I. Introduction: The Operating Layer

Every wealth-generating activity (a tech startup, a real estate portfolio, or a consulting firm) needs a legal "container." This container serves two purposes:

1. Asset Protection: It keeps the business's liabilities from "leaking" into your personal life or your family trust.

2. Tax Efficiency: It determines whether you pay taxes at the corporate level, the individual level, or both.

In the modern "Fortress" architecture, we often use these entities as subsidiaries owned by a central Family Holding Company or Trust.

II. The LLC (Limited Liability Company): The Multitool

The LLC is the most popular choice for family wealth because of its "Chameleon" nature. It is a legal entity created by state law, but it has no "default" tax status with the IRS.

1. Legal Flexibility

An LLC is governed by an Operating Agreement. Unlike a corporation, you don't have to have a Board of Directors or hold formal annual meetings. You can split profits however you want—even if one partner put in 90% of the money and the other does 90% of the work.

2. Tax Flexibility

An LLC can choose to be taxed in four different ways:

• Disregarded Entity: (If 1 owner) Taxes are paid on your personal 1040.

• Partnership: (If 2+ owners) Profits pass through to the owners' personal returns.

• S-Corp: Electing to be taxed as a small business corporation (to save on self-employment taxes).

• C-Corp: Electing to be taxed as a separate taxpayer at the corporate rate.

III. The C-Corp: The Growth Engine

The C-Corporation is the traditional "Big Business" structure. It is a completely separate taxpayer from its owners.

1. The Double Taxation Trap

The C-Corp pays tax on its profits (currently 21% in the US). If it then pays a dividend to you, you pay tax again on your personal return.

• When to use it: If you plan to reinvest 100% of the profits back into the company to grow it, the 21% rate is often lower than your personal top tax bracket (which can be 37%+).

2. Institutional Preference

If you want to raise Venture Capital or go public (IPO), you must be a C-Corp. Professional investors prefer C-Corps because of their standardized "Case Law" (especially in Delaware) and their ability to issue different classes of stock (Preferred vs. Common).

3. The QSBS Gift

As discussed in the SaaS entry, only C-Corp stock qualifies for QSBS (Section 1202), which can allow you to sell the business for up to $10M with zero federal capital gains tax.

IV. The S-Corp: The Income Optimizer

An S-Corp is not a separate type of company; it is a "Tax Election" made by an LLC or a Corporation. It is designed specifically for profitable, owner-operated businesses.

1. The Self-Employment Tax Strategy

In a standard LLC, you pay self-employment tax (~15.3%) on all profits. In an S-Corp, you only pay those taxes on the "Reasonable Salary" you pay yourself. The remaining profit (Distributions) is free from self-employment tax.

• The Math: If your business makes $200k, you pay yourself an $80k salary (taxed) and take $120k as a distribution (no self-employment tax). This can save you $10k–$15k per year in taxes.

2. Trust Ownership Restrictions

Warning for the Fortress: The IRS has very strict rules on who can own an S-Corp. Most notably, only certain types of trusts (like Grantor Trusts or ESBTs) can own S-Corp shares. If you put S-Corp stock into the wrong kind of Irrevocable Trust, you can accidentally "blow" the S-election, triggering massive back-taxes.

V. Comparing the Three Structures

VI. The "Fortress" Architecture: Layering Entities

For a true dynasty, we don't just pick one. We layer them. A common high-net-worth structure looks like this:

1. The Parent (Irrevocable Trust): Owns the Family Holding Company.

2. The Holding Company (LLC taxed as Partnership): Acts as the central vault. It owns the various operating subsidiaries.

3. Subsidiary A (S-Corp): Your active business (e.g., a dental practice or consulting firm) where you optimize for income taxes.

4. Subsidiary B (LLC): Holds the family's real estate. Real estate should never be in a corporation because it's difficult to get the property out without triggering taxes.

5. Subsidiary C (C-Corp): Your high-growth tech startup, optimized for Venture Capital and QSBS tax breaks.

VII. When to Pivot

Entity selection is not "set it and forget it."

• Startup Phase: Use an LLC or S-Corp to pass through early losses to your personal return to lower your taxes.

• Scaling Phase: Pivot to a C-Corp if you need to raise millions from outside investors.

• Legacy Phase: Ensure all entities are "moved" into the Trust before the assets grow too large to avoid future estate taxes.

VIII. Checklist for the Wealth Builder

1. Check for "Double Taxation": Are you a C-Corp paying dividends? If so, you're likely losing 15-20% of your wealth to inefficiency.

2. Review the Operating Agreement: Does it have "Charging Order Protection"? This ensures that if you are sued personally, a creditor can't take over your business; they can only wait for a distribution.

3. Confirm Trust Eligibility: If you have an S-Corp, ask your CPA: "Is my trust a Qualified Subchapter S Trust (QSST)?"

4. The "Exit" Goal: If you plan to sell the company in 5+ years, are you structured to take advantage of QSBS?

Conclusion

The entity you choose is the "Skin" of your business. It protects the internal organs (your assets) from the outside environment (litigation and taxation). In the Medici era, they had to invent these structures from scratch. Today, we have a menu of options. The key to the Fortress is not just picking an entity, but building an integrated System of Entities that allows wealth to flow up into the Trust while keeping liabilities trapped at the bottom.

Internal Encyclopedia Links:

• See: QSBS: The $10 Million Tax Gift

• See: Charging Order Protection: The Ultimate LLC Shield

• See: Family Holding Companies: The Hub of the Fortress

• Related to: The Ultimate Guide Part 3: The Fortress