When starting a new business, the first step is choosing how you will legally conduct business. Your structure shapes taxes, liability, banking, credibility, and future growth. Common options include sole proprietorship, Limited Liability Company (LLC), S-Corporation, C-Corporation, and partnership.

Sole proprietorship is the simplest. There is no legal separation between you and the business. If you pick this route, get a Federal Employer Identification Number (FEIN) from the IRS and use it with banks and vendors instead of your Social Security Number. It protects your privacy and looks professional.

An LLC creates a separate legal entity that helps shield personal assets if the business faces debts or lawsuits. By default many LLCs are taxed as pass-throughs, and some may elect S-Corporation taxation if it fits their situation. Partnerships operate similarly on the tax side but involve two or more owners and require a clear agreement.

Corporations offer a different set of tradeoffs. An S-Corporation is a pass-through entity. Profits and losses flow to the owners’ personal returns, subject to eligibility rules and reasonable-compensation requirements. A C-Corporation is taxed separately from its owners. It can retain earnings and use different tax strategies, which may suit businesses planning to reinvest profits or raise outside capital.

Separate entities provide a liability buffer. Keeping business obligations distinct from personal assets reduces the risk to your home, savings, and retirement accounts. This separation is especially important for licensed professionals. Physicians and other healthcare providers should strongly consider operating through an appropriate entity rather than as sole proprietors to help manage malpractice and contractual risk. Check your state’s rules on professional entities, as naming and eligibility vary.

Formation is state-specific. Each state sets its own filings, fees, and ongoing compliance. You can usually find step-by-step instructions on your state government website. Third-party services can handle the paperwork for a fee. Many enterprising owners save money by filing themselves after a careful read of the state checklist.

Make your choice before you open accounts, sign leases, or hire. Align the structure with your risk profile, tax needs, and growth plan, and keep clean records from day one.

Next in this series on starting a new business, we will cover core infrastructure and document retention so you stay organized and compliant after registering your entity.