Your business structure determines how you’re taxed, your personal liability, access to capital, and how much red tape you’ll face. In 2025, amid shifting tax rules and regulatory priorities, selecting the right structure isn’t just a legal step; it’s a strategic one that affects your growth, risk, and bottom line.
You must decide on a structure before registering your business with the state. This choice influences everything from how you pay taxes to whether your personal assets are protected. While changing your structure later is possible, it may trigger tax consequences, legal complexity, or even unintended dissolution.
Here’s a breakdown of the most common structures and the accounting and tax considerations that should drive your decision.
Sole Proprietorship: Simple, But Risky
A sole proprietorship is the most straightforward structure and ideal for testing a new business idea with minimal startup costs. From a tax perspective, it’s also uncomplicated—your business income and expenses flow directly onto your personal tax return via Schedule C.
However, this simplicity comes at a cost. There is no legal separation between you and your business, which means personal assets are at risk if the company incurs debt or is sued. Sole proprietors are also responsible for self-employment taxes, currently 15.3%, which cover Social Security and Medicare contributions.
Partnerships: Shared Control, Shared Liability
Partnerships offer a straightforward structure for businesses with multiple owners, but the level of risk and control varies widely depending on the type. In a general partnership, all partners share management duties and full personal liability for business debts, including those resulting from the actions of other partners. This makes general partnerships easy to form but potentially risky, particularly in industries with legal or financial exposure.
Limited partnerships (LPs) introduce a layer of protection. They require at least one general partner who manages the business and assumes unlimited liability, while limited partners contribute capital, hold no management authority, and are liable only for their investment. This structure often appeals to passive investors who want to share in profits without being involved in day-to-day operations, with income passing through to their personal tax returns.
Limited liability partnerships (LLPs) are a more secure option for professionals seeking liability protection without giving up control. LLPs shield all partners from personal responsibility for business debts and each other’s actions—an essential safeguard in fields like accounting, law, and consulting. While state laws govern LLPs and require formal registration, they offer operational flexibility and pass-through taxation. Each partner’s income share is reported on a Schedule K-1 and taxed at the individual level.
LLPs also require sound financial oversight. Maintaining accurate books, adhering to partnership agreements, and meeting ongoing compliance obligations are critical to protecting liability and avoiding disputes. For firms that value shared management and risk mitigation, especially in high-liability sectors, LLPs strike a strong balance between control, protection, and tax efficiency.
Limited Liability Company (LLC): Flexible and Tax-Efficient
Limited liability companies (LLCs) are a popular choice for entrepreneurs seeking liability protection and operational flexibility without the formalities of a corporation. One of the key advantages of an LLC is its ability to tailor how it is taxed. By default, the IRS treats a single-member LLC as a sole proprietorship and a multi-member LLC as a partnership for tax purposes. However, owners can choose to be taxed as a corporation, opting for S corporation status to minimize self-employment taxes or C corporation status to retain earnings at a fixed corporate tax rate.
LLCs also allow a wide range of ownership structures, with no limit on the number or type of members—individuals, corporations, or other LLCs can all hold ownership interests. This makes them suitable for joint ventures or businesses with diverse stakeholders. Management and profit-sharing arrangements are outlined in an operating agreement, which, though not always required by law, is essential for defining roles, decision-making authority, and procedures for handling disputes or ownership changes.
It’s important to note that LLC rules vary by state. In some states, the departure or addition of a member can trigger dissolution unless the operating agreement outlines a continuation process. Business owners should review state-specific requirements and ensure the operating agreement includes explicit provisions for membership changes, capital contributions, and buyouts to avoid administrative disruption. This structure offers the adaptability and protection needed to support long-term growth, especially for businesses that value simplicity without sacrificing control.
Corporations: Built for Scale
C corporations are separate legal entities from their owners, providing the strongest liability protection. They can issue multiple classes of stock and attract institutional investors, making them ideal for companies planning to scale or go public. However, C corps are subject to double taxation—first at the corporate level (currently 21%) and again when dividends are paid to shareholders.
From an accounting standpoint, C corps must adhere to Generally Accepted Accounting Principles (GAAP), maintain strict financial records, and file annual corporate returns. These obligations create a higher administrative burden, but also provide transparency and legitimacy, which can aid in securing financing or negotiating deals.
S Corporations: Corporate Protection with Pass-Through Taxation
S corporations are designed to avoid the double taxation faced by C corporations by allowing income, losses, deductions, and credits to pass through directly to shareholders, who report them on their personal tax returns, similar to a partnership. This makes S corps particularly attractive to small, domestic businesses with no more than 100 shareholders.
Owners can benefit from favorable tax treatment by taking a reasonable salary subject to payroll tax and receiving additional income as distributions, which are not. S corps must still meet corporate formalities, such as filing Form 1120S and providing Schedule K-1s to shareholders. While this structure offers substantial tax advantages, state treatment varies—some states tax S corps on income, while others follow federal rules. Consult a Stephano Slack tax advisor to understand your state’s approach and ensure compliance.
Key Considerations for Choosing a Structure
When selecting a business structure in 2025, focus on:
- Liability Protection: LLCs and corporations shield personal assets. Sole proprietorships and general partnerships do not.
- Tax Strategy: Choose a structure that aligns with your income level, risk tolerance, and reinvestment plans.
- Administrative Burden: Understand your capacity to manage compliance. Corporations require more oversight than LLCs or sole proprietors.
- Growth Potential: If you anticipate raising capital or bringing on partners, structures like LLCs, C corps, and S corps offer greater flexibility.
- Succession Planning: Corporations and LLCs are easier to transfer or sell than sole proprietorships.
Conclusion
There is no one-size-fits-all answer when choosing a business structure. What’s right for one company may be inefficient or risky for another. Your structure should align with your goals, risk profile, and financial strategy. As tax laws and compliance rules evolve, working with an accountant or tax advisor is more important than ever to ensure your structure supports your growth.
By building your business on the right legal and financial foundation, you’ll be better equipped to weather uncertainty and capitalize on opportunity. Contact your Stephano Slack tax manager/partner at 610-687-1600 or TaxInfo@StephanoSlack.com to discuss the best structure for your business.
Author Jackie Himes, CPA, partner, is a trusted authority in serving high-net-worth individuals and closely held businesses. She provides strategic financial guidance that fuels growth and sustainability. She can be contacted at 610-710-4057 or Jhimes@stephanoslack.com.
Disclaimer: This content is for informational purposes only and doesn’t constitute professional advice.
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