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Hit 7 figures but losing 5 figures to taxes? Earn a 6-figure income but feel financial chaos? Welcome to the show helping you Simplify Your Numbers.
Most business owners in the $1M–$10M range feel like "passive payers"—surprised by a massive bill every April and wondering why their hard work isn't reflected in their bank account. Host Fabrice Metan, a veteran CFO and tax strategist, cuts through the noise of complex financial data to provide straightforward, actionable insights for the "7-6-5" entrepreneur.
This podcast is the bridge between traditional bookkeeping and high-level advisory. We move you away from a reactive "compliance mindset" and into a proactive strategy where your business becomes your greatest wealth-building tool.
Stop being a passenger in your own financials. It’s time to simplify your numbers, maximize your profit, and hold onto more of what you earn.
Subscribe to join the 7-6-5 community and start your transformation today.
Ep08
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[00:00:00]
Incorporation Myths Online
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Fabrice Metan: Social media has completely confused business owners about how to incorporate a business. Some people think creating an LLC automatically save taxes. Some others believe that everyone should be an S corp. In reality, a lot of that advice is flat out wrong. And so in this episode, I'd like to do a little bit of a deep dive in each one of those entity structures, when it makes sense and when it doesn't.
Let's do it.
Fabrice Metan: [00:01:00] All right.
LLC Basics and Protection
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Fabrice Metan: So let's start with the LLC, which, you know, everyone essentially talks about it as, you know, you started a business, you should go ahead and create an LLC. You gotta have your LLC. But a lot of people talk about it as a tax savings tool, when in reality, setting up an LLC does not automatically save you taxes.
The one thing that it gives you is legal protection. That is the first reason why you should have an LLC. Es-essentially separating your business structure from yourself, right? Now, a single-member LLC is still treated as a sole proprietorship for tax purposes, because at the end of the day, you would still file a Schedule C inside your personal tax return, [00:02:00] as opposed to having a separate business tax return, right?
So i- from a tax standpoint, because it's treated the same, it doesn't automatically save you in taxes. All right.
LLC When It Works
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Fabrice Metan: And so I'd like to give you a few examples as to when I recommend the LLC versus when I don't just to give you an overview, so you get a sense of why you should or shouldn't set up as an LLC. I love the LLC for legal protection, love the LLC for simplicity, love the LLC for passive real estate.
Right? If you own rentals, you have long-term renters essentially having that LLC to protect yourself and separate yourself from the legality of those properties makes sense And I also love the LLC for flexibility to be able to eventually convert if you ever needed to into another entity.
LLC Income Threshold Issues
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Fabrice Metan: Does Now, I don't like the LLC when you have an operating entity that is making you too much money. And here's what [00:03:00] I mean by that. My threshold is fifty thousand dollars. If your LLC is earning you more than fifty thousand dollars, I'd like to look at a conversion into another type of entity, and we'll talk about that.
When it makes you less, you might be able to remain an LLC, and it still makes sense. But when you have an operating entity, and the reason why I say operating is because that's very different from a passive entity. If you own real estate within an LLC that is still passive, you do not pay self-employment taxes on the earnings that you make from that entity.
But if you actually run a business, an accounting firm, like what I w-- I, I have. if you are in the production industry, for example, right? You sell widgets, whatever that might be. If you, you actually have an operation, every dollar that you earn under that business would be subject to self-employment taxes.
That's when the LLC doesn't make sense anymore once you reach a certain threshold.
One of the major issues with the LLC is that [00:04:00] all of your earnings, all of your net earnings from that entity are considered compensation You're essentially looked at as all of the money that you bring in from that business are considered wages, and all of the taxes applicable to wages apply to the money that you make.
So whether it's federal and state income tax, that's the first thing, but then you're dealing with self-employment taxes, where you as an individual and as the business owner would pay both the employee and employer side 15.3%. It could be very high.
Does All right.
