How do we pick the right entity and not get screwed with our taxes?

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Question – Hi we are at a stand still .. We are waiting for our cpa to tell us whether to put the business under an LLC or an entity ( for tax purposes ).

I have a dog grooming job full time and my husband is a fire fighter full time so we just wanted to make sure we picked the right one and wouldn’t get screwed with our taxes . Not sure if you could be any help to us .. it is a dog hiking business, we will take dogs on 2 -3 mi hikes in the woods about 3 to 4 rounds a day of different dogs. It will be just me and my husband working no other employees.

Our Response – This can be an interesting question to answer since everyone’s finances are different.  You should talk with a CPA to get specific advice but do have a few thoughts to share. 

– The entity may have a small impact on your taxes, but what will matter more is how you elect it to be taxed.  The LLC is the most flexible as you can elect to be taxed as a sole proprietorship, partnership, C corporation or S corporation.  (The corporation you can choose to be taxed as a C or S corp).  

– Many people will choose to have their LLC taxed like an S corp since it is not double taxed like a C corp.  So this makes the LLC whats called a disregarded entity, which means the entity isn’t taxed as the taxes pass on to the owners.  This part is kind of similar to how a sole proprietorship or partnership is taxed.  What makes the S corp election especially interesting is that any profits that are made above whats considered a “normal salary”, those profits can be distributed as dividends which keeps them from being taxed the various payroll taxes of 15.3%.  A “normal salary” is determined by the IRS and is going to vary based on industry, what similar people would make doing the same job, etc. Regardless, saving 15.3% on some of your profits can be a great way to legally shield your money from the tax man.  

– Whats also interesting about the LLC is the ability to change your tax status.  There are some stipulations on how often you can do it, but this gives you flexibility as the business changes. 

– With that said, one of the downsides of an LLC taxed as a corp (either one) is that you have to pay yourself a salary and with that comes additional paperwork, payroll taxes, workmans’ compensation, etc.  This could be farmed out to a payroll company or you could learn yourself, but is time you could be better spent on the business and with the limited time you have left over, you need to use it as efficiently as possible.   

– All that said, from what it sounds like is that your business is going to be part-time in the beginning while you keep your full-time jobs and building the business.  In reality, it’s likely that none of the entities are going to save you much, if any money in taxes.  The LLC is going to provide you with asset protection, so if something happens in the business, your personal assets are going to be safer than if you were to file as a sole proprietorship.  You may want to consider starting out as an LLC that elects to be taxed as a sole proprietorship while it is getting off the ground.  Once the business can pay you more than the “normal salary” and you can take dividends you can change the election for s corp status.  This way, you don’t have to worry about all of the extra paperwork and complexity. 

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