Which Business Structure Is Costing You Money? The Tax Guide Every Black Business Owner Needs (Part 2 of 7)

Hello

In our last email, we laid the foundation for understanding business taxes. Today, we're diving into a decision that could save (or cost) you thousands each year: choosing the right business structure.

Here's something many tax advisors won't tell you upfront: Black businesses often start as sole proprietorships because it's simple, but this could be leaving money on the table. Let's break down each business structure and discover which one could work best for your situation.

The Four Main Business Structures: Breaking Down the Tax Impact

1. Sole Proprietorship: The Starting Point

• What It Is: You and your business are legally the same entity

• Tax Impact: All profits are reported on your personal tax return (Schedule C)

• Self-employment tax: 15.3% on all profits

• Real Numbers Example: On $100,000 of profit • Self-employment tax: $15,300 • Personal income tax: Varies by tax bracket • No way to separate personal and business income for tax purposes

Quick Tip: While sole proprietorships are simple, they often result in higher tax bills and offer less protection for your personal assets.

2. Limited Liability Company (LLC): The Flexible Option

• What It Is: Separate legal entity with flexibility in tax treatment

• Tax Options: • Single-member LLC: Taxed like a sole proprietorship • Multi-member LLC: Taxed like a partnership • Can elect to be taxed as an S-Corp or C-Corp

• Benefits: Asset protection while maintaining tax flexibility

• Real Numbers Example: Same $100,000 profit, but with more options for tax treatment

Success Story: Lisa's Journey Lisa started her natural hair care product line as a sole proprietorship. After hitting $80,000 in annual profits, she restructured as an LLC taxed as an S-Corporation. This allowed her to:

• Pay herself a reasonable salary of $50,000

• Take the remaining $30,000 as distributions (not subject to self-employment tax)

• Save approximately $4,590 in self-employment taxes annually

3. S-Corporation: The Tax Saver

• What It Is: Special tax status that avoids double taxation

• Key Benefits: • Owners can be employees • Only pay self-employment tax on salary, not distributions • Profits pass through to personal tax return

• Real Numbers Example: On $100,000 profit • Set reasonable salary: $60,000 • Take distributions: $40,000 • Self-employment tax only on salary: $9,180 (versus $15,300 as sole proprietor) • Potential tax savings: $6,120 annually

Warning: The IRS watches S-Corps closely. Your salary must be "reasonable" for your industry and role.

4. C-Corporation: The Growth Structure

• What It Is: Separate tax-paying entity

• Best For: Businesses planning to: • Seek major investment • Go public eventually • Retain significant profits in the business

• Tax Considerations: • Corporate tax rate: 21% flat rate • Double taxation on dividends • More deduction options for fringe benefits

Making the Right Choice: A Decision Framework

Consider these factors when choosing your structure:

1. Current Revenue Level

• Under $40,000: Sole proprietorship might be fine

• $40,000-$100,000: Consider LLC with S-Corp election

• Over $100,000: Strongly consider S-Corp or C-Corp

2. Growth Plans

• Steady small business: LLC or S-Corp

• Rapid scaling/investment: C-Corp

• Family legacy building: S-Corp or LLC

3. Complexity Tolerance

• Simple operation: Sole proprietorship or LLC

• Can handle more paperwork: S-Corp or C-Corp

Action Steps for This Week:

1. Calculate your projected annual profit

2. List your 3-5 year business goals

3. Consult with a tax professional about switching structures

4. Start tracking time spent working in your business (crucial for S-Corp salary documentation)

What's Coming Next In our next email, we'll reveal the 10 tax deductions that Black entrepreneurs often miss – deductions that could save you thousands this year. You won't want to miss these hidden opportunities to keep more money in your business.

Have questions about business structures? Reply to this email. I read every response and your questions help shape future content.

Building wealth together,

Lashell

P.S. If you're considering changing your business structure, now is the perfect time. Many business owners wait until tax season, but planning ahead can save you both money and stress.