I had a conversation last month with a guy who runs a specialty contracting company in central Massachusetts. Good business. Real revenue, around $5.4M last year, solid margins for his industry, a crew he's built over a decade. He came to me because he was thinking about bringing on a partner and wanted help thinking through the deal structure.
We spent maybe twenty minutes on the partnership question before I asked him to walk me through his entity setup.
He looked at me like I'd asked him to explain quantum physics.
Not because he was unsophisticated. He isn't. He knows his business cold. He could tell me his job cost margins by project type without looking at a spreadsheet. But his entity structure? He had a single-member LLC, the same one he'd formed in 2014 when he was doing $380,000 a year and his accountant said "just set up an LLC and we'll figure out the rest later."
The rest never got figured out.
And here's the thing. He is not an anomaly. He is the rule. I see this constantly with businesses in the $2M to $10M range, and the cost of ignoring it isn't some abstract tax efficiency number on a spreadsheet. It shows up in real dollars, real liability exposure, and real constraints on what you can do with your business when you eventually want to do something different with it.
The Structure You Started With Was Not Designed for the Business You're Running Now
When most people form an entity, they're doing it for one of two reasons. Either someone told them they had to, or they got scared enough about liability to go to LegalZoom and pull the trigger. Either way, the decision was made when the business was small, the future was uncertain, and "whatever protects me right now" was a perfectly reasonable standard to apply.
The problem is that entity structure, like a lot of foundational business decisions, tends to get set and forgotten. You file your taxes every year. Your accountant does what accountants do. And nobody sits down to ask whether the structure you're operating in still makes sense given what the business has become.
At $380K in revenue, a single-member LLC taxed as a sole proprietorship is fine. You're not leaving a catastrophic amount of money on the table, the liability exposure is manageable because the business is small, and the administrative simplicity actually has value when you're trying to survive.
At $5.4M? That same structure is quietly doing damage in at least three directions.
The S-Corp Conversation Nobody Is Having With You
I want to be careful here because I'm not a CPA and I'm not your lawyer, and nothing I write in a blog post should substitute for sitting down with people who are. But I am a fractional CFO who reads a lot of financial statements and has a lot of conversations that should have happened years earlier, and the S-Corp election question is one that comes up almost every time.
Here's the basic issue. If you're running a profitable LLC and you're paying self-employment tax on your entire net income, you are likely overpaying the federal government. An S-Corp election, combined with a reasonable salary structure, can reduce the amount of income that's subject to self-employment tax. On $400,000 in owner earnings, that difference can be $20,000 or more per year. That's not a rounding error.
Now, is an S-Corp right for everyone? No. If you're planning to bring in investors, the restrictions on S-Corp ownership get complicated fast. If you're building toward a sale to a private equity firm, the structure of the deal may make a C-Corp or a specific LLC arrangement more advantageous. There are situations where the administrative cost of the S-Corp (payroll, additional filings, stricter bookkeeping requirements) eats into the benefit for smaller operations.
But here's what gets me. Most business owners at the $5M level have never had this conversation at all. Not because it doesn't apply to them. Because nobody who understood it ever bothered to bring it up.
What Happens When You Want to Sell, Partner, or Step Back
This is where entity structure stops being a tax optimization conversation and starts being a genuine strategic constraint.
I worked with a woman who runs a regional staffing company, somewhere around $8M in revenue. She'd been approached by a larger firm that wanted to acquire her business or take a meaningful equity stake. Good problem to have. Except when we started pulling apart her structure, we found that she'd been operating two distinct service lines, permanent placement and contract staffing, under the same entity, with everything mixed together.
Not illegal. Not uncommon. Completely defensible when you're building. But when a buyer's attorney starts doing due diligence on a business where the revenue streams, the liability exposure, and the operational models are all tangled together in one LLC with one set of books, deals slow down, valuations get haircut, and sometimes they just don't close.
A cleaner approach, and one I see working businesses implement all the time once someone points it out, is an operating company / holding company structure. The HoldCo owns the assets, the intellectual property, real estate if there is any, and has an ownership interest in the OpCo, which is where the business actually runs. This does a few things. It creates a firewall between operating liability and the assets you've accumulated. It makes it easier to bring in a partner at the operating level without touching your asset base. And when you eventually want to sell, a buyer can acquire the OpCo without necessarily having to acquire everything you've built under it.
Is this setup more complicated to administer? Yes. Does it require better bookkeeping and a more engaged relationship with your advisors? Absolutely. But we are talking about a business doing $5M or more in revenue. The complexity is appropriate to the size of what's at stake.
The Real Estate Problem
If you own the building your business operates out of, and it's sitting inside your operating entity, we need to talk.
This is one of the most common and most expensive structural mistakes I see. The building has appreciated. The business carries liability. Those two things should not be in the same legal bucket.
When your operating company has a bad year, gets sued by a customer, or runs into a contract dispute that goes sideways, everything inside that entity is exposed. If your real estate is in there, your real estate is exposed.
The fix is usually straightforward. Place the real estate in a separate LLC and have the operating company pay rent to that entity. You create a lease at market rate, which also has the useful effect of establishing a legitimate expense on the operating company's books, and the real estate is now insulated from whatever happens on the business side. This structure also makes succession and estate planning dramatically cleaner, which becomes relevant faster than most owners expect.
I've had clients tell me their accountant "knows about" their real estate situation. Knowing about it and actually restructuring it are two completely different things. If your real estate is still sitting inside your operating entity, someone is going to learn an expensive lesson at some point. I'd rather it not be you.
Why This Doesn't Get Fixed
I think about this a lot because I talk to smart, capable business owners all the time who are sitting on structural problems they've had for a decade. And it's not because they don't care. It's because the advisory relationship most of them have with their financial professionals is reactive by design.
Your accountant is trying to get your taxes filed accurately and on time. That's what you're paying them for. Your attorney drafted your operating agreement in 2014 and hasn't heard from you since. Your banker is focused on whether you can service the debt. Nobody in that picture has a mandate to sit down with you once a year and ask whether the whole setup still makes sense.
That's not an indictment of those professionals. That's a description of a gap in how most small businesses consume financial and legal advisory services. The work that happens between the tax return and the legal document is where a lot of value gets lost.
The contractor I mentioned at the top of this post? We didn't fix everything in one conversation. But we got his accountant and his attorney on the same Zoom call and started mapping out a restructure that made sense for where he wants to take the business over the next five years. The partnership he was thinking about ended up being structured differently than he'd originally imagined, in a way that protected him and made the deal more attractive to the person he was bringing in.
None of that happens if we spend the whole meeting talking about the partnership and never ask the question about the entity.
If you're running a business in the $2M to $10M range and you can't clearly explain why your entity is structured the way it is, that's not a small thing. It's worth an honest conversation with someone who isn't trying to sell you anything.