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Part of Entity type selection: three decisions, not one
Entity type selection questions: who can answer them
Entity type selection questions grouped by who can answer them: you, an accountant, a lawyer, the state filing office, and the IRS on tax treatment.
Most people arrive at the meeting that will decide their business structure with one question: which one should I pick? Nobody can answer that from the doorway.
The entity type selection questions that actually get you an answer are below.
For a real business, the structure itself is settled with a lawyer or an accountant who has your facts. This page only makes that conversation shorter.
What to take away
- Every question below belongs to someoneyou, an accountant, a lawyer, the state's filing office, or the IRS. Ask it there and nowhere else.
- Your own questions come first, because the professionals can only reason from the facts you hand them.
- Figures are never yours to assume. The current fee, form, deadline or threshold is whatever the state office or the IRS says on the day you ask.
- Two questions cannot be answered by anyone yet, and it is worth knowing which they are.
Questions for yourself
Write the answers down before booking anyone. They are the raw material for everything that follows, and the reasoning behind each one is set out in the guide to choosing a business structure.
Self-Questions Before Booking Anyone
- How many owners now and in two years?
- Worst realistic thing in this work, to whom?
- How will money leave the business?
- Where will business and customers be?
- Which recurring chores would I keep up?
- Any client, lender or landlord requirement?
- Who owns the business, in what percentages, and what happens to a share if an owner leaves, dies or stops working?
- What could go wrong that turns into a claim against my personal assets, and how large is that exposure in dollars?
- Where does the money come from to start and to run the first year, and does a lender or investor require a particular form?
- Do I expect to hire employees or contractors in the next year?
- How much annual paperwork and cost will I accept to keep the liability separation?
- What is my exitsell, bring in a partner, close the doors, or hold? Each answer points to a different structure.
How the answers point to a form. One owner, low exposure, no employees: a sole proprietorship, or an LLC if the liability separation is worth the annual cost. Two or more owners sharing profit: a partnership or an LLC taxed as one. Profit well above a reasonable salary, with the IRS tests met: an LLC electing S-corp treatment. Outside investors and future share issues: a C-corp.
Questions for an accountant
- For each legal form open to me, which tax classifications are available, and what does each mean for how I pay myself?
- What does each option cost to run every year, in bookkeeping, payroll and return preparation, not only to set up?
- Which elections have a windowthe S-corp election on Form 2553, an entity classification election on Form 8832 — and where do I stand relative to it?
- If I change my mind in two years, what does the switch look like from the tax side?
- What records would you need from me each year, and what happens if I cannot produce them?
The accountant's answers depend on numbers you may not have yet. Bring a realistic range rather than a hope. The IRS keeps its own description of what a business is expected to be able to produce on its page about keeping business records, which is a useful reality check before the meeting.
Questions for Your Accountant
- Which tax classifications are available for each form?
- What does each option cost to run yearly?
- Which elections have a window and where do I stand?
- What does switching in two years look like?
- What records do you need each year?
Questions for a lawyer
- How much of my exposure does a structure actually address, and how much is an insurance problem in disguise?
- Are there licensing rules for my trade or profession that restrict which forms I may use?
- What governing document does my form need, and what do the state's default rules do to me if I skip it?
- If I operate or hire in more than one state, where do I have to register?
- What have I already signed in my own name, and does forming anything change it? It does not, but the lawyer will tell you what to do about it.
Questions for the state filing office
These are questions of record, and the office's own website or clerk is the only source that counts. In most states that office is the Secretary of State; a few route business filings through a department of state or a corporations division. How to find that office and read what it publishes is covered in the state filing walkthrough.
Questions for the State Filing Office
- Is this name available, and what does availability mean?
- What is the current filing fee and recurring report?
- Which details become public, including agent address?
- What does it take to amend or dissolve later?
- What forms does the state require for the form I am considering, what are the current filing fees, and where do I file each one?
- What are the registered agent rules, and can I act as my own agent in this state?
- When is the annual report due, what does it cost, and what happens if I miss it?
- What are the exit or dissolution termshow do I wind the entity down, what must I file, and what fees or taxes are due at the end?
Ask the last one first if you can. The exit terms shape the entrance more than people expect, and the office answers it in a sentence.
Questions for the IRS
- Does my chosen form need its own Employer Identification Number (EIN), and at what point do I file Form SS-4 to get it? The sequence is set out in the piece on EIN applications.
- What are the current criteria and windows for the tax election my accountant has proposed — the S-corp election on Form 2553, for example?
The IRS describes the tax treatment available to each legal form on its own business structures page. Read the current version, not a summary of it, and take the answer to your accountant rather than acting on it alone.
Questions for the IRS
- Does my chosen form need its own federal identifier?
- When do I apply for that identifier?
- What are the current criteria for my tax election?
- What are the windows for that election?
Questions you will need later
Two more belong on the list, though not urgent on day one. Who is named as your point of contact for legal papers, and is that still true a year from now? The answer lives with the agent of record.
And what has to be told to whom when something about the business changes, which is the subject of keeping the record current.
Two questions nobody can answer
"Which is best?" has no answer without a business attached. And "what will I regret?" cannot be answered in advance by anyone, which is why honest professionals will say so. The substitute for both is a decision you can explain in writing and a date to look at it again.
Common questions
Do I need both a lawyer and an accountant?
For a one-person business with low exposure, an accountant alone often covers the tax side and the state's own instructions cover the filing. Once there is a second owner, an employee, or real liability, both.
Can a filing service answer these?
A filing service submits documents. It is not licensed to tell you which document to submit, and most say so in their own terms. Treat its answers as marketing rather than advice.
What if the accountant and the lawyer disagree?
They usually disagree because they are optimizing different things: tax cost against liability and governance. Put them in the same conversation, or carry each one's reasoning to the other. The decision is yours, made on both.
How long should this take?
The fact gathering is an evening. The professional conversations are usually two short meetings. People stretch it over months because they are waiting to feel certain, and certainty is not one of the outputs.
Is there a question I should ask that is not on this list?
Ask each professional what they would need to know for their answer to change. It is the fastest way to find out which of your facts are actually doing the work.
