Choosing the Right Legal Entity
A Practical Guide to Taxes, Liability, and Paying Yourself
This free guide from Webb CFO breaks down the most common business structures in clear, practical terms so you can better understand your options and have more informed conversations with your legal and tax advisors.
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- The differences between a sole proprietorship, LLC, partnership, S corporation, and C corporation
- How each entity type is taxed
- How business owners can pay themselves
- The key advantages and drawbacks of each structure
- Common filing, payroll, and reporting requirements
- Practical questions to consider before choosing or changing your entity
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Your Business Structure Can Affect More Than You Think
The entity you choose can influence:
Whether you take an owner’s draw, wages, distributions, or guaranteed payments
This guide gives you a straightforward overview of the options before you speak with your CPA, attorney, or financial advisor.
What's Inside the Guide
Five structures, broken down the same way — how they're taxed, how owners get paid, and what to watch for.
Sole Proprietorship
Limited Liability Company
Partnership
S Corporation
C Corporation
See when a C corporation may be appropriate, how corporate taxation works, and why this structure is often better suited to companies planning to raise equity or go public.
Who This Guide Is For
This resource is designed for business owners at every stage of the entity decision.
- New business owners choosing an entity for the first time
- Sole proprietors considering an LLC or S election
- Business owners adding partners, shareholders, or employees
- Professional service firms reviewing their compensation structure
- Growing companies reassessing whether their current entity still fits
- Owners who want a clearer understanding before meeting with their advisors
Make a More Informed Decision
There is no single entity structure that is right for every business.
Your revenue, number of owners, hiring plans, level of risk, compensation strategy, and long-term goals all matter.
Download the guide to get a clearer picture of the options and the questions worth asking before you make a decision.
Frequently Asked Questions About Choosing a Business Entity
What is a business entity?
A business entity is the legal and tax structure under which a company operates. Common structures include sole proprietorships, limited liability companies, partnerships, S corporations, and C corporations.
Your entity type can affect how you file taxes, how owners are paid, whether payroll is required, how much personal liability you may carry, and how easily the business can add owners or investors.
Why does choosing the right business entity matter?
Your business structure can influence how income is taxed, how you pay yourself, whether you need to run payroll, your personal exposure to business liabilities, your reporting and compliance requirements, and your ability to add owners, investors, or shareholders.
The right choice depends on your revenue, ownership structure, hiring plans, business risk, compensation strategy, and long-term goals.
What is the difference between a sole proprietorship and an LLC?
A sole proprietorship is not legally separate from its owner. Business income and expenses are generally reported on Schedule C of the owner’s individual tax return, and the owner is personally liable for the business.
An LLC creates a separate legal entity and may provide liability protection. A single-member LLC is generally taxed like a sole proprietorship unless it elects another tax classification.
How does a sole proprietor pay themselves?
How is an LLC taxed?
An LLC does not have one automatic tax structure.
A single-member LLC is generally treated as a disregarded entity, with income reported on the owner’s individual tax return. A multi-member LLC is generally taxed as a partnership by default.
An eligible LLC may also elect to be taxed as an S corporation or C corporation.
How are partnerships taxed, and how do partners pay themselves?
Partnerships generally file Form 1065. Each partner receives a Schedule K-1 showing their share of the partnership’s income, deductions, and credits, which they report on their individual tax return.
Partners generally do not receive W-2 wages. They may receive distributions of partnership income or guaranteed payments for services performed for the business.
What is an S corporation, and how does an owner pay themselves?
An S corporation is a corporation or eligible entity that elects pass-through tax treatment.
A shareholder who works in the business generally receives reasonable compensation through W-2 wages. The shareholder may also receive distributions from the company.
This structure may create tax planning opportunities, but it also requires payroll, tax filings, and ongoing compliance.
What is reasonable compensation for an S corporation owner?
Reasonable compensation is the salary the business would ordinarily pay another person to perform the same work.
Factors can include the owner’s role, responsibilities, experience, time spent in the business, industry standards, company size, and comparable salaries. The salary should reflect the actual value of the services performed.
What is a C corporation, and when might it make sense?
A C corporation is a separate taxable entity. The corporation generally pays tax on its income, and shareholders may also pay tax when they receive dividends.
A C corporation may be a good fit for companies that plan to raise substantial equity, issue multiple classes of stock, include foreign investors, or eventually go public.
Can a business change entity types later?
Yes. A business may begin as a sole proprietorship or single-member LLC and later elect S corporation treatment or reorganize as a corporation.
Changing entity types can affect taxes, payroll, ownership, liability, and reporting. Business owners should review the decision with legal and tax advisors before making a change.
Is this information a substitute for legal or tax advice?
No. This FAQ is for general educational purposes only. Entity selection and taxation can vary based on your state, industry, ownership structure, and individual circumstances. Information current as of July 2026.
About Webb CFO
Webb CFO helps business owners understand how their entity structure affects taxes, payroll, compensation, and long-term growth.
The team works alongside legal and tax advisors to help business owners make financial decisions with greater clarity and confidence.
Need help understanding how your entity structure affects your finances?
Schedule a conversation with Webb CFO to review your accounting, payroll, compensation, and long-term planning needs.