If you run a business — or you're thinking about starting one — the question of business structure comes up fast. Sole proprietorship? LLC? S-Corp? Each one affects how you file your business income tax, how much self-employment tax you owe, and how much liability protection you carry. Choosing the wrong structure doesn't just create paperwork headaches; it can mean paying more to the IRS than you need to, year after year. This guide breaks down the three most common structures so you can have a smarter conversation with your CPA before year-end — and there's still time to make 2026 count.

Sole Proprietorship: Simple to Start, Costly to Keep

A sole proprietorship is the default. If you're doing business under your own name and you haven't filed any formation documents, you're already one. That simplicity is real — there are no state filing fees, no separate business tax return, and your income flows straight onto Schedule C of your personal income tax return.

The trade-off shows up in two places:

  • Self-employment tax. As a sole proprietor, you pay self-employment tax on your net profit. That covers both the employee and employer sides of Social Security and Medicare. For profitable businesses, that adds up quickly.
  • Liability exposure. There is no legal separation between you and your business. A business debt or lawsuit can reach your personal assets.

For someone just testing an idea or earning occasional side income, a sole proprietorship makes sense. For a business with consistent, growing profit, it's worth looking at what a different structure could do for your tax preparation picture.

LLC: Flexibility With Real Protection

A Limited Liability Company (LLC) is the most popular structure for small business owners in Montana — and for good reason. It separates your personal assets from your business, which matters if things ever go sideways.

Here's what surprises many business owners: an LLC is a legal structure, not a tax structure. By default, the IRS treats a single-member LLC the same as a sole proprietorship — your profit still lands on Schedule C, and you still pay self-employment tax on all of it. A multi-member LLC is taxed like a partnership by default, which requires its own return (Form 1065).

The good news: an LLC gives you options. You can elect to have your LLC taxed as an S-Corp, which is where things get interesting for profitable businesses.

From a business income tax standpoint, the LLC itself doesn't save you money by default — but the liability protection it offers is genuinely valuable, and it sets you up to make smarter tax elections as your revenue grows.

S-Corp: Where the Tax Savings Often Live — and the Complexity Begins

The S-Corp election (technically an IRS filing that tells the government to treat your business as an S-Corporation for tax purposes) is the structure most commonly discussed when business owners talk about reducing self-employment tax. Here's the core idea:

  • As an S-Corp owner-employee, you pay yourself a reasonable salary. That salary is subject to payroll taxes — both the employee and employer portions.
  • Profit above and beyond your salary passes through to you as a distribution. Distributions are not subject to self-employment tax.

If your business generates meaningful profit above what counts as a reasonable salary for your role, the S-Corp structure can reduce the amount of income subject to self-employment tax. That's the appeal.

But the S-Corp comes with real responsibilities that sole proprietors and single-member LLCs don't face:

  • You must run payroll — including withholding, deposits, and quarterly filings.
  • You file a separate corporate tax return (Form 1120-S), which is more involved than a Schedule C.
  • You must pay yourself a "reasonable compensation" — the IRS watches this closely, and underpaying yourself to inflate distributions is a known audit trigger.
  • There are ongoing compliance requirements: annual reports, separate bank accounts, and proper bookkeeping.

The S-Corp makes sense when the tax savings outweigh the added cost of compliance. That crossover point is different for every business. A CPA who knows your numbers can tell you whether you're there yet — or how close you are.

How to Think About the Decision Right Now

We're in the final stretch of 2026, which makes this a good moment to think about entity structure — not because you need to panic, but because some elections have deadlines. An S-Corp election for the 2027 tax year, for example, generally needs to be filed by March 15, 2027. If you're considering a change, starting the conversation now gives you time to get it right rather than rushing.

Here are the questions worth asking yourself — and then discussing with your CPA:

  • How much net profit is your business generating? Is it consistent, or does it swing year to year?
  • Are you currently paying self-employment tax on all of your business income?
  • Do you have proper bookkeeping in place, or is your recordkeeping informal?
  • Are you prepared to run payroll — or work with someone who handles it for you?
  • What's your liability exposure? Do you have assets worth protecting?

None of these questions has a universal answer. A freelance consultant with modest income and low overhead has a very different calculation than a Billings-area contractor with employees, equipment, and growing revenue. Entity structure is one of those decisions that looks simple from the outside and gets specific fast once you're looking at real numbers.

What a CPA in Billings Can Do That a Generic Article Can't

Reading about entity structures is a good starting point. Making the right call for your business requires looking at your actual income, your actual expenses, what you pay yourself, and what your goals are for the next few years.

At Streamlined Services, PC, Jake Linville works with business owners across Billings, Bozeman, Missoula, Great Falls, and throughout Montana to answer exactly these questions. The approach here isn't to hand you a generic recommendation — it's to look at your situation, explain what the numbers actually mean, and help you make a decision you understand.

That includes helping you think through the downstream effects: if you elect S-Corp status, you'll need payroll processing and proper bookkeeping to stay compliant. If you're already on top of those, the transition is smoother. If you're not, that's part of the conversation too.

Whether you're filing as a sole proprietor today and wondering if you've outgrown it, or you're setting up a new business and want to start in the right structure, the time to think about it is before the tax year closes — not after.

Ready to Talk Through Your Business Structure?

New clients receive a free 15-minute consultation with Jake to review your situation and confirm that Streamlined Services, PC is the right fit. No obligation, no pressure — just a straightforward conversation about where you are and what your options look like.

Call (406) 652-7999, email [email protected], or visit bookmycpa.com to book your consultation. You can also explore our full range of tax and accounting services to see how we support businesses at every stage.

Serving Billings and clients across Montana and the United States — virtually and in person at 645 Grand Ave, Billings, MT 59101.