Which Entity Type Should I Choose for My Business?
Choosing the right business entity is one of the most important decisions you'll make when starting your company. Your entity type impacts everything from how you pay taxes and raise money to your personal liability and daily operations. Whether you're launching a side hustle, a tech startup, or a brick-and-mortar business, selecting the best structure can save you money—and headaches—in the long run.
But with so many options—sole proprietorship, LLC, S Corp, C Corp, partnership—how do you know which one is right for you?
This guide breaks down the most common entity types, who they’re best suited for, and what you need to consider before making your choice.
Why Entity Type Matters
Your entity type determines:
How your business is taxed
How much personal liability you have
Your ability to raise capital
Compliance and administrative requirements
Credibility and legal protections
Getting it right from the start can help you avoid costly restructuring later. Let’s look at the most common types.
Common Business Entity Types
1. Sole Proprietorship
Best for: Solo entrepreneurs testing a business idea
A sole proprietorship is the simplest and most affordable structure. There's no legal distinction between you and the business—you are the business.
Pros: Easy to set up, low cost, minimal paperwork
Cons: No liability protection, harder to raise capital, taxed as personal income
You may still need licenses, permits, or a DBA ("doing business as") name.
2. Partnership (General or Limited)
Best for: Two or more people starting a business together
A partnership is similar to a sole proprietorship but involves multiple owners. Partnerships come in two main types:
General Partnership: All partners share liability and management duties.
Limited Partnership (LP): At least one general partner manages the business, while limited partners invest but don’t manage.
Pros: Shared startup costs, flexible structure, pass-through taxation
Cons: Potential for disputes, personal liability (for general partners)
3. Limited Liability Company (LLC)
Best for: Small to medium businesses wanting legal protection and flexibility
An LLC combines the simplicity of a sole proprietorship with the liability protection of a corporation.
Pros: Personal liability protection, pass-through taxation, flexible management
Cons: Varies by state, may face self-employment tax, more paperwork than a sole proprietorship
You can choose how the IRS taxes your LLC—as a sole proprietorship, partnership, or corporation.
4. S Corporation (S Corp)
Best for: Profitable businesses looking to reduce self-employment taxes
An S Corporation is a tax status, not a business structure. You must first form an LLC or C Corporation and then file IRS Form 2553 to elect S Corp status.
Pros: Potential tax savings on self-employment taxes, pass-through taxation
Cons: Strict ownership rules (e.g., U.S. citizens only), limited to 100 shareholders, increased IRS scrutiny
5. C Corporation (C Corp)
Best for: Startups planning to raise venture capital or go public
A C Corporation is a separate legal entity and the preferred structure for larger businesses or startups seeking investment.
Pros: No limits on shareholders, easier to raise capital, strong legal protections
Cons: Double taxation (profits and dividends), more regulatory requirements, complex compliance
Many venture capitalists will only invest in C Corps due to stock structure flexibility.
How to Choose the Right Entity
Consider these factors:
FactorBest Entity TypeSimplicitySole Proprietorship, PartnershipLegal protectionLLC, CorporationTax efficiencyLLC or S CorpInvestment goalsC CorporationMultiple ownersLLC, Partnership, CorporationScalabilityC Corporation
Also, take into account your state’s specific laws, startup costs, and annual filing requirements.
Q&A: Common Questions About Business Entities
Q: Can I change my entity type later?
A: Yes, but it can be complex and may trigger tax consequences. It's better to get it right from the beginning.
Q: What’s the difference between an LLC and an S Corp?
A: An LLC is a legal structure; an S Corp is a tax classification. You can elect to have your LLC taxed as an S Corp to potentially save on self-employment taxes.
Q: Do I need a lawyer to set up an entity?
A: Not necessarily. Many entrepreneurs use online platforms or DIY through the state’s Secretary of State website. However, complex businesses or partnerships should consult a lawyer.
Q: Which entity is best for a side hustle?
A: A sole proprietorship or LLC is usually sufficient. An LLC offers liability protection, while a sole proprietorship is easier and cheaper to set up.
Q: Can I form an LLC in a different state?
A: Yes, but you may still need to register as a foreign entity in your home state, depending on where you operate.
Think Long-Term
You may be tempted to pick the simplest structure now, but if you’re planning to scale, raise funds, or bring on co-founders, it’s worth thinking ahead. Transitioning from a sole proprietorship to an LLC or C Corp later can be costly and disruptive.
Also, consider speaking to a tax advisor. The right entity type can significantly affect your net income after taxes and long-term growth strategy.
Final Thoughts
The right business entity sets the foundation for your success. From legal protection to tax treatment, your choice will influence how your business operates now and scales in the future. It’s not one-size-fits-all, and there’s no shame in asking for help.
If you're unsure, start with an LLC—it offers a flexible, protective option that works well for many small businesses. But if you have specific goals—like raising capital or minimizing self-employment tax—consult with a legal or tax professional.
Ready to Form Your Business?
Whether you're launching your first side hustle or preparing to raise your first round of funding, we can help you choose and form the right business entity. Our tax experts is here to guide you.
Start smart. Stay compliant. Build confidently.
