Why Entity Selection is Important as a Business Owner and Entrepreneur

Christian Binger |


For a business owner, choosing your entity is one of the first critical decisions to make before starting your venture. It sets the course for ownership structure, liability protection, and taxation. It's also one that should be evaluated periodically to ensure it still fits your business needs and goals. Here are the 5 main business entities and their respective pros and cons:

1. Sole Proprietorship

  • Formation: Most simple form of business entity.  Simple and cost efficient to establish.
  • Ownership: Single owner operated.
  • Liability: Owner retains all liability and bears all responsibility for the business's debts and responsibilities.
  • Taxation: Business income reported on owner's personal tax return under Schedule C. Owner receives 100% of any potential profits and 100% of any potential losses.
  • Continuity: The business is tied to the owner's life, making business continuity and succession challenging in case of illness, disability, or death.

2. Partnership

  • Formation: Requires a partnership and operating agreement and possible additional legal requirements. It can have a general/managing partner and limited partner(s).
  • Ownership: Formed and operated by two or more individuals, who share the profits and losses. The individuals share in the profits and losses based on defined ownership percentage.
  • Liability: Like a sole proprietorship, partners typically have unlimited personal liability for the business debts and obligations.
  • Taxation: Partnerships are pass-through entities. Therefore, partners report their share of business income on their personal tax returns and bear the tax responsibility.
  • Continuity: More stable than a sole proprietorship but still can be impacted by changes in partners

3. Limited Liability Company (LLC)

  • Formation: Requires filing paperwork with the state of domicile and creating an operating agreement amongst the owners.
  • Ownership: LLC's can have one or more owners.
  • Liability: An LLC offers usually the preferred form of liability protection. The owners liability is limited to what they placed into the business. Their personal assets are protected from business debts.
  • Taxation: LLC's provide the most taxation flexibility. Owners can decide how they want the business to be taxed. Options are sole proprietorship, partnership, S corporation, or C corporation. Choosing the taxation determines if tax liability is taken care of within the business or passed through to the owners.
  • Continuity: The continuation of the business can be more stable because it's not tied to individual members (unless the LLC only has one owner). Structuring a succession plan keeps the continuity stable.

4. S-Corp

  • Formation: Must file with the state and have an operating agreement. A S Corporation must also meet these IRS rules:
    • Be a domestic corporation
    • Allow only individuals, certain trusts, and estates as shareholders
    • No more than 100 shareholders.
    • Have only one class of stock.
    • Not be an ineligible corporation
  • Ownership: Owned by shareholders but S Corporations may have no more than 100 shareholders. 
  • Taxation: S Corporations are pass through entities. Therefore, profits and losses are passed through to shareholders, who bear the income tax responsibility on their personal returns.
  • Continuity: It's imperative  to have a succession plan because although an S Corporation is more stable than a sole proprietorship, it can be affected by changes in a shareholder's life.

5. C-Corp

  • Formation: Most complex of all the business structures. It's formed as a separate legal entity and requires compliance with various government regulations and IRS reporting.
  • Ownership: A C Corporation is owned by shareholders. Shares of stock are issued and there can be an unlimited number of shareholders.
  • Liability: Shareholders have limited personal liability and their only liability is their investment in the C Corporation. Their personal assets are protected from business debts.
  • Taxation: C Corporations are subject to double taxation. The corporation pays taxes on profits at a flat 21% rate, and shareholders pay individual income taxes on dividends the corporation distributes.
  • Continuity: The continuation of a C Corp is the most stable because operation of the business is traditionally not closely tied to one or a few individuals. There are typically multiple shareholders.


If your or your team of advisors is not talking about or evaluating entity structure periodically, you should be. The business entity should match the desired ownership structure, liability protection, tax strategy, and long-term business goals. It’s an opportunity we love to have business owners seize.