Entity type selection checklist: twelve facts to prepare before advice

An hour with an accountant or a lawyer is worth a great deal if you arrive with the facts, and almost nothing if you arrive with questions they have to ask you and wait for.

This is not a filing checklist. It is a one-page brief of twelve facts, sorted by where each answer comes from: papers on your desk, conversations with co-owners, or your own judgment. Nothing here is advice. It is preparation for getting advice, which is a different thing.

What to take away

Answers that sit in documents

Three of the twelve facts are already written somewhere. Find the papers first, because they cannot be argued with and they change what an adviser can recommend.

What you already owe, and what you have already signed. Loans, leases, equipment finance, and above all any personal guarantee. Guarantees do not disappear when an entity is formed, and existing obligations shape what a restructure can achieve. Personal guarantees signed before formation are one of the entity type selection mistakes that no later filing undoes.

The largest contract or commitment you expect to sign. The question behind it: is there a plausible claim you could not absorb personally? That is the threshold at which the structure stops being administrative.

What insurance you have or have been quoted. Bring the quotes. An entity decides who a claim lands on; insurance decides who pays it. Advisors frequently find that the coverage question matters more than the entity question, and they can only tell you that if they can see both.

Answers that need your co-owners

Five facts cannot be filled in alone. Put them on the agenda for a conversation, and bring the agreed answers rather than your guesses about them.

Every person or entity that will hold ownership, and the exact percentages. Not "we'll split it fairly." Numbers. Ownership determines which forms are available, which tax classifications you qualify for, and what happens in a disagreement. Round numbers agreed early are better than precise numbers agreed late.

Exact percentages also decide which entity type selection questions an adviser can answer without waiting on your other owners.

Whether any owner is not an individual US person. Another company, a trust, a partnership, or someone who is not a US taxpayer. Certain tax classifications carry eligibility restrictions on who may own an interest, and this is the fact most likely to invalidate a plan that otherwise looked fine.

Who actually works in the business, and who only invests. Working owners and passive owners are treated differently on both the liability side and the tax side. If someone is putting in money but not time, say so at the start: it changes which structures are worth discussing.

What happens when an owner leaves. Give the version you have already discussed. Even a rough answer is useful: can they sell, to whom, who values it, what happens on death. If you have not discussed it, write that down too.

It is the most common gap and the most expensive one to leave open; see partnership formation for the full set of questions.

How the owners intend to be paid. Wage, share of profit, or both, and whether the profit split matches the ownership split. It does not have to. If you want them to differ, write that intention into the brief before a structure is chosen rather than after.

Answers that are your own judgment

The last three facts need no one else, only honesty. Write them as plainly as the documents.

Roughly what the business will earn, and how variable that is. Approximate is fine. This decision is partly arithmetic, and the arithmetic behaves differently at different scales and with different volatility. A structure that suits steady income can be poor for lumpy income.

Whether profit stays in the business or comes out. Reinvestment versus distribution is one of the strongest drivers of the tax conversation. Say which you expect, and whether that changes after the first couple of years.

The specific ways this business could cause a loss. Not a general worry: the actual mechanisms. Can someone be physically hurt? Do you hold client money or property? Could a piece of professional work cause someone a financial loss? Do you have vehicles, premises, or staff?

The list determines whether liability separation is the main event or a side issue.

What running the structure will take

Registration is often where the cost starts: operating in more than one place can mean registering in more than one place, with each state's recurring obligations. Registration details and deadlines come from your own state.

Be honest about the admin: separate accounts, separate books, recurring filings, records of decisions, possibly payroll. A structure you will not maintain gives you cost and false confidence instead of protection.

Which facts feed which criterion

The twelve facts are not a decision rule. They are the inputs an adviser needs for each of the usual sorting criteria, so the choice between forms can be made in the meeting.

The one-page brief

Condense the twelve answers into a single page before the meeting.

Then add one line: the one thing you are most unsure about. Advisors are good at the question you did not know how to ask, but only if you tell them where you feel uncertain.

Where to look things up yourself

The IRS lists the most common forms of business as the sole proprietorship, partnership, corporation and S corporation, and notes that an LLC is a structure allowed by state statute.

The SBA says that consulting with business counselors, attorneys, and accountants can prove helpful. Both send you to your own state for specifics, which is the correct answer. Anything with a fee or deadline should come from the responsible authority's own page and be rechecked on the day you rely on it.

Common questions

Do I need both an accountant and a lawyer?

For a single-owner business with modest exposure, an accountant is usually the higher-value first call. As soon as there is more than one owner, or a contract large enough to hurt, the legal side stops being optional.

What if an owner has no US taxpayer number?

Say so in the brief. It is the fact most likely to invalidate a plan, and getting an EIN without a Social Security number is a separate question to settle with your adviser.

Can I do this before I have any revenue?

Yes, and it is often cheaper to. Answering these questions early costs an evening. Answering them after a dispute costs considerably more.

Is this list complete?

No, and it is not meant to be. It is what makes the first conversation productive. The advisor will have follow-up questions specific to your trade, and those are the ones worth paying for.