Colorado LLC, S-Corp, or Sole Proprietorship? The Most Expensive Mistake High Earners Make

For Colorado real estate professionals, choosing the right business structure is one of the most important financial decisions you'll ever make. And yet it’s also one of the most commonly misunderstood. The wrong entity type can increase your tax bill, expose you to unnecessary risk, and limit the deductions you should legally be taking.

 

At Mountain Bookkeeping LLC, entity structuring is a core specialty—because owner Ginny Craig not only supports high‑income real estate clients, she also manages her own real estate assets. She understands the tax implications firsthand, not just on paper. This blog breaks down the real difference between an LLC, an S‑Corp, and a sole proprietorship, and explains why high-income earners in Colorado often choose the wrong one.

The Hidden Cost of Choosing the Wrong Entity

Real estate professionals—agents, brokers, flippers, short‑term rental owners, and developers—often default into one of two costly mistakes:

1. Remaining a sole proprietor far too long 
2. Creating an LLC but never electing the correct tax classification

While an LLC offers liability protection, it does not automatically create tax advantages. And staying a sole proprietor means everything you earn is subject to full self‑employment tax—something most high‑income earners could significantly reduce with proper strategy.

 

Mistake 1: Staying a Sole Proprietor Too Long

Many Colorado real estate professionals start as sole proprietors because it's easy. No formal filings, no elections, no structural decisions. But as your income grows, so does the tax burden.

A sole proprietor pays:
• Full self‑employment tax on all net earnings 
• Higher effective federal tax rates due to lack of planning 
• Limited deduction optimization because all income is lumped together 

For anyone earning over $150,000—especially those with multiple income streams—remaining a sole proprietor is often the most expensive option.

 

Mistake 2: Creating an LLC Without Electing the Right Tax Status

The next most common mistake? Creating an LLC and assuming that solves the problem. It doesn’t.

 

An LLC is a legal structure, not a tax structure. By default, the IRS still treats it as a sole proprietorship unless you elect otherwise. This means many real estate professionals in Colorado believe they are operating in a tax‑efficient way when nothing has actually changed.

 

High-income earners frequently miss:
• Self‑employment tax reduction opportunities 
• Salary + distribution structuring through an S‑Corp 
• Proper deduction categorization 
• Strategic income timing 
• The ability to coordinate real estate income with other revenue streams 

When your income isn’t structured correctly, you pay more—even when you have an LLC.

 

Mistake 3: Electing S‑Corp Status Too Early—or for the Wrong Type of Income

While S‑Corps can be powerful, especially for service-based real estate activities (like commissions), they are not appropriate for all types of real estate income.

Rental income, for example, generally should not run through an S‑Corp. Electing S‑Corp status without understanding the implications can create unnecessary limitations and administrative burdens.

This is why real estate professionals benefit from guidance from someone who owns and manages real estate themselves—someone who understands which strategies work in the real world, not just in theory.

 

What the Right Structure Can Do for Your Tax Bill

Choosing the correct entity type is not simply a compliance decision—it is a tax strategy. When structured correctly, high‑income real estate professionals often benefit from:

• Reduced self‑employment tax 
• Proper salary + distribution planning 
• More favorable deduction opportunities 
• Strategic separation of income types 
• Stronger liability protection 
• Clearer bookkeeping and tax documentation 

The result is often thousands of dollars in legal tax savings each year.

 

A Colorado Example: How Structure Impacts Your Taxes

Consider a Evergreen real estate professional earning:
• $180,000 in commissions 
• $60,000 in short‑term rental revenue 
• Additional passive real estate income 

If all of this is reported under a single sole proprietorship, taxes are maximized.

 

But with proper structuring:
• Commission income may flow through an S‑Corp 
• Rental income may remain inside an LLC 
• Consulting or coaching income may be separated strategically 
• Each entity supports a different tax outcome 

 

One structure does not fit all income—and in Colorado's high‑growth real estate environment, the difference is costly.

 

Why Mountain Bookkeeping Specializes in Real Estate Professionals

Our advantage is simple: we live in this world daily. As a real estate investor and owner, we understands:

• How different income types should flow 
• Which IRS rules apply to short‑term vs. long‑term rentals 
• How depreciation interacts with entity choice 
• When an S‑Corp is appropriate—and when it’s not 
• How to set up books so deductions aren’t lost 

 

This is why high‑earning real estate professionals across Lakewood, Denver, Golden, and the mountain communities partner with Mountain Bookkeeping LLC.

They want strategy—not guesswork.

 

Your Entity Structure Isn’t Just a Form—It’s a Financial Strategy

Most business owners choose their entity based on ease. High-income earners choose their entity based on strategy.

If your business structure hasn’t been reviewed, you may be paying thousands more in taxes every year.

The IRS doesn’t penalize you for overpaying. But it does reward those who plan.

Ready to See if You’re Using the Right Entity Structure?

 

High-income real estate professionals often discover:
• They are using the wrong entity 
• They elected the wrong tax classification 
• They are missing deductions 
• Their income structure is costing them thousands 

 

Mountain Bookkeeping LLC offers a comprehensive, proactive review through the High Income Tax Strategy Program.

Schedule your Advanced Tax Strategy Consultation to determine:
• The right entity for your situation 
• Whether S‑Corp status makes sense 
• How your real estate and business income should be structured 
• How much you could be saving every year 

 

Book your consultation with Ginny at Mountain Bookkeeping LLC and protect the income you’ve worked hard to build.