp.
The big benefit? Self-employment tax savings.
How it works:
- You pay yourself a reasonable salary (via payroll). This salary is subject to FICA taxes (Social Security + Medicare).
- The rest of your profit is taken as a distribution, which is not subject to self-employment tax
- You file a separate business tax return (Form 1120-S) and issue yourself a W-2
- If you hire contractors, you’ll issue 1099 NEC forms by January 31 annually
Real Example:
Your business nets $100,000 annually.
- As an LLC (default): You pay 15.3% self-employment tax on $100K = $15,300
- As an S-Corp: You pay yourself $50K in salary, and the other $50K as a distribution
- FICA tax on salary = $7,650
- Distribution not taxed at 15.3%
- You save $7,650 in self-employment taxes
- FICA tax on salary = $7,650
Over five years, that’s $38,250 in tax savings. All from one strategic election.
And yes, Insogna CPA will handle the entire process. From Form 2553 filing to payroll setup, tax forecasting, and year-end tax preparation services.
When Is the Best Time to Switch to an S-Corp?
If your net profit is consistently over $50,000 per year, it’s time to consider the switch.
But it’s not just about income. You also need:
- A reasonable salary benchmark (based on your industry and region)
- The ability to run payroll. Either via a tool like Gusto or with help from an Austin accounting firm.
- A willingness to stay compliant with quarterly filings, W-2 issuance, and annual S-Corp returns
We recommend working with a licensed CPA or enrolled agent to evaluate whether an S-Corp makes sense now or in the near future.
Can You Be an LLC and an S-Corp at the Same Time?
Yes, and this is where many business owners get confused.
You can form an LLC at the state level (e.g., with the Texas Secretary of State), then elect to be taxed as an S-Corp with the IRS by filing Form 2553.
This structure offers the best of both worlds:
- Legal protection via LLC
- Tax advantages via S-Corp
And it’s the route we recommend for most six-figure service business owners who want to optimize their tax position.
Key Compliance Considerations for S-Corps
It’s not just about filing a form and calling it a day. As an S-Corp, you must:
- File Form 1120-S annually
- Issue W-2s to any employee (including yourself)
- Withhold and remit payroll taxes (or hire a provider to do it)
- Track expenses with precision
- Pay quarterly estimates based on profit and salary
- Issue 1099 NEC forms to eligible contractors
- File FBAR (Foreign Bank Account Report) if you hold over $10K abroad
It’s not impossible but it’s not DIY. That’s why our clients choose Insogna CPA, one of the most experienced Austin CPA firms, to stay ahead of deadlines and avoid penalties.
What About C-Corporations?
We won’t spend too much time here because most small service businesses don’t need a C-Corp structure unless they’re seeking venture capital or issuing stock.
What you need to know:
- Subject to double taxation (corporate + personal)
- Good for high-growth startups with multiple investors
- More admin, less flexibility, but necessary in some industries
If you think your business is heading toward outside funding or stock issuance, let’s talk. We’ll match you with the right entity structure and tax advisor in Austin to support that growth.
Bottom Line: How to Decide What’s Right for You
Stick with a Sole Proprietor if:
- You’re just starting
- Your profit is under $25K annually
- You have no employees or significant legal risk
Form an LLC if:
- You want personal liability protection
- You want flexibility in taxation
- You’re earning $25K–$80K annually
Elect S-Corp if:
- You’re making $50K+ in net profit
- You want to reduce your self-employment tax
- You’re ready to run payroll and stay compliant
Talk to a CPA if:
- You’re unsure of your current structure
- Your income is rising rapidly
- You haven’t revisited your tax strategy in 12+ months
Our team of certified professional accountants, chartered public accountants, and Austin tax consultants will help you stop overpaying and start planning for the future.
How Insogna CPA Makes This Easy (and Profitable)
As a full-service Austin accounting firm, we handle everything:
- Entity formation and Form 2553 filing
- Payroll setup and quarterly tax payments
- Annual W9 and 1099 NEC form generation
- FBAR filing (if needed)
- Tax planning, forecasting, and compliance
We’re not just another tax place near you. We’re your strategic growth partner.
Final Word: Don’t Let Your Business Structure Be an Afterthought
You’ve worked hard to grow your business. Now it’s time to structure it in a way that supports growth, protects your assets, and maximizes your wealth.
We’ll help you figure out whether it’s time to form an LLC, make the S-Corp election, or rebuild your tax plan from the ground up.
Because good business isn’t just about how much you make. It’s about how much you keep.
Ready to find out which business structure will save you the most money? Let’s talk. Schedule your consultation with Insogna CPA today.