Picking Your Business Structure: A Guide to Getting It Right

Deciding how to legally set up your business is one of the biggest choices you’ll make. It’s not just about what sounds professional; your choice changes how much you pay in taxes, how much paperwork you have to file, and whether your personal bank account is protected if the business gets sued.

 

For 2026, here is a look at the common options and what you need to keep in mind.

The Starting Point: Sole Proprietorships and LLCs

Most people starting a side project or a home-based business begin as a Sole Proprietorship. There’s no formal process to create it, and you don’t have to file a separate business tax return. The downside is that you have zero liability protection—if the business owes money, you personally owe it.

Many owners upgrade to a Single-Member LLC. It’s still simple to run and doesn’t require a separate tax return, but it adds a layer of liability protection for your personal assets. However, keep in mind that you’ll still pay self-employment tax on all your net profits.

Moving Up: S Corps and C Corps

If your business is growing and has significant liability risks, a corporation might be the way to go.

• S Corporations are popular because they allow you to avoid double taxation. One big perk is that you don’t pay self-employment tax on the entire profit—only on the salary you pay yourself. The catch? They are expensive to maintain and require regular board meetings and minutes.
• C Corporations are the standard for businesses that want to stay around forever or raise money by issuing stock. They are separate legal entities from their owners, but they face “double taxation,” meaning the business pays tax on profits, and then shareholders pay tax again on any dividends they receive.

The “Corporate Veil” Warning

No matter which structure you choose, you have to treat the business like a separate person. If you start paying for groceries out of the business checkbook or fail to keep the company properly funded, you risk “piercing the corporate veil”. If a court finds the business is just an “alter ego” of yourself, they can hold you personally responsible for business debts, effectively wiping out your liability protection.

Additionally, be careful with loans between yourself and the business. If they aren’t documented correctly, the IRS might recharacterize them, leading to unexpected tax bills.

Get the Full Breakdown

Choosing the right entity is about balancing simplicity with protection. To help you compare all the options side-by-side—including Partnerships and LLPs—we’ve put together a detailed reference guide for 2026.

Click the link below to download the full Business Entity Pros and Cons guide for your records.

[Download the 2026 Business Entity Guide (PDF)]

Not sure if your current setup is still the best fit for your goals? Reach out to JD Tax & Accounting Advisors to discuss your specific situation before the next tax season hits