Choosing the Right Business Structure: What New Entrepreneurs Should Know
- Steve Julal
- 1 day ago
- 4 min read
Starting a business? One of the first (and biggest) decisions you’ll face is choosing what kind of business entity to form. It might not sound exciting, but your choice affects how you’re taxed, how much paperwork you’ll deal with, and how much personal risk you take on.
Whether you’re launching a brand-new venture or rethinking your current setup, understanding how each business type is taxed can save you time, money, and stress down the road. Let’s break down the basics of the five most common structures.
Option #1: Sole Proprietorship: The Simple Start
If you’re a one-person operation, a sole proprietorship is the easiest way to get going. There’s no special paperwork to form one — you just start doing business.
Taxes: You’ll report your income and expenses on your personal tax return (Form 1040, Schedule C). The downside? You’ll pay self-employment tax (15.3%) on your profits, since you’re both the boss and the employee. The good news is you might qualify for the Qualified Business Income (QBI) deduction, which could lower your tax bill.
Compliance:Other than getting any required licenses or registering your business name, there’s not much paperwork. Remember, you’re personally responsible for any debts or lawsuits, since there’s no legal separation between you and your business.
Option #2: S Corporation: Tax Perks for the Organized Entrepreneur
An S corp can be a great option if you want to save on self-employment taxes, but it comes with more rules.
Taxes: An S corp doesn’t pay taxes at the business level. Instead, profits “pass through” to you and any other shareholders, who report them on personal tax returns using Schedule K-1. You’ll pay yourself a reasonable salary (subject to payroll taxes), and any extra profits can be taken as distributions, which aren’t hit with self-employment tax. You can also take advantage of the QBI deduction.
Compliance: You’ll need to file Form 2553 to elect S corp status, follow corporate formalities (like keeping minutes and holding meetings), and file an informational tax return (Form 1120-S) every year. There are limits — like no more than 100 shareholders, and all must be U.S. residents or citizens.
Option #3: Partnership: Teaming Up
If you’re starting a business with one or more partners, this structure lets you share profits, losses, and responsibilities.
Taxes: A partnership itself doesn’t pay income tax. Instead, you’ll file Form 1065, and each partner gets a Schedule K-1showing their share of profits or losses to report on their personal return. General partners usually pay self-employment tax, but limited partners may not. Partnerships can also qualify for the QBI deduction.
Compliance: Partnerships are more complex than sole proprietorships. You’ll need a clear partnership agreement outlining who owns what, how profits are split, and how decisions are made. Still, it’s a flexible option for businesses with multiple owners.
Option #4: Limited Liability Company (LLC): The Flexible Favorite
LLCs are popular because they combine the best of both worlds: liability protection like a corporation and flexibility like a partnership.
Taxes: By default, a one-member LLC is taxed like a sole proprietorship, and a multi-member LLC is taxed like a partnership. However, you can choose to be taxed as an S corp or C corp by filing a simple form (Form 2553 or Form 8832). That flexibility lets you plan around your tax goals. Non–C corp LLCs can claim the QBI deduction, too.
Compliance: LLCs must file articles of organization, and most states require an operating agreement. You’ll also have to keep up with any state filings or fees, but it’s still simpler than running a full-blown corporation.
Option #5: C Corporation: Built for Growth
If you’re thinking investors, venture capital, or going public someday — a C corp might be what you’re after.
Taxes: C corps pay taxes at the corporate level (currently 21%), and then shareholders pay taxes again on dividends — that’s the “double taxation” you may have heard about. On the plus side, C corps can deduct things like health insurance and retirement benefits, and they can retain earnings to reinvest in the business.
** Note: There are no QBI deduction for C corps.
Compliance: C corps are the most complex to run. You’ll need bylaws, a board of directors, annual meetings, and detailed recordkeeping. But if you plan to raise serious capital, it’s often the way to go.
What’s Next
Once you start building a team, the tax and paperwork side grows, too. You’ll need an Employer Identification Number (EIN), and you’ll have to withhold payroll taxes and handle employment law requirements. It’s a lot, but the right accountant can help you stay compliant.
There’s no “one-size-fits-all” answer. The best choice depends on your goals, ownership setup, and long-term plans. It’s also ok to switch business structures as your business grows. For instance, many small business owners start as an LLC and later elect S corp status to save on self-employment taxes.
If you’re unsure, don’t go it alone. Talk to a tax professional and a lawyer, if needed. At VAAS, we can help you find the setup that fits your business vision while keeping taxes and compliance in check. Ready to get started on your business? Let us help!
