Most businesses could raise money from professional investors someday—but most never do. The choice of business entity should reflect your actual strategy, not a hypothetical one.

Unless raising outside capital is a clear and intentional part of your plan, don’t over-engineer your structure for an investor who doesn’t exist yet. Focus on what’s real, not what’s possible.

Answer the question below based on your current business model and immediate goals—not speculation about the future.

Some business owners plan to build and sell their company for a significant profit. If that’s your goal—and you’re willing to hold stock for at least five years—there may be powerful tax advantages available to you.

This section helps us identify whether you’re on a path that could qualify for those benefits. Answer based on your actual plans and expectations.

Note: Focus on what you know, not what’s possible. If selling the business is only a vague idea, answer accordingly. This analysis works best when it reflects your real-world strategy.

Based on your answers, your business plan appears compatible with a powerful tax strategy: Qualified Small Business Stock (QSBS) treatment.

If your business is structured correctly and everything goes according to plan, you could exclude up to $10 million (or 10x your investment) in capital gains from federal income tax when you sell your stock after five years. That’s a complete exemption from long-term capital gains tax, including the 3.8% net investment income tax—potentially saving you hundreds of thousands of dollars or more at exit.

But there’s a tradeoff

To qualify for QSBS, your business must be taxed as a C corporation—which means you’ll face double taxation on operating profits:

• 21% corporate tax when your business earns a profit
• Another up to 23.8% tax when you take money out as dividends

That’s a combined tax bite of up to 39.8% on profits you distribute—compared to a single layer of tax in an LLC or S corporation.

There’s also execution risk

Even if you qualify for QSBS treatment, it’s not guaranteed you’ll get the benefit. Most private equity firms and other acquirers prefer to buy assets, not stock. If that happens, the gain may not qualify for QSBS—unless you negotiate a stock sale or restructure the deal to preserve eligibility.

Bottom line: The tax savings at exit can be massive—but they come at the cost of less efficient taxation during operations and real-world deal uncertainty.

Some business owners don’t need to take profits out of the business right away. Instead, they plan to leave the money in the company to fund growth—like hiring, expansion, or product development.

If that’s your approach, there may be tax advantages to structuring the business in a way that favors reinvestment. But it also means paying a second layer of tax if you eventually take money out for personal use.

Note: Answer based on what you realistically expect to do—not just what sounds good in theory. The right structure depends on how you actually plan to handle profits.

You may benefit from forming a C corporation if you plan to retain most of your profits in the company instead of distributing them to the owners.

C corporations are taxed at a flat 21% federal rate—lower than most individual income tax rates. If you leave profits in the company to reinvest in growth, you may pay less tax than you would as a sole proprietor, partnership, or S corporation.

But there’s a cost if you take the money out

If you distribute profits to yourself as dividends, you’ll face a second layer of tax—up to 23.8%—on top of the 21% corporate tax. That’s a combined tax bite of up to 39.8% on operating profits that are fully distributed.

• 21% tax on profits when earned
• Up to 23.8% tax on dividends when withdrawn

There’s also legislative risk

The 21% corporate tax rate is historically low and could increase in the future. If Congress raises the rate, the benefit of retaining earnings in a C corporation could shrink—or disappear—overnight. This strategy only works as long as the corporate tax remains significantly lower than the top individual rate.

Bottom line: This is a tradeoff between locking in today’s low corporate rate and accepting potential double taxation if you later want to extract the cash.

Trust ownership in your business can restrict certain tax classifications, such as S corporation status, which allows only specific trust types as shareholders.

• Revocable Living Trust or Other Grantor Trust. A trust where the grantor (creator) is a U.S. citizen and retains control over the trust’s income or assets, making the grantor taxable on the trust’s income (IRC Section 671). The grantor or their spouse is typically treated as the owner for tax purposes. The typical living trust that gives the person the power to revoke it is considered a grantor trust.
• Voting Trust. A trust created to hold and vote S corporation shares for shareholders, typically for a limited period, where the trust’s beneficiaries are the shareholders who transferred the stock (Treas. Reg. § 1.1361-1(h)(1)(iv)). The trust’s purpose is to centralize voting control.
• Qualified Subchapter S Trust (QSST). A trust with a single current income beneficiary who is a U.S. citizen or resident, where all income is distributed to that beneficiary, and the trust elects QSST status with the IRS (IRC Section 1361(d)). The beneficiary is taxed on the S corporation’s income.
• Electing Small Business Trust (ESBT). A trust that elects to hold S corporation stock, with beneficiaries limited to individuals, estates, or certain tax-exempt organizations, and files an ESBT election with the IRS (IRC Section 1361(e)). The trust is taxed on S corporation income at the highest individual rate.

