How Does One Choose an Entity Type?

accountant-accounting-adviser-advisor-159804When starting a new business, one of the most important things you can do is figure out your taxes. Because the IRS doesn’t mess around, you have to make sure that you’re doing things in the right way. One crucial aspect of that is picking the right entity type, which will determine which tax bracket you will be in. To help you out, we’ve listed the top four entity classifications so that you can check your EIN status.

Sole Proprietorship

For most new businesses, this is the most common choice. It keeps things simple when tax time comes, and it doesn’t require that you list other people as owners or proprietors of your business. The downside, however, is that your personal assets are tied to the company, so if it struggles, it could affect your own earnings and holdings as well.


If you are starting a business with another person, then a partnership is the way to go. In this case, your assets are still tied to the company, but it’s shared between both of you. In some situations, you can make it a limited partnership, which lowers your liability level, but that’s only if neither of you directly manage the business dealings.


In this case, you are creating a separate entity from yourself, which means applying for a federal tax ID or EIN number. The benefit here is that your personal assets are not tied to the business, and everything stays separate. The process of creating a corporation is more complex and can be laborious for some people, but it will protect you in case the company ever has financial problems.

Limited Liability Corporation (LLC)

This entity type is very popular because it gives you options with regard to how you are taxed. You can either go the route of a corporation, meaning that you are separately taxed for your income and not the business’ earnings, or you can choose to make it like a sole proprietorship for simplicity’s sake.

After you submit your entity, it’s important that you check your EIN status to make sure that it was approved. To ensure things are done correctly, use a lawyer and/or an accountant. They can help you navigate the ins and outs of this process.