01 Start with the Primary Goals: Protection, Flexibility, and Taxes

Every business entity accomplishes (or limits) something different. A well-chosen structure should provide:

• Legal protection: Your entity should shield personal assets from business liabilities and reduce risk exposure across owners, operations, and assets.
• Operational flexibility: The structure should support the way you actually run the company, influencing decision-making, partner roles, profit sharing, and reinvestment.
• Tax efficiency: The impact on self-employment taxes, income taxation, deductions, depreciation, fringe benefits, and long-term planning should all be considered.

02 Sole Proprietorships and General Partnerships: Simple, but Often Risky

While sole proprietorships and partnerships are easy to set up from a legal standpoint, these structures expose owners to unlimited personal liability. As businesses grow and undertake additional tasks such as hiring employees, signing contracts, purchasing equipment, or handling client data, this structure typically exposes owners to major risk.

03 LLCs: A Flexible Foundation for Many Businesses

Depending on the business, one structure we often recommend is a Limited Liability Company (LLC). A LLC provides:

• Strong liability protection
• Broad operating flexibility
• The option to elect how you are taxed (sole prop, partnership, S-corp, or C-corp)
• Multi-member partnership opportunities
• Cleaner separation between personal and business assets

04 S-Corporations: Powerful for Tax Savings When Used Properly

Electing for S-Corp taxation can reduce self-employment taxes by allowing owners to split income into two categories: a reasonable salary (subject to payroll taxes) and owner distributions (not subject to payroll taxes). This set-up can generate significant long-term savings. However, the structure also comes with requirements:

• Reasonable compensation rules
• Rigid profit distribution rules
• Strict shareholder restrictions
• More complex compliance requirements

05 C-Corporations: Best for Larger Growth Plans and Long-Term Expansion

C-Corps are often associated with large companies, but they offer strategic advantages for certain owners:

• The lowest flat federal corporate tax rate
• The ability to retain earnings in the business
• Multiple classes of stock
• Straightforward investor and shareholder structures
• Potential Section 1202 (QSBS) tax exclusions on future sales

06 Multi-Entity Structures: Not Just for “Big Companies”

In some cases, a business may benefit from being structured into multiple separate entities. Many successful small and mid-sized companies benefit from using multiple entities to:

• Separate operating risk from valuable assets
• Reduce tax friction
• Improve liability protection
• Prepare for a future sale or transition
• Create clean divisions between business lines or real estate

07 Your Entity Should Evolve as Your Business Evolves

Clearly, different business structures offer different slates of advantages and disadvantages, depending on the nature of your business as well as its size, how it operates, its preferred ownership structure, and short- and long-term goals. Moreover, your structure may need to change as it grows or as your intentions shift over time.

In general, entity structure should be reviewed at certain flexion points, such as when you:

• Add partners or key employees
• Expand into new lines of business
• Begin planning for succession or sale
• Purchase major equipment or real estate
• Move into new states
• Experience rapid growth
• Face increased risk or liability exposure