Entity Selection Assistant

Types of business entities: Choose the right structure for your team

Choosing your business structure shouldn't keep you up at night. But here you are, frantically googling "LLC vs corporation" again.

You've read the same IRS page three times and you're still not sure if you need liability protection or if sole proprietorship sounds too...unprofessional? Meanwhile, your friend's cousin who "knows business stuff" keeps telling you to "just go with an LLC like everyone else."

The stakes feel huge because they are. Pick the wrong structure and you could be handing over extra cash to the IRS every year or putting your house on the line if someone decides to sue your business. You know there are different types—sole proprietorship, partnership, LLC, corporation—but with all this confusion, figuring out which one fits your actual situation feels impossible.

Our entity selection assistant cuts through all that noise in about two minutes. Just follow three steps to answer a few questions about your business. Our AI will then analyze your answers to give you a clear recommendation that makes sense for your specific goals. No more second-guessing whether you're making a $10,000 mistake.

TL;DR: Quick guide to business entity types

Most people get overwhelmed trying to figure out which business structure makes sense. You've probably seen the same four options everywhere: sole proprietorship, partnership, LLC, and corporation. Our Entity Selection Assistant weighs your specific situation against these choices to cut through the confusion.

• Sole proprietorship means you and your business are the same legal person. Easiest thing in the world to set up, but if someone sues your business, they can come after your house and car too.
• Partnership happens when you're splitting ownership with other people. Everyone shares the profits and the liability—so if your partner makes a costly mistake, you're on the hook for it.
• LLC gives you a legal wall between your business and personal assets. Someone can sue your business all day long, but your personal stuff stays protected. You still get to choose how you handle taxes.
• Corporation offers the strongest protection and works best if you're planning to raise money from investors. Way more paperwork and rules to follow, but it's built for businesses that want to scale big.
• S-Corporation is basically a corporation that elected different tax treatment. Instead of getting taxed twice, profits flow through to your personal return like a partnership.

Sole proprietorship: The simplest business structure

A sole proprietorship is what happens when you just start doing business without filing any paperwork. The moment you start freelance writing, mowing lawns, or selling crafts online, you're automatically a sole proprietor. No forms, no fees, no legal setup required.

It's the business equivalent of putting on your shoes and walking out the door. Our Entity Selection Assistant often points people toward sole proprietorships when they're testing an idea or running something genuinely low-risk.

Why people go this route

• You're completely in charge: Want to pivot your business model next week? Do it. No partners to convince, no board meetings to schedule, no approval processes. Every decision and every dollar of profit is yours.
• Tax time couldn't be simpler: Everything goes on your personal return using Schedule C—same form, same process you already know. Your accountant handles it without breaking a sweat, or you can knock it out with TurboTax.
• Starting costs are basically zero: Maybe you need a business license depending on your city. That's it. No state filing fees that can run $50-$500 like LLCs require.

The catch that trips people up

Your personal assets are fair game if things go wrong. Someone sues your business or you can't pay debts? They can come after your house, car, savings—everything. There's no legal wall between your business problems and your personal life.

Growth gets complicated quickly:

• Banks won't lend to sole proprietorships (no separate business credit history)
• Want to add a partner? You'll need to convert to a completely different structure
• If something happens to you, the business dies with you

Self-employment tax hits every dollar. 15.3% for Social Security and Medicare on top of regular income tax. Other structures help you avoid some of this bite.

When it actually makes sense

• Testing service-based work without major liability risks: Consulting, tutoring, graphic design, writing—industries where your biggest worry is clients not paying, not lawsuits over injuries or defective products.
• Keeping things simple while figuring it out: Why pay LLC fees and deal with extra paperwork if you're not sure you'll stick with it?

Our tool typically suggests this when you pick "just me" for ownership and flag low liability concerns. But mark any growth plans or liability worries? It'll probably push you toward an LLC instead.

Partnership: Shared ownership and responsibility

Partnerships work when you're not flying solo but don't want corporate complexity. Two or more people share profits, losses, and business decisions together. It's the default when multiple people start doing business without filing formal paperwork.