The question below asks whether one of these descriptions.

Sometimes, a business is partially owned by another company—like a limited liability company (LLC). Whether this works for your structure depends on how that LLC is treated for tax purposes.

If the LLC has only one owner and is ignored for tax purposes (a “disregarded entity” that reports its income on Schedule C of the owner’s personal tax return), it’s treated the same as the individual who owns it.

If the LLC has multiple owners or elects to be taxed like a corporation, it’s treated as a separate business and may limit your structure options.

Many business owners plan to reward key team members, advisors, or contractors with a share of ownership in the business. This is called incentive compensation—giving equity in exchange for services.

It’s a powerful tool, but it affects how your business should be structured. Certain equity arrangements may trigger taxes if not planned carefully. Others may require specific entity types to work properly.

The questions below will help us understand whether incentive compensation is part of your plan and how it’s structured, so we can guide you toward the best setup.

Note: Choose your answers based on what you actually plan to do, not what you might do someday. The goal is to match your structure to your real-world strategy, not to hypothetical possibilities.

One of the main reasons businesses elect S corporation tax treatment is to save on self-employment taxes.

Here’s how it works: Instead of paying self-employment tax (15.3%) on all business income, you pay yourself a reasonable salary and take the remaining profit as a distribution—which isn’t subject to payroll tax. For example, if your business earns $150,000 and you pay yourself a $90,000 salary, you’ll only pay employment taxes on that $90,000. The remaining $60,000 avoids payroll tax, saving you over $9,000 per year.

But these savings come at a cost. To qualify and maintain S corporation status, you must:

• Pay yourself a “reasonable” salary based on your role
• Distribute profits strictly based on ownership percentage
• Avoid offering special profit rights to specific owners
• Keep careful records of payroll and distributions
• Accept that appreciated assets can’t be removed from the company without triggering tax

Note: This is a tradeoff between tax savings and operational flexibility. Some businesses choose the savings. Others prefer the freedom to structure ownership and distributions without IRS constraints.

U.S. states allow a business purpose to be either general (for example, “any lawful activity”) or specific (for example, “real estate investment purposes, including buying, selling, renting, and otherwise dealing with residential and commercial real estate”).

In most cases, restricting an entity’s business purpose can raise questions about the entity’s authority and create more problems than it solves. Specific business purposes are used primarily in two contexts:

• Professional Entities—If the business is a professional entity that can only engage in specific activities associated with the profession, the entity may be required to identify the authorized professional activity for which it is being formed.
• Special Purpose Entities—As a condition of financing or as a result of some other business arrangement, an entity may be contractually obligated to restrict its activities to a specific purpose.

Even if the new business entity is being formed to engage specific activity, there is usually no legal reason to restrict the new entity’s authority. Unless one of the two exceptions above apply, it is usually best to give the new entity a general purpose (any purpose permitted by law).

Each state requires out-of-state (foreign) businesses that to register to do business in the state if the have business operations in the state. If the business will maintain ties to another state , it may be necessary to register it in multiple states. The determining factor is whether the business will be “doing business” in other states.

Each state has specific definitions and thresholds for what constitutes “doing business,” and the exact application of the the rules to a specific business are often unclear. “Doing business” generally includes:

• Having a physical office or place of business in the state.
• Hiring employees in the state.
• Conducting regular meetings with clients or customers in the state.
• Engaging in significant, continuous, or substantial business activities in the state.
• Holding property, such as warehouses or retail locations, in the state.

While not conclusive, a good litmus test is whether the business will have an ongoing business connection to a state that is different than any other U.S. state. If so, that could indicate a substantial connection that requires registration. If the business will have a connection to one state that is more continuous than its connection to any other state, then it is probably “doing business” for purposes of the registration requirements. These are general guidelines only.