Tax Implications of Your Business Structure

By Keiter CPAs

Tax Implications of Your Business Structure

What business owners should know about filing classifications in 2025

Selecting an appropriate business structure is a key decision for any business owner. Tax implications and liability protection significantly influence the suitability of different business structures. Business structures are primarily distinguished by how they handle income taxation and owner liability. Below we will examine three types of business structures: Limited Liability Companies, S Corporation and C Corporations.

Limited Liability Companies

A Limited Liability Company (LLC) is a business structure governed by state laws, which vary by state. LLC owners, called members and may include individuals, corporations, other LLCs, and foreign entities. Most states allow single member LLCs with no limit to the number of members.

The IRS classifies LLCs based on elections and membership. Generally, multi-member LLCs are taxed as partnerships, while single-member LLCs are treated as disregarded entities for income tax purposes. Both can file Form 8832 to elect corporate tax treatment. For employment and excise taxes, single-member LLCs are treated as separate entities.

An election specifying an LLC’s classification can take effect no more than 75 days before the filing date and no later than 12 months after the filing date. Business owners should review their state’s requirements and federal tax regulations before electing this business structure.

S Corporations

S corporations pass corporate income, losses, deductions, and credits to shareholders, who report them on personal tax returns, avoiding double taxation. However, S corporations may owe taxes on certain built-in gains and passive income if the company was formerly a C Corporation. To qualify, a corporation must be domestic, have no more than 100 eligible shareholders (individuals, certain trusts, or estates), one class of stock, and not be an ineligible business such as a financial institution or insurance company. To elect S corporation status, Form 2553 must be filed with unanimous shareholder consent.

C Corporations

When forming a corporation, shareholders exchange money or property for capital stock. A C corporation, as a separate tax entity that conducts business, pays taxes, and distributes profits to shareholders. C Corporations are subject to both corporate-level taxation and tax on dividends to shareholders.

While recent tax reforms have made this classification more attractive for certain scenarios, it is important to stay informed about the changes in tax policy that may impact your business.

Should You Consider a Structure Change?

While current tax laws favor certain business structures, changes may be on the horizon:

  • Individual tax rates: The top individual tax rate of 37% is scheduled to increase after 2025 unless lawmakers act to extend the current rates.
  • Corporate tax rates: Proposals to increase the corporate rate could impact the long-term attractiveness of C Corporations.

The potential tax benefits of switching structures can be appealing, but other tax consequences should be considered:

  • Conversion Costs: Restructuring may trigger capital gains or other tax liabilities.
  • Future Uncertainty: Tax rates are subject to legislative changes, which could alter the benefits of a new structure.

Your opportunity advisor can help you weigh the benefits and risks of your current structure and determine whether a change aligns with your long-term financial goals.


Read our tax planning guide for more 2025 business strategies and guidance.

 

 

 

 

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About the Author


Keiter CPAs

Keiter CPAs

Keiter CPAs is a certified public accounting firm serving the audittax, accounting and consulting needs of businesses and their owners located in Richmond and across Virginia. We focus on serving emerging growth businesses and companies in the financial servicesconstructionreal estatemanufacturingretail & distribution industries and nonprofits. We also provide business valuations and forensic accounting servicesfamily office services, and inbound international services.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.

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