Choosing the Right Legal Entity: A Business Owner's Guide

When starting a business, you have many things to consider, such as where you’ll locate, the name of your company, staffing decisions, preferred suppliers, key distribution channels, marketing and advertising plans, plus much more. But what about your type of legal entity?  

Choosing the right legal entity is one of the most foundational decisions a business owner can make. Your entity structure doesn’t just determine your tax treatment; it also influences your exposure to risk, your ability to grow, your flexibility in bringing on partners or investors, and even the long-term economics of selling your business. 

While this topic can feel technical and not as interesting as some of the other considerations we mentioned above, understanding the high-level differences between entity types can empower owners to make informed decisions that support both their business goals and their personal financial outcomes.

Most businesses begin by considering the five most common structures: sole proprietorships, general partnerships, limited partnerships, limited liability companies (LLCs), and C corporations. Sole proprietorships and general partnerships are the simplest to establish, but since they offer no liability protection, your personal assets remain exposed to business risks. Limited partnerships introduce a split between general partners who manage the business, and limited partners who typically contribute capital without taking on liability. LLCs, by contrast, offer the liability protection of a corporation with the flexibility of pass-through taxation, which is why they have become a preferred choice for many small and mid-sized businesses. C corporations provide the strongest liability protection and unlimited growth potential, but introduce double taxation, which business owners must plan for strategically.

Entity choice matters because the wrong structure may unintentionally increase taxes or expose an owner to unnecessary risk. It’s critical to understand how profits flow, how owners get paid and how distributions are taxed. For example, an LLC taxed as an S corporation may reduce self-employment taxes through reasonable salary planning, while a C corporation may provide access to powerful long-term tax benefits, such as the qualified small business stock (QSBS) exclusion under Section 1202.

Specialized tax strategies play an even greater role during major transitions, especially when a business is being sold or reorganized. A drop-down F reorganization, for example, allows S corporation owners to restructure before a sale, so they can receive equity in a tax-deferred manner while giving buyers a step-up in asset basis. Section 1202 (QSBS) provides qualifying C corporation shareholders with the opportunity to exclude up to $15 million of capital gains after satisfying required holding periods. Elections under Sections 338(h)(10) and 336(e) allow transactions structured as stock sales to be treated as asset sales for tax purposes, offering buyers accelerated depreciation and other benefits without disrupting contracts or licenses.

At Corient, we help business owners make sense of these complexities so they can select the legal entity that’s most appropriate for their unique circumstances. Our advisory process begins by understanding your goals, such as whether you’re protecting personal assets, optimizing cash flow, planning for growth or preparing for a future sale. With those priorities in mind, we evaluate entity structures, model tax outcomes and highlight opportunities to reduce risk and enhance long-term value. For owners considering a business transition, we guide you through strategies that may improve after-tax proceeds and align your business structure with your broader financial plan.

Choosing a legal entity is more than a compliance decision. It’s a strategic lever that matches your specific needs and objectives, and since it can influence the entire lifecycle of your business, having an appropriate entity in place is essential from the ownership phase right through to selling the business. If you’re launching a new venture, reorganizing an existing one, or planning an eventual exit, our team is here to ensure your structure supports your success today and well into the future. Get started on entity planning and selection by contacting a Corient Wealth Advisor.

ABOUT THE AUTHOR

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