We work closely with growing founders every day and have seen the ripple effects of entity structure on everything from annual tax bills to long-term exit strategy. Let’s break down what you need to consider from the tax side of the house.
Different business structures are taxed in very different ways. Here's a quick overview of how common entities impact your taxes:
Pass-through taxation, but allows owners to pay themselves a salary (subject to payroll taxes) and potentially take the rest as distributions, which may reduce self-employment tax. Losses are only deductible to the extent of the shareholder's basis in stock and loans made to the corporation, and may also be limited by at-risk and passive activity rules.
Profits pass through to the owners and are taxed at individual rates. Subject to self-employment tax unless treated otherwise. Can elect to be taxed as an S-Corp or C-Corp.
Subject to corporate income tax. Profits distributed as dividends are taxed again at the individual level (double taxation). But may offer tax advantages at scale, especially for reinvestment or raising capital.
Each of these comes with pros, cons, and compliance obligations. It’s not about picking the "best" entity—it's about choosing the one that fits your business stage, goals, and tax priorities.
As a Ready Founder™, your job is to anticipate what’s next—not just react. Here are some tax-related triggers that may indicate it’s time to revisit your setup:
Once you're over $1M in annual revenue, entity inefficiencies can start costing real money. Self-employment taxes, state income taxes, and qualified business income (QBI) deductions are all in play.
If you're drawing more from the business, how you’re taxed on those payments matters. The right structure could significantly reduce what you owe in self-employment taxes.
Many investors prefer C-Corp entities, especially in business-friendly states like Delaware, Texas and Nevada. This also affects how gains are taxed at exit (think QSBS—Qualified Small Business Stock—treatment).
Expanding across state lines or serving overseas markets brings tax complexity. Nexus, franchise tax, and transfer pricing all become part of the picture.
For SaaS companies specifically, entity structure becomes even more critical as you scale. When providing financial management for SaaS companies, we often discover that subscription-based revenue models create unique tax considerations around revenue recognition, customer acquisition costs, and international expansion. Our CFO services for SaaS companies help founders understand how these tax implications can significantly impact cash flow and valuation as they evaluate their entity structure.
Not all restructuring events require a new EIN. For example, if an LLC elects S-Corp status, it may retain its existing EIN unless other structural changes apply.
Also note that once you elect a new tax classification using IRS Form 8832 or 2553, you generally must wait 60 months before making another change, unless you meet specific IRS exceptions.
Keep in mind that converting from one entity type to another may trigger IRS-deemed transfers or liquidations, resulting in immediate taxable events. Always model these outcomes before making a change.
Changing your entity type isn’t just a legal formality—it comes with tax implications that must be carefully modeled. Here are a few:
In short: consult your tax advisor *before* you make a move. Restructuring without modeling the tax impact can be a costly mistake.
At One Degree Financial, we support founders with strategic tax insight, but we do not give legal advice or make entity recommendations. That’s a job for your attorney. Our role is to help you understand the tax consequences of your decisions—whether you’re just starting out or rethinking your structure as you scale.
If you haven’t reviewed your entity structure since you launched—or if your business looks a lot different than it did when you picked it—it’s time for a check-in.
Ready Founders™ don’t leave taxes to chance. They model scenarios, understand the downstream impact, and make decisions that serve their long game.
Want help evaluating your structure through a tax lens? Let’s talk about how our Ready Founder™ services can help you make a strategic choice that supports where you’re headed.
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