Strategic Tax Planning for Founders and Growing Businesses

Many new founders understandably focus on gaining traction and growth, often sidelining tax strategies—especially when profits are minimal early on. However, thoughtful tax planning from the start can save significant money and prevent future headaches. Below are key considerations to guide your strategy from launch through growth.

Choosing the Right Entity Structure

Entity structure is important to both your legal and tax positions. It is important that you consult with your attorney and tax advisor when starting your business and as your business grows.

LLC vs. C-Corp

Starting as an LLC is common and allows for the ease of pass-through taxation. This means that the profits of the company are passed through to the owners, and the owners are responsible for the tax. Some businesses opt for an LLC legal structure and a Sub-S tax structure to save on owner employment taxes. A Sub-S election is also subject to pass-through taxation. It may create strict limitations on how owners are compensated and profits are distributed, possibly negating the value of any employment tax savings. Both the LLC and Sub S tax structure may qualify for the QBI (Section 199A) deduction, providing a 20% reduction of taxable income.

A C-Corp election may entitle you to the benefits of the Qualified Small Business Stock exemption (QSBS or Section 1202). A C-Corp is often put aside when considering double taxation because the company pays income tax, and the owners pay tax on distributed profits. Creating a model is important because corporate tax rates at 21% may be less than owner personal tax rates, and compensation costs paid to active owners are tax-deductible expenses to the business. Many times, the double taxation cost is minimal compared with the QSBS advantage.

Qualified Small Business Stock (QSBS) and Other Key Benefits

If you are fundraising to support your business through outside investors, it is important to understand the QSBS or Section 1202 tax advantages. As of July 4, 2025, if you elect to become a C-Corp before your company has $75 million in assets, your shareholders may be exempt from capital gains up to $10 million when your company is sold.

Learn about the specifics of QSBS Watch Now

If your company has a small ownership pool, a pass-through entity structure could provide a breakthrough Pass-Through Entity Tax (PTET) in some states. Suppose you are subject to state income tax. In that case, you may be allowed to pay state income taxes at the entity level and then deduct the taxes on your federal return, without being subject to the $10,000 State and Local Tax (SALT) limitation put on individuals.

Another structure consideration is around attracting top talent and offering ownership as compensation. Will you offer stock options or Restricted Stock Awards (RSAs)? Will these options be offered on a vesting schedule, or will they expire? How will these units impact your ownership model for earnings distributions or proceeds at the time of a sale? How will your employees interpret their possible dilution in the case of additional outside investment? It is important for you to understand the costs of maintaining legal compliance, periodic 409a valuations, and reporting taxable income/loss to these employees.

Maximizing Research and Development Tax Credits

There are several strategy considerations for research and development.

What Qualifies as an R&D Expense?

R&D costs are direct expenditures toward developing, designing, and enhancing products. These costs include research and experimental development, including failed attempts and abandoned projects. The R&D rules can also apply to the development of internal software. It is important that all projects are documented contemporaneously, especially if the intent is to take the R&D tax credit.

The Impact of Location on R&D Tax Rules

Where will the work be done? Recent changes allow the choice of immediate deduction or 60-month amortization of domestic research and development costs. However, if the work is done offshore, you are forced to capitalize the expenses for tax purposes and amortize the costs over 15 years. Unfortunately, GAAP rules will not allow the capitalization of the costs on your Balance Sheet, creating a “book/tax difference” to be tracked by your tax preparer.

Claiming the R&D Tax Credit

Will you take the R&D tax credit? Only domestic expenses will qualify. There is a list of specific exclusions, such as market feasibility studies, quality control testing, and end-user documentation, that cannot be included in the calculation.

If you take the R&D tax credit, you must reduce your R&D tax expense by the amount of the tax credit taken. The calculation of the credit can be complicated, including establishing a base percentage that cannot exceed 16% multiplied by the average gross receipts from the prior 4 years to establish the base amount. Reduce the current year qualified R&D Expenses by the greater of 50% of the established base amount. The credit is equal to 20% of the reduced R&D Expenses. Despite the complication, if your company is profitable, the savings could be significant.

State and Local Tax Obligations to Understand

Each state establishes reporting requirements for income, franchise, payroll, and sales tax based on Nexus, or your connection to the state.

What is Nexus?

Every state has its own Nexus rules. Most states set Nexus thresholds based on the delivery of goods or services into the state, the physical presence of people, or the presence of inventory. If your product is sold online and shipped to multiple states, it is important to track the dollar volume of the sales made into each state.Some states consider wholesale sales as part of the Nexus threshold, even when those sales are not subject to sales tax.

As a business owner, you are responsible for knowing if you have Nexus in a state. There are many applications and programs to help you collect, report, and pay sales taxes.

Set Your Business Up for Success

Tax planning is a critical part of building a sustainable and scalable business. Our outsourced CFO team can help you model scenarios, collaborate with legal and tax advisors, and ensure your decisions align with your long-term goals.