Coordinated Counsel
Incorrect Entity Selection
Transcript
BARRY: Number three is incorrect entity selection. Can you shed light on why entity selection matters at all? Why can’t you just knee-jerk into going on Sunbiz, filing a company, and just crushing it?
CHAD: Well, there’s two sides of the table to this. There’s the legal implications of entity selection in terms of exposure to yourself personally, and there’s also the tax side of it. Because you can be classified as one type of entity for legal purposes but be classified as another for tax purposes.
It’s very common that for legal purposes, businesses will be classified as a limited liability company — an LLC — but elect S corp status for tax purposes. There are financial reasons for doing so, in terms of not having to pay self-employment tax. But at the end of the day, one of the big choices is whether you’re gonna have a flow-through entity, where the profits of the business are still going to flow through to you individually, or are you gonna have a C corp, where it’s really two separate entities. You have the business and you have you.
There are reasons for and for not being a C corp. It used to be a lot less common that people would elect to be a C corp because there was a much higher corporate tax rate. But when the tax law changed in, I believe 2017, the Tax Reform Act, the C corp rate got substantially reduced. Now, for some individuals who are in the highest tax bracket, it could potentially make sense to have a C corp status at 20% tax rate because less money would be flowing through to them on the individual tax rate side of things.
BARRY: Let me add to that that the 2017 act did substantially lower the corporate rate to make it, on its face, look more attractive. But you gotta do the math at the end of the day, right? Because, if you recall, you have the double taxation of C corps, which is that the C corp is a standalone taxable entity. It pays its own taxes. It does not flow through to the 1040. So it pays taxes once, then when the dividends come out to you as a shareholder, you’re going to pay capital gains on them, which is the second taxation of that money. That money gets taxed twice. So it just comes down to — one consideration is that: Is the double taxation worth it? Because you still might be better off with double taxation than passthrough depending on your income and other factors.
Another thing I would say is that there are other non-tax reasons to do a C corp. I’d like to mention two, and one of them is really awesome and fun and exciting, and I’d love to have a whole session on it by itself, and now I’m knocking the first one. The first one is that some things you can qualify for — there’s benefits you can qualify for as a company that you can do more advantageously through a C corp than you can through other entities. It’s a non-tax consideration.
And the second thing which I’m gonna add to the list — You can add to the list a thought.
CHAD: And one financial reason is that when you’re a C corp, the business owner can actually executive bonus himself money and get the deduction, as opposed to an S corp or an LLC where you can’t do that to yourself.
BARRY: Yeah, there’s a lot of nuances that really go into this selection. One thing I’ll note is that there’s something called Section 1202, which I’m sure you’re familiar with. It’s a qualified small business section that if a lot of factors are met, a company can sell after five years and have 100% of the gains be tax-free. One hundred percent of the gains can be tax-free. A lot of hurdles, a lot of conditions, but a lot of interesting ways to use that for planning.
CHAD: That’s something we had for a later date.
BARRY: We should jump into that, I think. Get some experts on that to come and talk. But that’s a really interesting thing. Correct me if I’m wrong, though: when it comes to entity selection as far as C corps go, in my opinion, generally speaking you don’t want to do a C corp.
CHAD: Correct.
BARRY: The reason why I don’t do them, and I think you mentioned it a minute ago, there’s other entities. They all have their advantages and disadvantages. We can get into that in a whole other video.
CHAD: Just don’t be a sole proprietor. We don’t need another video for that one.
BARRY: We can skip that one.
CHAD: It’s one thing I can tell everyone. Do not be a sole proprietor.
BARRY: But I would like to talk about that when we do the entity selection. But I would say C corps are not necessary unless you’re gonna be a publicly-traded company or you’re gonna raise shares and capital in a certain way. Because LLCs can elect to be taxed as a C corporation. So you can have the best of both worlds. Both legally and tax. We’ll get into that another day.
But incorrect entity selection — kind of pushing aside C corps — what else comes to mind in terms of why that’s just a total mistake?
CHAD: In terms of incorrect entity?
BARRY: Yeah. Because a lot of people go to their accountant — and I’m not trying to knock on accountants or CPAs — but sometimes CPAs are giving the legal advice of which entities to form. Because they say, “Oh, S corp. Do an S corp.” And then they just do an S corp and that’s the end of it. There’s no discussion or dialogue with the attorney and the CFP, you know?
CHAD: Yeah. Well, from the legal side, I’d love to hear your take.
BARRY: Okay. I’ll give you a Twitter summary, but again it’s a breakout session.
CHAD: A lot of it comes down to the liability to the owner. Correct me if I’m wrong.
BARRY: It does not. It does not, actually. Here’s why. You’re not gonna be a sole proprietor, because that doesn’t ever make sense, really. So we’re talking about limited partnerships and a variety of different ways limited partnerships can be organized, because there’s a bunch of different numbers of Ls before the P.
