As a tax senior associate at MP CPAs, one of the most common questions I get from aspiring entrepreneurs is: “What kind of business entity should I choose?” And I get it—it’s not always the most exciting decision when you’re dreaming about launching your big idea. But I can tell you from experience that this is one of the most important decisions you’ll make in the early stages of your business. The entity you choose has long-term implications for your taxes, legal liability, ability to grow, and even how easy it is to get financing.

Before you even settle on an entity structure, I always recommend that my clients take care of a few key preliminary steps. First, write a business plan. It doesn’t have to be a 100-page document, but it should outline your goals, market research, financial projections, and growth strategy. This becomes a vital tool if you ever want to secure a bank loan, SBA financing, or attract investors. From there, you’ll need to register your business name, apply for a federal tax ID (EIN), get any required licenses or permits, and understand your state and local tax requirements. And if you plan to hire employees, it’s important to understand what that means from a payroll and compliance standpoint.

When it comes to entity selection, I walk clients through five primary options: sole proprietorships, partnerships, LLCs, S-Corps, and C-Corps.

A sole proprietorship is the easiest to set up—it’s essentially just you doing business under your own name or a DBA. But the tradeoff for that simplicity is that you have no liability protection. Your personal assets are on the line if something goes wrong.

Partnerships are common when two or more people want to launch a business together. They offer flexibility and shared responsibilities, but just like sole proprietorships, they also come with personal liability unless you form a limited partnership or LLC.

Limited Liability Companies (LLCs) are one of the most popular choices because they offer a great balance—limited liability like a corporation but with the simplicity and flexibility of a partnership. They’re especially useful for small businesses, freelancers, and real estate investors.

S-Corporations are great for small to mid-sized businesses that want liability protection and pass-through taxation. You can avoid self-employment tax on distributions and instead pay yourself a W-2 wage. But S-Corps have strict requirements—only U.S. citizens or residents can be shareholders, and you’re limited to one class of stock and 100 shareholders.

C-Corporations are more complex but offer the most growth potential, especially if you’re looking to bring in outside investors or issue stock. They are taxed separately from the owners, which can lead to double taxation, but there are planning opportunities here—like Section 1202 Qualified Small Business Stock—that can offer big tax breaks if the stock is held for at least five years.

From a tax perspective, each structure works differently. Sole proprietors and partnerships report income on their personal returns and pay self-employment taxes. LLCs are usually treated the same unless you elect corporate treatment. S-Corp owners can reduce their self-employment tax burden through a reasonable salary plus distributions. C-Corps are taxed at the corporate level, and then again when dividends are paid, but they may benefit from corporate deductions and lower flat tax rates.

When clients ask me, “What’s the best structure?” I always say—it depends. There’s no one-size-fits-all answer. The best choice depends on your business goals, risk tolerance, how much capital you need, whether you’ll have investors, and what kind of exit strategy you’re planning. That’s why it’s so important to work with both a CPA and an attorney when making this decision. We help you weigh the pros and cons specific to your situation.

Lastly, I can’t stress enough how many new business owners make costly mistakes because they try to do everything alone. They underestimate startup costs, fail to keep good records, or don’t understand basic financials. I always recommend building a support team early—an accountant, an attorney, and potentially a financial advisor. You don’t have to go it alone, and your future business will be stronger because of it.