No single structure is universally best. The right choice depends on your income level, how you plan to use profits, your growth trajectory, and your specific tax situation. Here’s how each option actually works so you can make an informed decision.

An LLC taxed as a sole proprietorship or partnership is where most small businesses start. As a single-member LLC, you report business income on Schedule C of your personal return. You pay self-employment tax of 15.3% on all net profit plus your regular income tax. When profits are modest, this simplicity works fine. There’s minimal paperwork and low compliance costs. But once your net income starts climbing past $50,000 or $60,000, that self-employment tax bill starts to hurt.

An S-Corp isn’t actually a separate entity type. It’s a tax election you make with the IRS, and you can make it with an LLC or a corporation. The main benefit is splitting your income into two buckets: a reasonable salary that’s subject to payroll taxes and distributions that are not subject to self-employment or payroll taxes. If your business nets $120,000 and you pay yourself a $60,000 salary, you only pay payroll taxes on the salary. The remaining $60,000 passes through as a distribution taxed at your income tax rate but without the additional 15.3%.

The catch is “reasonable salary.” The IRS requires that you pay yourself what someone in your role would earn in the market. You can’t take a $20,000 salary on $150,000 of net income. Get this wrong and you’re looking at back taxes, penalties, and interest. S-Corp status also comes with added compliance costs. You need to run payroll, file a separate business tax return (Form 1120-S), and deal with state requirements. In Tennessee, your entity will be subject to the franchise and excise tax regardless of whether you’re an LLC or S-Corp. Between payroll and filing costs, expect to spend $3,000 to $5,000 per year on compliance alone. The self-employment tax savings need to exceed those costs for the election to make sense.

C-Corps pay a flat 21% federal tax rate on profits. That sounds attractive until you remember that any money you take out as dividends gets taxed again on your personal return. This double taxation makes C-Corps a poor fit for most small businesses that are pulling out all their profits to live on. Where C-Corps can make sense is when you’re reinvesting heavily in the business and the 21% corporate rate is lower than your personal rate, or when you’re raising outside investment. But for most small business owners in Franklin or Nashville, a C-Corp creates more tax complexity than it solves.

If your net income is under $50,000, stay with a simple LLC. The compliance costs of an S-Corp election would eat your savings. Once you’re consistently netting $60,000 or more after a reasonable salary, run the numbers on an S-Corp election. The savings typically range from $5,000 to $15,000 per year depending on your income level and that adds up fast.

This isn’t a set-it-and-forget-it decision either. As your business grows, the optimal structure can change. What works at $80,000 in profit might not be ideal at $300,000. Regular tax advisory conversations should always include reviewing whether your current entity structure still serves you well.

The biggest mistake business owners make is choosing a structure based on something they read online or heard from a friend. Your buddy’s S-Corp might save him $12,000 a year, but your situation could be completely different. Before making any changes, get someone who understands your full financial picture to run the actual numbers. That’s exactly the kind of work that CFO services for small businesses are built for, taking the guesswork out of decisions that affect your tax bill for years to come.