One of the most important financial decisions a business can make is what kind of structure to use. But a lot of owners don’t know that the structure they picked years ago might not be the best one for them anymore. In fact, keeping the wrong setup could cost you more in taxes, make it harder to follow the rules, or even make you miss out on valuable deductions. If you’ve been wondering if your setup is helping or hurting you, it might be a good idea to talk to a Small Business CPA in San Francisco to make sure you’re not wasting money.

Why the structure of your business is important

Most business owners are focused on getting their businesses up and running when they first start them. They often choose a structure – like a sole proprietorship, partnership, LLC, or corporation – based on how easy it is to use instead of how it will affect their finances in the long run.

But the structure you choose affects:

• How much tax you pay (and what rate applies)
• How much liability you have for personal and business assets
• Whether you can get deductions and credits
• How complicated it is to run your business and how much it costs to comply with the law.
• How profits are shared and reported

As your business grows, what worked at first may not always be the best way to save money.

How Different Business Structures Affect Your Finances

Sole Proprietorship

Setting up a sole proprietorship is easy and doesn’t cost much. But the downside is that all profits are taxed as personal income and subject to self-employment tax, which can lead to a higher rate compared to other entity types. You are also personally responsible for debts. This means your personal assets such as your savings or home could be at risk if the business faces financial or legal trouble.

Partnership

Income goes straight to the partners’ tax returns in a partnership. Depending on allocations and deductions, this can increase personal tax liability compared to other structures. Also, disagreements about how to share profits and who is responsible can make things more difficult.

Limited Liability Corporation (LLC)

An LLC protects you from liability and gives you more options when it comes to taxes. If an LLC elects S-Corp taxation, owners may reduce self-employment taxes by splitting income between salary and distribution. However, the IRS requires that owners pay themselves a reasonable wage. LLCs also often have to pay state-specific fees and file paperwork every year, which adds to their costs.

Quick note: In California, LLCs are subject to an $800 annual minimum franchise tax, plus an additional gross receipts fee that scales with revenue – costs that can add up quickly for small businesses.

S-Corporation

An S-Corp lets profits (and some losses) go straight to the owners’ personal tax returns, so they don’t have to pay taxes twice. Owners can also pay themselves a fair wage and take extra profits as distributions, which could lower their self-employment taxes. S-Corps still need more paperwork and have stricter rules.

C-Corporation

C-Corp has some good things about it, like tax-deductible benefits for employees and stock options, but it also has double taxation, which means that the company has to pay taxes on its profits and then again on its dividends without proper tax planning.

Signs that your current structure might be costing you money

1. You think your tax bill is too high.

If you are always shocked by how much you owe in taxes, it might be time to think about whether your structure is helping you save the most money.

2. You’re not using deductions to your advantage.

Different structures offer different deductions, such as contributions to retirement accounts and health insurance premiums. If you miss these, you’re leaving money on the table.

3. Your business has grown a lot.

Your structure may not work as well when you’re making $500,000 or more as it did when you were making $50,000.

4. You’re paying fees that you don’t need to.

Some structures have to pay state fees, franchise taxes, and administrative costs every year that may no longer be necessary.

5. You’re worried about being held responsible.

If your current setup puts your personal assets at risk, legal problems could cost you a lot more than taxes.

How a CPA for a Small Business Can Help

It doesn’t have to be hard to look at your business structure again. A Small Business CPA in San Francisco can:

• Look at how your business is set up now and compare it to other options
• Figure out how much money you can save on taxes in different situations
• Find deductions and credits you might have missed
• Make sure you follow all federal and state rules
• Give advice on payroll, benefits, and distributions

You can make a proactive change that could save your business thousands of dollars a year by working with an expert.

Don’t let the wrong structure hurt your profits.

Your business structure should help you, not hurt you. Now is the perfect time to check if it’s still the best fit if you set it up years ago. Talking to a Small Business CPA in San Francisco can help you find ways to save money, lower your risks, and set your business up for long-term success.

Schedule a 15-minute meeting with our expert Samy Basta today to discuss your current structure and explore opportunities to save money and grow smarter.