Pass Issues
🗞️ October 2025 Issue –
Kreative Tax Pros Newsletter
Wednesday 12 November, 2025
Vol. 1 – Issue #2 For Individuals & Small Business Owners
TOP NEWS
LLC (default): Pass‑through taxation (sole prop/partnership). Net profit generally subject to self‑employment tax. Simple to operate.
LLC taxed as S‑Corp: Pass‑through; owners take a reasonable salary (subject to payroll taxes) and may take remaining profit as distributions not subject to SE tax. Requires payroll and filings.
C‑Corp: 21% federal corporate tax. Potential double taxation on dividends, but broader fringe benefits and planning opportunities (e.g., retained earnings, potential Section 1202/QSBS if eligible).
Partnership: Flexible allocation and basis rules. Many items (including guaranteed payments) can be subject to SE tax for active partners.
QBI (199A): Pass‑throughs (LLC/Partnership/S‑Corp) may get up to a 20% deduction, subject to income limits, wages/basis tests, and specified‑service rules.
Benefits & Payroll: S‑Corp requires reasonable compensation; C‑Corp offers more fringe benefits; partnership/LLC default typically simpler admin.
Coming Next Month
Year‑End Tax Moves for Business Owners — actionable steps before December 31.
LLC vs. S‑Corp vs. C‑Corp vs. Partnership: Which Saves You More Taxes?
The entity you choose affects how you’re taxed, your payroll obligations, and your take‑home profit. Here’s a clear side‑by‑side to help you decide when an LLC (default or S‑Corp election), a C‑Corp, or a Partnership could be the most tax‑efficient choice.
What You Can Do Now
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Run an entity‑choice analysis. Compare projected profit, salary needs, and distributions to estimate SE‑tax and income‑tax savings.
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Consider an S‑Corp election (Form 2553). Prospective elections are cleanest; late‑relief may be available in some cases.
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Set “reasonable compensation.” Establish payroll for owner‑employees and document the methodology.
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Tighten bookkeeping. Separate business/personal, adopt an accountable plan, and track home‑office, mileage, and equipment.
Real‑Life Example: Maria the Small Business Owner
Real‑Life Example: The Two‑Owner Agency
A marketing agency expects $150,000 in annual profit with two owners actively working. As an LLC (default), most or all of that profit is subject to self‑employment tax. Electing S‑Corp and paying each owner a reasonable salary (e.g., $45k each) can shift remaining profit to distributions, often reducing overall SE‑tax exposure while keeping income tax similar. The exact savings depend on wages, other income, and QBI limits — running the numbers matters.