Tax Law ✦ Entity Selection & Structuring
Your Entity Choice Is a Tax Return You File Every Year.
LLC, S corporation, C corporation, partnership: the box you check at formation quietly decides how much tax you pay on every dollar the business ever earns. North Star Law Firm structures New Mexico businesses with the legal and the accounting analysis done by the same professional, so the entity fits the numbers, not the other way around.
Overview
Why does entity choice matter so much?
Because the label controls four separate tax outcomes: how profits are taxed as they are earned, how much self-employment or payroll tax the owners absorb, what happens when the business is sold, and what planning doors stay open along the way. Most New Mexico businesses start as LLCs for good non-tax reasons, liability protection with minimal formality, and then never revisit how that LLC is taxed, which is a choice, not a default you are stuck with. A single-member LLC can be taxed as a sole proprietorship, an S corporation, or a C corporation, and the right answer changes as profit grows, partners arrive, and exit plans form.
- Entity and tax-classification analysis run on your actual numbers
- S corporation elections, late elections, and reasonable compensation studies
- New Mexico PTE election analysis for the federal SALT deduction
- Partnership and operating agreements drafted with the tax exhibits done right
- Restructuring paths: F reorganizations, conversions, check-the-box elections
- Coordination with gross receipts tax registration and compliance
The Comparison
How do the choices actually compare?
| Structure | Federal treatment | The New Mexico wrinkle |
|---|---|---|
| Sole proprietor / SMLLC | Schedule C; income and self-employment tax on everything | Simplest start; GRT registration still required from dollar one |
| Partnership / multi-member LLC | Flow-through; flexible allocations; SE tax varies by role | PTE election available; community property affects spousal LLCs |
| S corporation | Flow-through; salary plus distributions can cut SE/payroll tax | PTE election available; reasonable compensation is the audit issue |
| C corporation | Flat 21% federal rate; second tax on dividends; QSBS potential | New Mexico corporate income tax is a flat 5.9% |
The federal side gets the attention, but two New Mexico layers change the math. Every operating business deals with gross receipts tax regardless of entity, our GRT guide covers that world, and flow-through owners pay New Mexico personal income tax at rates that now top out at 5.9 percent.
What is the New Mexico pass-through entity election, and who should make it?
Since the federal $10,000 cap on state and local tax deductions arrived, most states built a workaround, and New Mexico’s is the elective pass-through entity tax under NMSA 1978, § 7-3A-10. A partnership or S corporation elects to pay New Mexico tax at the entity level at 5.9 percent on income apportioned to the state. The entity deducts that payment federally as a business expense, restoring a deduction the owners would lose on their personal returns, and the owners claim the payment through New Mexico’s credit mechanism. For a profitable Albuquerque S corporation whose owners are already capped on SALT, the election routinely saves five figures of federal tax a year. It is not automatic and not always right: owner residency mix, loss years, and the credit mechanics all matter, and the election is made with the return, so the analysis belongs in the fall, not on April 14.
When does an S corporation actually save money?
The classic play: pay yourself a defensible salary, take remaining profit as distributions, and stop paying the 15.3 percent self-employment tax on the distribution slice. It works, at the right profit level and with a salary that survives scrutiny, because “reasonable compensation” is the first page of every S corporation audit. Run honestly, the analysis is empirical: what would it cost to hire someone to do what you do? We document that number the way an examiner would test it. The S election also carries costs people skip past: basis tracking, payroll administration, less flexible profit-sharing than a partnership, and complications if a non-qualifying owner, an entity, a foreign investor, ever wants in.
Is the C corporation making a comeback?
Selectively. A flat 21 percent federal rate is attractive for businesses that reinvest profits rather than distribute them, and qualified small business stock under I.R.C. § 1202 can exclude substantial gain at exit for qualifying C corporations, an exclusion Congress expanded in the 2025 tax law. The trap remains the second layer of tax when cash comes out and when the company sells assets. For most closely held New Mexico service businesses the flow-through structures still win, but for a startup planning outside investment or a capital-intensive company building toward a stock sale, the C corporation deserves a real look instead of a reflexive no.
The Attorney-CPA Difference
One engagement. The documents and the math.
- Projections comparing structures on your actual profit, not rules of thumb
- Formation documents, elections, and operating agreements executed together
- Reasonable compensation supported by data before the IRS ever asks
- Annual revisit as profit, partners, and exit plans change
Questions & Answers
Entity selection questions, answered
I formed an LLC years ago. Am I stuck with how it’s taxed?
No. An LLC’s tax classification can change: an S election going forward, a late election in some cases, or a restructuring such as an F reorganization when the change is bigger. What matters is running the numbers before switching, because some doors, like undoing an S election, have waiting periods.
At what profit level does an S corporation start making sense?
There is no magic number, but the arithmetic usually starts working when profits comfortably exceed a defensible salary for your role. Below that line the payroll costs eat the savings; well above it the SE tax savings compound. We model your actual figure rather than quoting folklore.
Does the PTE election help if I’m the only owner?
A single-member LLC taxed as a sole proprietorship cannot make the election, but the same LLC taxed as an S corporation can. For high earners hitting the SALT cap, that combination is often the quiet reason to elect S status even when SE tax alone would not justify it.
My spouse and I own the business together. Does community property change anything?
Yes. New Mexico is a community property state, so a spousal LLC can often be treated as a disregarded entity rather than a partnership, simplifying filings, and community property ownership affects basis at death in ways that are usually favorable. It is one of the underused advantages of building a business here.
Do any of these choices change my gross receipts tax?
Essentially no. GRT attaches to the business activity, not the entity form. What changes is who is responsible for compliance and how cleanly the books separate GRT from income tax, which is where combined planning earns its keep.
The right structure pays for itself every April.
Bring your last return and an hour. You will leave knowing whether your current structure is costing you money and exactly what changing it would save.