Sole Proprietor Pros and Cons
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Fabrice Metan: The second entity would be a sole proprietorship. Now, in a sole proprietorship, the simple way to put it is that a sole proprietorship and you as the business owner are essentially the same person. You might create a separate EIN number at the IRS level, at the federal level, but at the end of the day, it's viewed as you and the business being one and the same, which is why the state sometimes does not even require you to register your sole [00:05:00] proprietorship at the state level.
Now, the sole proprietorship a lot of the times makes sense for simplicity, right? And for very small entities, right? Startup, you're not exactly sure if you're really gonna take it somewhere. It might make sense at that point. But where I don't like it is that the sole prop does not allow you to have any protection.
You and the business are exactly the same. So if there's anything wrong that happens at the business level and that the business gets sued, guess what? You are getting sued as well, right? So you wanna be very careful at that point. And the sole proprietorship does not have the flexibility to be converted into something else.
In most cases, when you are a sole proprietorship, if you ever wanted to become an LLC, you'd have to create a whole separate entity. Something to think about.
Paying Kids Strategy
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Fabrice Metan: But there is one little strategy where I love the sole proprietorship. That would be for your family management company. In other words, if you have kids under the age of seventeen and that you would like [00:06:00] to pay them to help you in your business, it makes a lot more sense to set up a sole proprietorship that hires the kids so that there is absolutely no tax implication as long as they get paid under the standard deduction for a single taxpayer.
And so you don't have to pay any Social Security taxes on those wages, any Medicare taxes on those wages, any unemployment taxes on those wages, as long as they're hired by a sole proprietorship. When that switches to an LLC or an S corp, it starts changing things where you actually have to pay attention to the tax liability on those wages, maybe not at the federal and state level, but you will still have to deal with the Medicare and Social Security and unemployment taxes on those, those wages paid.
S Corp Tax Savings Explained
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Fabrice Metan: All right, and number three is the S corp Now, everyone knows how much I love the S corp as an entity, and we've covered that in episode two if you wanted to do a complete deep, deep dive about everything, the dos and don'ts when it comes to the S corp.
But h- for a quick overview, I love [00:07:00] the S corp once you reach that $50,000 net earning threshold and that you expect to make more from that point forward. Because then you can decide to give yourself a reasonable compensation, which is the only portion of your earnings that will be considered wages and that will be subject to self-employment taxes.
Again, that is 15.3% applied to almost all of your earnings. I say almost because the Social Security portion of your wages caps at, I believe in 2026, we're looking at 184,500, above which you no longer have to pay Social Security taxes, but Medicare tax still applies, right? And so under the S corp, you get to separate your wages and your compensation as an officer of the company from the rest of your earnings.
So if your company earns $500,000, for example, you may be able to say only, you know, $150,000 of that is my reasonable compensation based on what I do for the business and based on the [00:08:00] earnings of the company. And the remaining portion, the remaining $350,000 that you might earn, may be sheltered from additional self-employment taxes.
That is the main reason why you want to become an S corp. Now, there's still some instances where I do not like the S corp versus when I actually think it makes sense.
S Corp Best Use Cases
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Fabrice Metan: So first thing, it does make sense when you make enough money, right? You have a profitable business above $50,000, the S corp would make sense for you.
It also makes sense when you are in real estate, but specifically fixing and flipping real estate. The reason why is because when you are doing a lot of fix and flip, the earnings that you earn are considered short-term capital gains, which are essentially taxed as ordinary income, which means that you would pay federal and state income tax plus self-employment taxes on all of your earnings.
Now, if you're fixing and flipping all the time, I would think that you'll be making at least $100,000 in that year because you will be fixing and flipping at least four [00:09:00] properties, you know, hopefully generating you $25,000 each. So in a situation like that, by being an S corp, you allow yourself to separate your earnings into two separate buckets, so you can mitigate the amount of tax, taxes that you pay on the earnings that you have. And so after taking your compensation as the officer of the company, you still have a net profit from the business, right? Because you are in a pass-through entity, you would still get taxed on that portion, except you would only pay federal and state income tax on the remaining portion of your earnings, as opposed to having to pay self-employment taxes on those earnings.