Why partnerships appeal to people

You're sharing the load with someone who gets it. Running a business solo means every decision, every late night, every crisis lands on you. Partners mean shared responsibility and hopefully complementary skills.

Getting started costs almost nothing

• General partnerships don't require state filings or legal fees
• Write up a partnership agreement (or don't, though you should)
• Get an EIN and you're in business

Taxes stay relatively simple. The partnership files an informational return and gives each partner a K-1 showing their share of profits and losses. Everyone reports their piece on personal tax returns—no corporate tax complications.

The partnership reality check

• Every partner can legally bind the entire business: Your partner signs a lease, takes a loan, or makes a deal? You're on the hook whether you agreed or not. That shared authority means shared risk for everyone.
• Personal liability hits everyone equally: If the business gets sued or can't pay debts, creditors can chase any partner's personal assets. Your house could pay for your partner's mistakes.
• Limited partnerships offer some protection: Limited partners risk only their investment, not personal assets. But someone still needs to be the general partner taking on full liability and management responsibility.

When partnerships actually work

• Professional services needing shared expertise Law firms where partners bring different specialties, medical practices with complementary skills, consulting groups with distinct client relationships.
• Family businesses with deep trust The shared liability feels less scary when you've known your partners your whole life and everyone's genuinely committed long-term.

Our Entity Selection Assistant often steers people away from partnerships, even with multiple owners. Most business relationships work better with LLC protection because you can still share ownership and decisions without putting everyone's personal assets at risk.

LLC: Limited liability with operational flexibility

LLCs are like getting a bodyguard for your personal assets without hiring a team of lawyers to manage it. Your business can get sued, rack up debts, or face other disasters, but creditors can't touch your house, car, or savings account. You get corporate-level protection without drowning in corporate paperwork.

Our Entity Selection Assistant suggests LLCs more than any other structure because they solve the biggest small business problems without creating new headaches.

Why LLCs work for almost everyone

Stop losing sleep over liability. That legal wall between your business and personal assets means you can take reasonable risks without betting your family's security. Sole proprietorships leave everything exposed—LLCs don't.

Taxes stay flexible and manageable:

• Single-member LLCs report everything on Schedule C (like sole proprietors)
• Multiple members get partnership-style K-1s
• Don't like either option? Elect corporate taxation instead
• You pick what works best for your situation

You write your own rules. Through an operating agreement, you decide how things work instead of following rigid corporate requirements:

• Split profits based on effort instead of ownership percentage
• Give one member decision-making authority
• Pay some people salaries, others distributions

What you need to know upfront

• Formation costs hit differently depending on your state. Delaware charges $90 to start an LLC while California demands $800 annually whether you make money or not. Factor these ongoing costs into your decision.
• Don't skip the operating agreement if you have partners. Most states don't require one, but without it you're stuck with default state rules that probably don't match your actual situation. Pay upfront to avoid expensive fights later.
• Self-employment tax still bites. That's 15.3% on top of regular income tax in most cases—though electing S-corp status can help reduce this hit.

LLCs make sense when

Your business involves real liability risk:

• Contractors working in people's homes
• Retail shops with customer foot traffic
• Restaurants with food safety concerns
• Service businesses using equipment that could break something expensive

You want professional credibility without partnership complications. Solo consultants, small agencies, or service providers who need to look legit but don't want shared decision-making drama.

You're planning to grow beyond just testing an idea. LLCs handle employees, multiple locations, and future investment opportunities better than sole proprietorships without requiring corporate complexity from day one.

Our tool pushes toward LLCs when you flag any liability worries, mention growth plans, or want professional credibility. It's the sweet spot for most small businesses—protection when you need it, simplicity when you don't.

Corporation: Built for complexity and growth

Corporations are the big leagues of business structures. You're creating a completely separate legal entity that can own property, sign contracts, and get sued without dragging you down personally. It's the strongest liability protection you can get, but it comes with serious paperwork and complexity.

Our Entity Selection Assistant suggests incorporation when you indicate aggressive growth plans, need for outside investment, or high-liability business activities.

