Is Your Business Structure Costing You Money? | Ben Rosbach and Kevin Kort, CPA

Is Your Business Structure Costing You Money? 

By: Ben Rosbach and Kevin Kort, CPA

Why the entity you picked on day one might not be the right one today 

If you started your business a few years ago, there's a good chance you set up an LLC, checked the box, and never looked back. Maybe your buddy told you, "just get an LLC." Maybe your CPA set it up and you haven't thought about it since. 

This is how most people do it at the start. But here's the thing: the structure that made sense when you were bringing in $60K on the side probably doesn't make sense now that you're clearing $200K or more. And the gap between where you are and where you should be? That's costing you real money every single year. 

The Set It and Forget It Trap 

Most business owners treat their entity structure like their Wi-Fi password. Set it up once and never think about it again. The problem is that your business isn't static. Your revenue has likely grown and expenses look different. But the structure you're operating under is still the one you picked when you were just trying to get off the ground. 

This isn't a paperwork issue. It's a tax issue, a retirement planning issue, and ultimately a wealth building issue. The longer you stay in the wrong structure, the more you leave on the table. 

What Staying in a Default LLC Is Actually Costing You 

If you're running as a sole proprietor or a single member LLC taxed as a disregarded entity, every dollar of net profit gets hit with self-employment tax. That's 15.3%, covering both the employer and employee side of Social Security and Medicare, on top of your federal and state income tax. 

When you were making $50K or $70K, that tax rate was manageable. But let's say you're now netting $250K. That's roughly $25K or more per year in self-employment tax alone. Not income tax. Just the SE tax. 

What Exactly Is an S Corp? 

Let's back up for a second, because this term gets thrown around a lot without much explanation. 

An S corporation isn't a type of business entity, it’s a tax election. You keep your LLC, but you file IRS Form 2553 to tell the government you want your LLC to be taxed as an S corporation instead of a disregarded entity or sole proprietorship. 

This fundamentally changes how your income gets taxed. Instead of all your profit being subject to that 15.3% self-employment tax, you split your income into two buckets: a W-2 salary that you pay yourself through payroll, and distributions that flow to you as the owner. The salary gets taxed like any normal paycheck. The distributions? They bypass the 15.3% self-employment tax entirely. 

The Cost of Running an S Corp 

Operating as an S Corp comes with legitimate costs. You'll need to run payroll, which typically runs anywhere from $500 to $2,000 per year depending on the service used. You'll likely need a more involved tax return, which means higher CPA fees, and there may be state level fees or franchise taxes depending on where you operate. 

All in, you might be looking at $3,000 to $6,000 per year in additional overhead to maintain the S Corp properly. 

That means the election doesn't make sense for everyone. If your business is netting $50K, the self-employment tax savings from the salary and distribution split probably won't outweigh those added costs. The general rule of thumb is that you want to be netting somewhere around $150K to $200K or more before the math starts to work in your favor. Below that, you may actually end up spending more to maintain the structure than you save in taxes. 

The Election Is Step One. Execution Is Where It Counts 

Here's where I see people stumble. They hear about the S Corp savings, they make the election, and then they don't change how they operate. The structure only works if you run it properly. 

That means setting up payroll. It means actually paying yourself consistently, not just pulling random draws. It means adjusting your quarterly estimated tax payments so you're not overpaying or underpaying. And it means understanding the state level implications, because not every state treats S corps the same way. 

The Retirement Play Business Owners Miss 

This is the part that gets me excited.  Once you're operating as an S Corp, you unlock retirement contribution strategies that most people have no idea exist. And this is where the structure really starts to pay for itself beyond just the tax savings. 

A Solo 401(k) is one of the most powerful tools available to business owners with no full-time employees other than themselves and potentially a spouse. On the employee side, you can defer up to $24,500 in 2026. On the employer side, your S Corp can contribute up to 25% of your W-2 salary on top of that. So, if you're paying yourself that $90K salary, you could be putting away $47K or more into a tax advantaged retirement account every year. Compare that to the $7,500 IRA limit most people think is their only option. 

A SEP IRA is another strong option, especially for its simplicity. There's less paperwork than a Solo 401(k) and it allows employer contributions of up to 25% of your W-2 compensation. The tradeoff is that you don't get the employee deferral side, so the total contribution ceiling is typically lower than what a Solo 401(k) allows. But for business owners who want a straightforward, low maintenance retirement vehicle, a SEP can be a great fit. 

The beauty of pairing either of these with your S Corp is that the employer contributions are a deductible business expense. So not only are you building long term wealth, you're reducing your taxable income at the same time. 

Timing Matters 

If you've been thinking about making a change, don't wait until December. S Corp elections have specific filing windows. Payroll needs lead time to set up. State filings have their own deadlines. The earlier in the year you start this conversation, the more of the tax benefit you capture. 

The Bottom Line 

If your business has evolved, your entity structure should evolve with it. The difference between the right structure and the wrong one isn't theoretical. It's tens of thousands of dollars per year that could be going toward reducing your tax burden, funding your future, or simply keeping more of what you've earned. 

If you haven't revisited your structure in a while, or if you set it up years ago and haven't thought about it since, it's worth a conversation. 

Sources: https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

https://www.irs.gov/retirement-plans/401k-plans-deferrals-and-matching-when-compensation-exceeds-the-annual-limit

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Ben Rosbach is a Financial Advisor of Santa Monica, California-based Gerber Kawasaki Inc., an SEC-registered investment firm with approximately ~$4.09B billion in assets under management and advisement as of 12/31/25.  The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss. Readers shouldn't buy any investment without doing their research to determine if the investments are suitable for their situation. “All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results." Every situation is unique and you should consult a tax professional and a financial advisor before making any decisions.