When S Corp Fails
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Fabrice Metan: Now, obviously, every structure is not a hundred percent perfect, and so here's when it doesn't make sense for you. Being an S corp doesn't make sense if your business-- if you have an operation that is making less than fifty thousand dollars.
It will be hard to justify that your reasonable compensation is less than that number by [00:10:00] looking at the market and the type of work that you do. The second reason why sometimes it doesn't make sense, if you're not properly set up to handle the administrative burden that the e- the S corp will bring to your operations, it probably doesn't make sense.
You wanna have a professional that helps you remit all of the payroll taxes that you're paying, making sure that all the filings are done on a quarterly and annual basis, as opposed to just handling everything yourself. The S corp will bring a little bit more complexity. The S corp also doesn't make sense when you have passive real estate.
I would not put real estate inside an S corp simply because it's already passive. It's already protected from self-employment taxes. So why put it inside an S corporation and now turn it into more of an active business, right? That portion specifically should remain in an LLC, as we spoke about earlier.
And S corps, a lot of the times, don't make sense for seasonal businesses, right? If you have spikes in [00:11:00] your revenue, you're not exactly sure where you're going to be next month, next quarter, you might look in a situation where it's hard for you to determine what that reasonable compensation might be or need to be so that you can actually pay yourself you know, frequently in a consistent manner, right?
C Corp Double Tax Reality
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Fabrice Metan: And so if you have a seasonal business, I probably wouldn't recommend the S corp. And last but not least, the C corp. Probably the most complex entity.
The one thing to always keep in mind is that a C corp is its own tax-paying entity, completely separate from you, pays its own taxes at the federal and state level, as opposed to passing through to your individual taxes. So a lot of the times, I would generally recommend C corps when you have venture-backed companies.
You have multiple investors. They're not necessarily looking to wait for a K-1 at the end of the year to determine their own personal taxes. They don't necessarily want to be [00:12:00] affected by you know, from their investment every single year. They would rather only be affected at the time of receiving a dividend from that C corp.
In that case, the C corp would make sense. But it-- because of the layer of complexity and also mainly because of the double taxation, sometimes a C corp makes absolutely no sense, right? A small business Electing to be a C Corp will see twenty-one percent at the C Corp level, and then pay taxes on the dividends that they take from that C Corp based on their tax bracket.
And so you always wanna think about that. The fact that the business already pays taxes, but at every single time you're pulling funds out of your business, you get to pay an additional tax. So the double taxation sometimes doesn't make sense for a C corp. The C corp makes sense when you are in a situation where you don't necessarily take a ton of dividends you know, regularly from the business, where you're not always going to be taking [00:13:00] distributions, draws, all of that.
And sometimes definitely a great layer of protection, separate entity, separate tax-paying entity as opposed to having anything to do with you at the personal level.
I would also say that the C corp can be a great entity if you plan to benefit from it without taking money out of it, if that makes any sense. So in other words, you can benefit through you know, fringe benefits and opportunities when you're selling the business, those kind of things, under the C corp.
But if you're planning to take a ton of distributions from it, it may not make sense. And so that's where you need to reevaluate whether the LLC, S corp, C corp makes a little bit more sense for you.
Choosing the Right Entity
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Fabrice Metan: So in closing, what I would say is that everyone on TikTok is telling you to get an LLC. Everyone talks about the S corp as if it magically makes all your taxes disappear. At the end of the day, there isn't one structure that fits everyone and that is perfect for every situation. [00:14:00] You have to understand your business and understand the structure that is the best fit for exactly what you do, the situation that you're in, and plan accordingly.
And also keep in mind that the way that you, the owner, your spouse, your kids, get compensated from all of the work that you do have drastic impact on your decision to choose the right structure.
And so you always want to take all of those factors into consideration when deciding the perfect structure for your business. so the goal is not to choose the trendiest entity. The goal is to choose the entity that aligns with your goals, your structure, your plans, and your tax strategy
[00:15:00]