Why corporations make sense for some businesses

Investors get what they expect

• Issue different stock classes
• Grant employee stock options
• Raise serious capital through equity sales
• Try this with an LLC and legal fees will crush you

Protection goes beyond personal assets. Corporate officers and directors get coverage too (when acting in good faith). High-risk industries or major liability exposure make this extra layer worth the hassle.

Tax strategy gets interesting. Retain earnings at corporate tax rates instead of personal rates. Helps when you're reinvesting profits for growth rather than paying yourself everything.

The corporate trade-offs

Double taxation hurts. C-corporations pay corporate tax on profits, then you pay personal tax on dividends. Many small corporations elect S-corp status for pass-through taxation instead.

S-corporations have rules

• 100 shareholders max
• All must be U.S. citizens
• One stock class only
• Break these and lose tax benefits

Compliance isn't optional. Board meetings, corporate resolutions, separate business accounts, annual state filings. Skip formalities and lose liability protection when you need it most.

Self-employment tax advantages

S-corp owners who work in the business take salary (subject to payroll taxes) plus distributions (not subject to self-employment tax). This can save thousands annually compared to LLC or sole proprietorship structures.

When incorporation actually works

• High-growth businesses planning investment: Corporate structure makes raising money or going public much smoother than converting from LLC later.
• Maximum liability exposure situations: Manufacturing, major construction contracts, professional services with serious malpractice risks where top protection justifies the complexity.

Our Entity Selection Assistant  suggests alternatives unless you specifically flag serious growth or investment plans. Most small businesses find compliance burden outweighs benefits—LLC protection handles needs without corporate headaches.

How to choose the right business entity

Picking between structures gets easier when you know what actually matters. Our Entity Selection Assistant handles these decision points automatically for you, but here's what's happening behind the scenes.

When you're stuck between options

• Sole proprietorship vs. LLC: Liability comfort and growth plans decide this. Getting sued would sting but not destroy you? Keep it simple with sole proprietorship. Losing your house over business problems terrifies you? Pay $200 for LLC protection.
• LLC vs. S-corporation: Self-employment tax savings potential makes the call. Expecting $60,000+ annually while working in the business? S-corp election could save thousands in self-employment taxes. Below that? Extra complexity isn't worth it.
• Partnership vs. LLC for multiple owners: LLC wins unless you have bulletproof trust and want true shared management. Partnerships work for family businesses or professional practices where everyone's equally committed. Most other situations? LLC protection beats partnership simplicity.

State stuff that matters

• Costs vary wildly: Wyoming LLCs cost $100 with zero annual fees. California hits you for $800 yearly regardless of profits. Location-flexible? Entity costs should influence where you incorporate.
• Tax treatment differs: Some states ignore S-corp elections entirely, treating you as regular corporation for state taxes while IRS sees pass-through.

Timeline considerations

• Starting simple vs. building for scale: Sole proprietorship to LLC? Easy. Partnership to corporation? More paperwork, potential tax mess. Corporation to anything else? Expensive nightmare.
• Plan three years out: Entity Selection Assistant weighs growth timeline because changing structures later costs time and money you could spend actually growing.

When to get professional help

• Complex situations need experts: Multi-owner structures, high liability businesses, significant investment scenarios should get attorney review. Our tool points direction, lawyers handle nuances that save or cost serious money.
• Beyond basic structures: Multi-state operations, international considerations, industry-specific regulations need expert guidance beyond any tool's reach.

Ready to manage your team in your new business structure?

You've picked your business entity, now comes the fun part. Building a team that actually shows up, tracks their time properly, and gets paid without you losing your mind over spreadsheets and calculators.

Here's what nobody tells you: your entity choice affects how complicated team management gets. Sole proprietors can wing it with basic time tracking. Corporations need formal payroll processes, proper documentation, and compliance with way more regulations.

Where Homebase comes in

Whether our Entity Selection Assistant pointed you toward a simple sole proprietorship or complex corporation, managing your team shouldn't require a business degree. We handle scheduling, time tracking, payroll, and compliance so you can focus on actually running the business you just structured.

From your first hire to your busiest season, we've got the team management side covered while you tackle everything else on your plate. Start managing your team the right way from day one.