Tax Benefits of Formalizing your Business
Are you self-employed? It might be time to start thinking like a Business.
Many freelancers, independent contractors, or small entrepreneurs start their business quickly, without formally registering as a business with tax authorities. However, taking the step toward formalization, whether as an LLC, Corporation, or another legal structure, requires proper legal verification with an attorney and guidance from a CPA for strategic tax planning.
At Jambrina CPA, we explain why forming a company can be a strategic decision for your financial future.
Main Tax Benefits of Forming a Business
1. Possibility of reducing your tax burden
When operating as an individual, you pay self-employment tax, which includes the full amount of Medicare and Social Security. But if you register as a business entity, you can structure your payments in a way that reduces the amount subject to this tax.
For example, certain structures like the S Corporation allow you to divide your income into two parts, such as:
Salary: subject to payroll tax
Profit distributions: not subject to payroll tax
This can help you reduce what you pay in taxes.
2. Access to more tax deductions
A formal entity can deduct expenses clearly and completely. In addition, as a business you can establish retirement plans like a 401(k) for yourself or your employees, and contributions made by the company are deductible as a business expense. This not only improves your tax burden but also strengthens your long-term financial stability.
3. Financial separation and asset protection
One of the advantages of formalizing as an LLC or corporation is the legal protection of your personal assets. This means that in case of debts or legal issues related to the business, your personal assets are not directly at risk if the entity has been properly structured. Additionally, separating personal and business finances makes it easier to keep accurate and organized accounting. To ensure adequate protection based on your case, it’s always recommended to complement accounting advice with a legal review by an attorney specialized in business structures.
4. Greater credibility and access to opportunities
Operating as a formally registered company with the IRS projects more professionalism to clients, financial institutions, and vendors. This can open opportunities such as applying for business credit lines, corporate or government contracts, receiving payments through merchant accounts (business accounts that allow you to accept card payments) or ACH (automated bank transfers between businesses and banks), and participating in financing or investment platforms.
5. Reduced risk of audits
Operating as a company with formal accounting, clear structure, and expense separation significantly reduces the risk of IRS audits. Registered entities tend to have more organized processes and consistent reports, which generates fewer red flags to the tax system. Also, having business documentation makes it easier to respond in case of IRS audits.
6. Access to immigration processes such as investor visas
Having a formally registered company in the U.S. can help with applying for investor or business visas (this opens the opportunity to form a company and be eligible for this type of visa, and as a business owner you can also hire abroad). Formalizing your activity does not guarantee a visa, but it is a key step if you plan to go that route in the future.
Which Legal Structure is Right for Me?
The first step is to speak with an attorney who can help you choose the type of company that suits you best. Then, a Certified Public Accountant (CPA) can guide you in choosing the best tax option based on your immigration status, annual income, and type of business. The most common structures are corporations (Inc. or Corp.) and LLCs (limited liability companies).
Here’s a simple explanation of the tax differences between each one:
· S Corporation
Helps you pay less in taxes by separating your salary from your profits. Only available to U.S. citizens or permanent residents. Ideal if you want to pay yourself a salary and save on taxes.
Maximum of 100 shareholders. (Can be with Corp or LLC)
· C Corporation
The company pays taxes independently.
Good if you want to retain profits or seek investors.
You can have foreign shareholders.
No limit on shareholders. (Can be with Corp or LLC)
· Partnership
When you form a business with another person. You can split the profits however you want. You need to be formed as an LLC and have 2 or more partners to use this option with the IRS.
Are You Growing as a Freelancer? Don’t Stay Informal
At Jambrina CPA, we help independent professionals, entrepreneurs, and freelancers:
Choose the correct tax structure
Register their business with the authorities
Set up a solid accounting system
Optimize their tax burden from day one
Whether you're just getting started or have been billing clients personally for a while, now is the best time to build a legal, profitable, and future-ready business.
Need Help? Contact Us!
Do it right. Optimize your taxes and professionalize your work.
📩 Book a consultation with our team and discover the best way to register your business.