💰 Your LLC might be costing you $10K+ a year in extra taxes

Happy Thursday! The structure you chose when you decided to open a business was almost certainly chosen under mild duress and even less information. That’s normal. Revisiting it is also normal, and with the §199A deduction now permanent, this is a reasonable year to do it.

This week’s lineup:

The Basics

🏢 LLC, S-Corp or C-Corp? Here’s how to actually decide

The entity you chose when you formed your business was probably chosen under duress. Your attorney suggested something. The online formation service had a dropdown. You picked one, filed the paperwork, and moved on, fully intending to revisit the question later.

Later, it turns out, is now.

The structure your business operates under determines how much self-employment tax you pay, how you compensate yourself, who can invest in you, and what the check looks like when you eventually sell. These are not minor administrative footnotes. They are the tax bill.

The quick version of each:

The OBBBA made the §199A pass-through deduction permanent. That means LLC and S-Corp owners below the phase-in threshold ($201,775 single or $403,500 married filing jointly) can now permanently deduct 20% of qualified business income (not all businesses qualify). Pass-through structures are more attractive in 2026 than they’ve ever been, and the C-Corp comparison gets harder to justify for most small businesses.

The right answer depends on your profit level, your growth trajectory, and what your exit looks like. But the wrong answer is the one you chose five years ago and haven’t looked at since.

👉 IRS overview of business structures — irs.gov

The Strategy

⚙️ How to convert your LLC to an S-Corp (and when to do it)

The S-Corp election is one of the most commonly recommended moves for growing small businesses. It is also one of the most commonly botched, not because the process is complicated, but because the timing rules are strict, the eligibility requirements have real teeth, and the ongoing compliance obligations have a way of surprising people who thought they were done after filing the paperwork.

Here is the short version of how to do it right.

Step 1: Confirm you actually qualify. Your LLC must be domestic, have 100 or fewer members, have only one class of membership interest, and have no foreign owners, corporate owners, or partnership owners. That last point catches people. If your LLC has a nonresident alien investor or a corporate member, the election isn’t available to you.

Step 2: Run the numbers before you file. The S-Corp election makes financial sense when the self-employment tax savings exceed the added cost of administration — payroll setup, quarterly filings, a more complex return. That added cost typically runs $1,500–$3,000 per year for a straightforward single-owner business. At $80,000 in net profit with a $50,000 salary, the distribution saves you roughly $4,590 in self-employment tax. That pencils out. At $40,000 in net profit, it usually doesn’t.

Step 3: Establish your reasonable salary first. The IRS requires S-Corp owner-employees to pay themselves what someone with your role, experience and industry would earn as a W-2 employee. Paying yourself $25,000 when your business is generating $300,000 in profit is a known audit trigger. The IRS has challenged it in court repeatedly and won. Get a defensible number documented before you elect, not after.

Step 4: File Form 2553 by March 15. This is the deadline most people miss. To have S-Corp status apply for a given tax year, Form 2553 must be filed by March 15 of that year. Miss it and you’re looking at the following year. Late election relief exists under Rev. Proc. 2013-30, but it requires reasonable cause and isn’t something to plan around.

Step 5: Set up payroll before your first distribution. Not after. Distributions that go out before a payroll structure is in place can be reclassified as wages by the IRS. The savings from the election can be retroactively erased. Run payroll first.

👉 IRS Form 2553 and instructions — irs.gov

The Deep Dive

🏦 Your entity choice today is your exit tax bill tomorrow

Most business owners think about entity structure as a tax efficiency question: How do I pay less this year? That framing isn’t wrong, it’s just incomplete.

The structure you’re operating under when you sell determines how much of the sale price actually ends up in your account. The difference between structures, on the same headline number, can be hundreds of thousands of dollars. And some of the most valuable options require planning that began years before any buyer appeared.

The foundational distinction: asset sales vs. stock sales.

In an asset sale, the buyer purchases the individual assets of the business. Each asset class is taxed differently, some at capital gains rates, some at ordinary income rates. Buyers prefer asset sales because they get a stepped-up basis in the assets and can depreciate them again.

In a stock sale, the buyer purchases the ownership interest in the entity itself. The seller’s gain is generally treated as capital gain, which is almost always more favorable. Sellers prefer stock sales. This preference collision is a standard feature of most business sale negotiations.

How your structure affects your options:

The exception is §1202. If you acquired original-issue stock in a qualified C-Corp, operated in a qualifying industry (not law, finance, health or consulting), kept the assets under $50 million, and held long enough, up to 100% of your capital gain may be excluded from federal tax. 

The OBBBA updated the terms for stock issued after July 4, 2025. The exclusion cap increased from $10 million to $15 million (indexed for inflation starting in 2027), and the gross asset threshold increased from $50 million to $75 million. The holding period structure also changed. Rather than requiring five years for any exclusion, the OBBBA introduced a tiered system: 50% after three years, 75% after four, and the full 100% after five. 

Gains on stock held for only three or four years are taxed at 28% rather than the standard long-term capital gains rates. For stock issued before July 4, 2025, the original $10 million cap, $50 million asset threshold, and five-year full-benefit requirement still apply. 

Either way, on a significant exit, the exclusion is worth millions of dollars.

§1202 also requires planning from the beginning. The five-year clock starts when the stock is issued. If you’re two years into building a business with a realistic path to a significant exit, the conversation about whether to convert to a C-Corp belongs on your agenda before you get any closer to a transaction, not after a buyer is at the table.

👉 Qualified Small Business Stock — irs.gov

The Freebie

🏗️ Not sure which entity is right for your business?

Wrong structure doesn’t just cost you this year. It can cost you when you sell, when you bring on investors, or when you try to change course and the timing no longer works.

Download the Free 2026 Entity Comparison Worksheet →

If you made it this far, you’re our kind of nerd. Hit reply and tell us which story you want us to dive deeper into next week.