CHAD: Yeah, I didn’t even get what for.
BARRY: There’s like LL, double L, triple L.
CHAD: Limited liability limited partnership.
BARRY: Yeah, right? They’re all interesting. The all have their advantages. I think that they’re more traditional. They were used in the 80s. For tax reasons. I’ll get into that another time. There’s LLCs. There’s LPs. There’s C corps. And I say S corp, but that’s really a tax designation. That’s not a legal designation. If you’re an S corp, you’re either a C corp who makes an election or you’re an LLC who makes an election. Legally you’re either one of those two.
So, entity selection-wise, all of those types of entities have the same limited liability with respect to the business. Except for an LP. It has the general partner as the managing partner. That’s why the general partner is always an entity itself, because that general partner carries all the liability of the partnership. Pushing that aside, all of those entities have the same limited liability with respect to the business operations. So if there’s a slip and a fall or a breach of contract or an employee conflict, it’s all just a company liability.
Where they differ, and where I think it’s frequently overlooked, is on the asset protection benefits to the owners of the business. So, as Chad the business owner or Barry the business owner, if I get sued or Chad gets sued, having nothing to do with the business — like you hit a Ferrari or someting on the way home from work and your insurance doesn’t cover it and they sue you for the deficiency, they’re gonna go after your assets. And on that list of assets — that menu — will be your businesses. And they are not all treated the same. Some of them can be taken away from you to satisfy a debt. Others can not.
So there’s very important asset protection considerations when it comes to entity selection. And I gotta tell you, it’s very hard to fix later. I have a lot of people come to me and they’ve already made the mistake of forming a C corp or making an S election due to the advice of somebody else or nobody at all. And it’s really hard to do, because if you’re converting these entities, there’s a lot of tax consequences.
CHAD: “A friend of mine gave me that advice.” How often do you hear that?
BARRY: Say that again?
CHAD: How often do you hear — you say, “Oh, why’d you do that?” And they’ll say, “Oh, my friend told me. That’s what he did.”
BARRY: Water cooler advice. We call it water cooler advice. I went to Panera a couple times for coffee and I was listening to people next to me and they’re talking about wills and trusts. “Oh, my friend told me to do this.” And I just kept my mouth shut. I just don’t want to deal with it. But, yeah, water cooler advice.
Entity selection, I think, is a whole window into another area that we can talk about.
5 Costly Consequences of Choosing the Wrong Business Entity
By: Barry E. Haimo, Esq.
October 23, 2025
Filing your business paperwork might feel like a formality — just a few clicks and you’re official. But the entity you choose at that moment can shape your taxes, your liability, your ability to grow, and even how (or if) you can sell your company later. Choosing the wrong structure isn’t just a paperwork problem. It can quietly chip away at your profits, expose your personal assets, and create years of headaches that are expensive to fix.
Here are five ways the wrong entity choice can come back to bite you.
1. You Could Be Paying More in Taxes Than You Need To
While the right entity can minimize taxes, the wrong one can lock you into higher rates or limit your deductions. For example, sole proprietors and some LLC owners pay self-employment tax on everything they earn. With different planning, they might reduce that burden through an S-corp election or other structure. Once tax season hits, it’s too late to switch retroactively.
2. Your Personal Assets Might Be at Risk
One of the biggest reasons people form a company is to protect their personal savings, home, and investments. But not all entities offer equal protection. A sole proprietorship leaves everything you own exposed. Certain partnerships can, too, if not structured carefully. Even an LLC’s protection can crumble if it’s poorly maintained or if you commingle business and personal funds.
3. You Could Face Double Taxation (and Not Realize It)
C corporations are taxed twice — once at the corporate level and again when profits are distributed to shareholders. In some cases, that’s worth it; in many, it’s not. Business owners who file as a C corp without understanding that reality often end up with an unexpected tax bill and a lot of regret.
4. You Might Miss Out on Key Opportunities
The right entity doesn’t just protect, it enables. Certain structures make it easier to raise capital, issue stock, or qualify for tax exclusions like Section 1202’s qualified small business stock (QSBS) benefit. Others can limit your ability to bring in investors or partners. If growth or sale is in your future, your formation choice should reflect that plan from day one.
5. Fixing It Later Can Be Painful and Expensive
Converting from one entity to another can trigger tax consequences, require new filings, and disrupt contracts, leases, and payroll systems. Many owners don’t realize that “just changing it later” can cost thousands in professional fees and lost deductions. In some cases, the structure you start with can’t be undone without dissolving and starting over.
The key point to remember is that entity selection isn’t a checkbox, but a strategic decision with real financial and legal weight. The best time to get it right is before you file. Work with your attorney, CPA, and financial advisor to understand your options and how they align with your goals.
Because when it comes to building a business, it’s a lot easier (and cheaper!) to do it right the first time than to unwind the wrong choice later. Don’t regret your decision — schedule a consultation with us.
