How to Choose the Right Entity Type for Your Small Business

Setting your business up as the right entity type can significantly reduce your taxes

Business entity? Really? Don’t I have more urgent and important things to deal with? That would have been my response when I started my first small business. The problem with that response is that when you start a business, you don’t get to not choose a business entity type. Either you choose it yourself, or it’s chosen for you by default.

When my wife started her private practice, like most therapists, she didn’t give much thought to the type of business entity she should set up. She just rented an office space, put up some online listings, and was “off to the races.” As a result, she defaulted into the so-called “sole proprietorship” or “sole prop” entity. While very typical, this is not necessarily the best one for a practice, and even if it is reasonably good at first, you may soon outgrow it.

A full description of all possible business entity types and all their requirements, costs, benefits, drawbacks, etc. would fill a book. Worse, a majority of those details are irrelevant to any specific practice (it’s just that which details are relevant will differ from one case to another). Instead, what I’ll do here is give you a very minimal primer so you…