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Why Entity Type Matters More Than You Think
Your entity type decides:
How you’re taxed
How much self-employment tax do you pay
Whether you can split income strategically
How clean do your books need to be
How investors look at you
How much of your own money do you keep
Most founders stay in their default structure too long.
Defaults are convenient.
Defaults are also expensive.
Let’s break this down simply, founder to founder.
The Three Entity Types
1. Sole Proprietor / Single-Member LLC
The starter zone.
Easy. Flexible. Minimal paperwork.
But the downside?
You pay self-employment tax on all your profits.
Great for the early days.
Terrible as you grow.
2. S-Corp (The Turning Point)
This is where the real tax strategy begins.
With an S-Corp, you split how you get paid:
Part salary
Part distribution
The salary gets taxed normally.
The distribution avoids self-employment tax altogether.
That difference is where founders save $3K–$10K+ each year.
When it makes sense:
~$60K+ in annual profit
Stable operations
Ready to run payroll (your accountant can automate this)
When it doesn’t:
Under ~$40K profit
Sporadic income
No clean bookkeeping
3. C-Corp (For the venture-backed world)
You pay corporate tax.
However, you may qualify for QSBS (game-changing at exit).
If you’re not raising money or planning equity strategies,
you probably don’t need this yet.
How to Know If You Should Switch to an S-Corp
Answer “yes” to at least three:
You’re paying too much in self-employment taxes
Profit is above ~$60K
You’re not on payroll yet
You want a clean separation between salary and owner draws
You plan to grow or hire soon
You want taxes that scale, not punish growth
If this feels eerily accurate, the switch is probably overdue.
The Real Benefit: Financial Control
This isn’t about trickery.
It’s about alignment.
An S-Corp gives founders control over:
When they take income
How much do they take
How their taxes scale
How predictable their cash flow becomes
It turns reactive finances into a proactive strategy.
And for founders, predictability is priceless.
Community Note
Founder, entity decisions are often made once, then never revisited. But your business changes. Your revenue changes. Your goals change.
So tell us:
Did switching structures save you money?
What confused you in the process?
What do you wish someone had told you sooner?
We’ll fold your insights into the NestLedger Playbook, giving other founders the clarity you had to earn the hard way.
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