Choosing the right business entity is one of those decisions many owners make early and then never revisit. At the start, the focus is usually speed and simplicity. You want to open your doors, invoice clients, and get cash flowing. The structure you choose often feels good enough.
But as your business grows, that original setup can quietly become expensive.
We see this often with Fort Worth business owners. Plumbers, HVAC contractors, real estate agents, insurance professionals, and small service businesses start as sole proprietors or simple LLCs. A few good years later, profits are higher, payroll is larger, and tax bills start to sting. That is usually the moment when owners consider a switch entity type for tax savings.
This guide walks through when it makes sense to revisit your entity structure, what changes when you switch, and how to decide whether the move is right for your business.
Your entity type determines how income is taxed, how payroll works, and which taxes apply to you as the owner.
Most small businesses start as one of the following:
Sole proprietors, partnerships, and most LLCs are pass-through entities. That means business profits flow directly to your personal tax return. You pay income tax and self-employment tax on the net profit.
Corporations work differently. An S corporation still passes income through to the owner, but it allows profits to be split between salary and distributions. A C corporation pays its own tax, and owners are taxed separately on wages and dividends.
The difference in how income is taxed is where planning opportunities appear.
As profits increase, self-employment taxes can become one of the highest costs for business owners. At that point, the structure that once felt simple can start to work against you.
One of the clearest signals that it may be time to switch entity types is consistent profitability.
When your business is earning modest income, staying a sole proprietor or basic LLC often makes sense. The compliance is lighter, and the cost to maintain the structure is low.
Once net profits regularly reach the $40,000 – $50,000 range, it becomes worth running the numbers. At that level, self-employment tax alone can cost thousands each year.
For many business owners, especially trades and service professionals, this is when an S corporation election starts to make sense.
An S corporation allows owner-operators to pay themselves a reasonable salary and take the remaining profit as distributions.
The salary portion is subject to payroll taxes. The distribution portion is not subject to self-employment tax.
This structure can create real savings, but only when done correctly. The IRS requires that owner salaries be reasonable for the work performed. Underpaying yourself to avoid tax is a red flag.
For example, an HVAC business owner earning $120,000 in net profit as a sole proprietor would pay income tax and self-employment tax on the full amount. Self-employment tax covers Social Security and Medicare and currently totals 15.3%.
If that same business elects S corporation tax treatment, the owner must pay themselves a reasonable salary for the work they do, say $70,000. That salary runs through payroll and is subject to income tax plus Social Security and Medicare payroll taxes.
The remaining $50,000 is taken as an owner distribution. It is still subject to income tax, but it is not subject to self-employment tax or payroll taxes, which is where the tax savings come from.
The key is that the salary must be reasonable based on the owner’s role and industry, or the IRS can reclassify the income and assess penalties. This is one of the most common reasons we help clients switch entity types.
Tax savings are not the only reason to change your entity.
Sole proprietors and general partnerships expose personal assets to business risk. If something goes wrong, personal savings, homes, and investments may be at risk.
Moving into an LLC or corporate structure creates a legal separation between the business and personal finances. For trades businesses, real estate professionals, and insurance agents, this protection is often just as important as the tax benefit.
If your business has grown in size, employees, or exposure, liability protection alone can justify a structural change.
Entity structure also affects how easy it is to grow.
Businesses that plan to add partners, bring in investors, or eventually sell often benefit from a more formal structure. Corporations provide clearer ownership rules, easier transfer of shares, and more predictable succession planning.
We often see this with growing real estate teams and insurance agencies. What started as a solo practice evolves into a business with multiple producers, shared ownership, and long-term value. At that stage, entity structure becomes a strategic decision rather than a tax formality.
Switching entity types is not always the right move.
Increased compliance and accounting costs can offset tax savings for smaller businesses. S corporations also come with stricter payroll rules and reporting requirements.
Some businesses benefit more from simplicity than optimization, especially if profits fluctuate or remain modest.
That is why entity changes should always be guided by real numbers, not generic advice.
Your entity type should support where your business is today and where it is headed next.
Tax savings rarely come from one big decision at year-end. They come from reviewing your structure, compensation, and cash flow throughout the year and adjusting early.
At Adam Traywick, CPA, we work with Fort Worth business owners to evaluate entity structure as part of a broader tax planning strategy. Whether you run a trade business, a real estate practice, or a growing service firm, the right structure can help you keep more of what you earn and reduce surprises.
If you have not reviewed your entity type in a few years, now is a good time to start the conversation.
Let’s make sure your business structure is working for you, not against you.
