Are you lying awake at night wondering if you've already made a catastrophic mistake with your business structure? Maybe you're stuck in analysis paralysis, convinced that choosing the wrong entity type will doom your business before it even begins.
You're not the only new business to ever feel this way. Almost every business owner struggles with structure decisions at some point, and the fear of "getting it wrong" keeps many entrepreneurs from even starting.
We've helped hundreds of small business owners navigate these decisions, and the choice isn't nearly as critical as you think it is, especially when you're just starting out. In fact, you might not even need a business entity right away.
In this article, we'll walk through:
- When you do and don't need an entity
- The main options (LLC vs. S-Corp) and their differences
- Common mistakes that cost owners money
- Why structure should evolve as your business grows
The Truth About Starting a Business: You Don't Always Need an Entity
This might surprise you, but you don't have to have a separate entity to start a business.
When I first started Patrick Accounting, I operated for 18 months without any legal entity at all. I had a separate checking account for the business and eventually got an EIN (federal tax ID number) when I hired my first employee after four months, but I didn't need a formal LLC or corporation to get started.
During that first year, I made $60,000 in profit, and the lack of a formal entity didn't impact my tax situation at all. I was still able to deduct all my ordinary and necessary business expenses: office supplies, equipment, mileage, software, and everything else I needed to run the business.
The "Go Make Money First" Philosophy
If you're just starting out and trying to decide between an LLC and S-Corp, here's my advice: Just go make money first.
Let's say you want to start driving for Uber. You don't need to form an LLC before you can start earning. Uber will issue you a 1099 to your Social Security number, you'll track your deductible expenses (mileage, bottled water for riders, Uber's fees), and report everything on your tax return. As long as you can justify your expenses as ordinary and necessary for that business, you're perfectly fine operating as a sole proprietor.
The structure itself doesn't magically change your tax bill… at least not until you're making significant profit. The same deduction rules apply whether you're a sole proprietor, LLC, or S-Corp. You still can't deduct personal expenses, you can still only deduct 50% of business meals, and life insurance premiums still aren't deductible.
The differences only start to matter once you’re generating significant profit (or have other risks to manage).
When You DO Need to Consider Business Structure
While you don't always need an entity immediately, there are specific situations where a formal entity makes sense right way, usually for protection, not taxes:
- High-liability industries (roofers, contractors, retail businesses, service providers on the road)
- Employees—the moment you hire, you’ll need an EIN and payroll compliance
- Business partners—you need agreements on profit splits, decision-making, and protection for each partner's interests
- Clear separation of personal and business finances as you grow
The goal is simple: If something happens at your business, your home and personal assets stay safe.
Why LLCs and S-Corps Are Your Two Main Options
When you're ready to form an entity, you'll typically choose between two main structures for small businesses. Both are what we call "flow-through entities," meaning the business itself doesn't pay federal income tax—the profits flow through to your personal return.
LLC (Limited Liability Company)
An LLC provides legal protection while offering flexibility in how you operate and distribute profits. By default, an LLC is taxed as a partnership, which means:
- Profits and losses flow through to your personal tax return
- You have flexibility in how you distribute money to owners
- You can distribute property (like real estate) without creating a taxable event
- You pay self-employment taxes on your share of the profits
S-Corporation
An S-Corp is a corporation that makes a special tax election to be treated as a "small business corporation." The key difference is that S-Corp owners who work in the business must pay themselves a reasonable salary:
- You pay payroll taxes (Social Security and Medicare) only on your salary
- Remaining profits can be distributed without self-employment taxes
- This can create tax savings, especially as profits increase
- You must follow corporate formalities (annual meetings, meeting minutes, etc.)
Why C-Corps Usually Don't Make Sense
Traditional C-Corps pay their own taxes, and then you pay taxes again when you take money out as dividends. That's double taxation, and most small business owners want to avoid that. C-Corps typically only make sense if you're planning to take on investors or go public.
The Real Factors That Should Drive Your Decision
The right structure depends on several factors specific to your situation, and that's why "it depends" is the most common (and most accurate) answer accountants give.
Why Your Industry and State Matter
Different industries have different liability concerns, and different states have different tax implications. For example, here in Tennessee, an S-Corp isn't always the most tax-efficient choice, even though it might be in 40+ other states.
How Your Growth Plans Factor In
Are you planning to open multiple locations? Operate in multiple states? The structure that works for a single-location business might not work when you're scaling. If you're planning significant growth, you need a structure that can handle that complexity.
Why Your Assets Are Important
Never put real estate inside an S-Corp. The only way to get real estate out of an S-Corp is through a taxable event. If you own real estate in an LLC taxed as a partnership, you can distribute that property to yourself as a partner without creating immediate tax consequences. This is why we often recommend separating your real estate from your operating business, even if you own both.
Why to Consider Your Employee Plans
If you're planning to hire employees, especially in multiple states, this affects your structural needs. Different structures handle multi-state payroll and employment taxes differently.
Common Mistakes That Cost New Business Owners Money
We've seen these mistakes over and over again, and they can be expensive to fix after the fact:
- Putting real estate in an S-Corp—creates expensive tax traps when you want to move property later
- Running multiple locations under one entity—limits flexibility and can increase tax burden
- Ignoring S-Corp compliance rules—skipping payroll, missing elections, or failing to document meetings puts your status at risk
- Following generic advice—what works for someone online in another state may not fit your situation
Why Structure Isn't "Set It and Forget It"
Your business structure should evolve as your business evolves.
I've personally evaluated whether to convert to an S-Corp probably half a dozen times over the 20+ years I've been in business. Each time my business changed—more employees, different revenue levels, new service offerings—I had to ask: Does my current structure still make sense?
Your Business Will Change
The business plan you have today may not be the same plan you have in five years. Maybe you'll:
- Open locations in new states
- Add partners or investors
- Significantly increase (or decrease) your revenue
- Change your service offerings
- Decide to sell the business
Each of these changes might require structural adjustments.
Regular Reviews Are Essential
This is why we do structural reviews with new clients, and why we revisit structure periodically with existing clients. We want to make sure your structure still makes sense for where your business is heading, not just where it's been.
During these reviews, we look at:
- Your current legal protection needs
- Tax efficiency opportunities
- Compliance requirements you might be missing
- Long-term plans and how structure supports them
What This Means for Your Business Right Now
If you're just starting out, don't let structure decisions paralyze you. Focus on making money first.
If you’re already in business, a structure review may uncover tax savings, reduce audit risk, or protect your personal assets better than your current setup.
Ask yourself:
- Do I have liability risks that require legal protection?
- Am I making enough profit for structure to impact my taxes?
- Do I have employees or partners that complicate my situation?
- Are my long-term plans supported by my current structure?
If you answered yes to any of these, it's probably worth a review.
Stop Overthinking Structure, Start Building Your Business
Structure decisions aren’t as scary as they seem, and they’re not permanent. The most important thing is building a profitable, sustainable business.
At Patrick Accounting, we help business owners make the right structure decisions at the right time. Sometimes, the best advice is simply: Make money first, and then optimize as you grow.
Read "S-Corp vs LLC: Which Structure Is Right for Your Growing Business?" next to understand the differences and see which structure may be the best fit as you grow.
If you're ready to take a strategic look at your business structure, or if you're still building toward that first profitable year, we're here to help.
