Most people pick a business structure for liability protection, which makes sense. The tax side gets less attention, and it can shape what you owe every year for as long as you own the business. Thinking it through before you file formation papers is much easier than changing course later.
Sole proprietorships and single-member LLCs
If you run a business on your own and don’t form anything, you’re a sole proprietor. A single-member LLC is taxed the same way by default. The IRS treats the business as part of you: profit goes on Schedule C of your personal return, and you pay income tax on it plus self-employment tax of about 15.3% on most of your net earnings. The LLC still protects your personal assets. It just doesn’t change the tax result on its own.
Multi-member LLCs and partnerships
With two or more owners, an LLC is taxed as a partnership unless it elects otherwise. The business files an informational return and each owner gets a Schedule K-1 showing their share of the profit. Owners pay tax on that share whether or not the money was actually paid out to them, which surprises a lot of new partners. A well-drafted operating agreement spells out how profits, losses and distributions are divided.
The S corporation election
An LLC or corporation can elect S corporation status. Profit still passes through to the owners, but an owner who works in the business takes a salary, and only that salary carries payroll tax. The rest of the profit comes out as distributions without self-employment tax. The catch is that the salary has to be reasonable for the work, and the IRS does look at owners who pay themselves very little. There’s also more paperwork: payroll, a separate corporate return and stricter rules about who can own shares.
C corporations
A C corporation pays its own tax at a flat 21% federal rate. When it pays dividends, shareholders pay tax again on what they receive. That double layer is the main drawback. C corporations still make sense for some owners, such as companies that plan to reinvest most of their profit or raise money from investors.
The qualified business income deduction
Owners of pass-through businesses (sole proprietorships, partnerships, LLCs and S corporations) may be able to deduct up to 20% of their qualified business income. Congress made this deduction permanent in 2025. Limits apply at higher incomes, especially for service businesses such as law, accounting and consulting, so the benefit depends on your numbers.
Planning ahead
Your structure also affects how easily you can bring in a partner, sell the business or pass it to the next generation. That’s why we look at formation and succession together. Our business formation and succession services are offered for North Dakota matters, as part of our estate planning practice. Call us at 703-649-4848.
This article is educational and general in nature. It is not individualized legal or tax advice, and reading it does not create an attorney-client relationship. Tax law changes often, so talk with a qualified professional about your own situation.
