Choosing an Entity – What Business Structure Is Best for You?

Starting a business is exciting, but before you create a logo or build your website, there’s one foundational decision you need to make: your business entity structure!

It may not be the flashiest part of entrepreneurship, but choosing the right entity affects how you’re taxed, how you are paid, your liability, and even how much paperwork you’ll deal with each year.

Let’s break down the most common options for small business owners and help you decide what’s best for you!

Why Your Business Structure Matters

Think of your business structure like the legal shell around your business. It determines:

• How you pay yourself and your taxes
• Your personal liability if something goes wrong
• The paperwork and costs to stay compliant
• Your ability to raise money or bring on partners

Choosing the right structure can save you money and protect your personal assets. Choosing the wrong one can create tax headaches and unnecessary risk!

Sole Proprietorship: Simple, but Risky

A sole proprietorship is the default structure if you start a business on your own without forming a legal entity. It’s the easiest to start, and no special paperwork needed (besides licenses or DBAs)!

Pros:

• Easiest and cheapest to set up
• You report income on your personal tax return
• No separate business tax filings

Cons:

• No legal separation between you and your business
• You’re personally liable for debts, lawsuits, or mistakes
• Harder to get business funding or credit

Best for: Freelancers, side hustlers, and very low-risk service providers just getting started.

LLC (Limited Liability Company): The Most Popular Choice for a Reason

An LLC is a separate legal entity that protects your personal assets. You can be a single-member LLC or have partners. It’s flexible and popular with small business owners who want structure without too much formality!

Pros:

• Limits your personal liability
• Flexible tax options (can be taxed as a sole prop, partnership, or S-corp)
• Easier to manage than a corporation

Cons:

• Annual fees and state filings required
• Taxes and fees vary depending on your state

Best for: Most small business owners who want liability protection without corporate complexity.

S Corporation (S-Corp): Tax Savings for the Right Setup

S-Corps are technically not a business entity you form, they’re a tax election you make with the IRS after forming an LLC or corporation. With an S-Corp, you pay yourself a salary and take additional profits as distributions, which can save on self-employment taxes!

Pros:

• Potential tax savings on Social Security/Medicare taxes
• You can still operate as an LLC with added benefits
• Good for growing service businesses

Cons:

• More IRS scrutiny
• You must pay yourself a “reasonable salary”
• Requires separate payroll and more bookkeeping

Best for: LLC owners who are earning over ~$100K/year in net profit and want to save on taxes.

C Corporation (C-Corp): Built for Big Growth

C-Corps are traditional corporations with more structure. They’re great for startups planning to raise investor capital or issue shares, but overkill for most small businesses!

Pros:

• Can issue multiple classes of stock
• Attractive to investors and venture capitalists
• Lower corporate tax rate for retained earnings

Cons:

• Double taxation: corporation pays taxes, then shareholders pay again on dividends
• Complex compliance requirements
• Requires a board, annual meetings, and detailed recordkeeping

Best for: High-growth startups, tech companies, and those seeking outside investment.

Nonprofit: Mission-Driven Structure with Tax Benefits

Nonprofits exist to serve a cause, not to generate profit. They’re eligible for tax-exempt status if they meet IRS requirements.

Pros:

• Exempt from federal income tax (if approved as 501(c)(3))
• Can receive donations and grants
• Builds public trust

Cons:

• Strict reporting and operational rules
• Must reinvest earnings into the mission
• No personal ownership

Best for: Community-focused organizations, charities, or mission-based ventures.

How to Pick the Right Entity for You

Ask yourself:

• Do I need liability protection?
• How much do I expect to earn?
• Will I hire employees or contractors?
• Do I plan to raise money?
• How much complexity am I willing to manage?

Still unsure? Set up a time to talk to us so Myles Ink can help you weigh the pros and cons for your specific situation!

Final Thoughts

Choosing the right structure now can help you save taxes, stay compliant, and protect your personal assets down the road. You can always change your structure later as your business evolves, but starting with the right fit sets a strong foundation. 

Contact us if you have any questions or would like to get started on building your business!

Sources:

IRS – Business Structures

SBA – Choose a Business Structure