How to Avoid the Wrong Business Entity Setup

You had a big idea. You launched your business. You filed some paperwork—maybe with help, maybe not. You picked an LLC or S Corp because that’s what your buddy said to do, or because it was the quickest path forward.

And then you got to work.

But here’s what most business owners don’t realize until it’s already costing them real money:

The business structure you chose on Day 1 might be totally wrong for Day 1,000.

The Entity Trap

We call it the entity trap. A business owner starts small, picks an entity type—LLC, S Corp, C Corp, or partnership—and keeps it that way forever. Even as the business scales, adds complexity, grows revenue, brings on investors, opens new locations, hires dozens of employees...the entity stays the same.

And that’s when the problems start.

We’ve seen it all:

LLCs taxed as partnerships paying way more in self-employment tax than necessary
C Corporations double-taxed when there’s no need to be
S Corps that can’t bring in new capital without triggering a tax disaster
Family businesses trying to transfer ownership with an entity structure that makes gifting a nightmare
Entrepreneurs using the wrong structure for IP protection, foreign investment, or even basic retirement plan optimization

The list goes on.

What’s at Stake?

Here’s what’s really on the line when your entity setup isn’t aligned with your business strategy:

1. Tax Efficiency

The IRS doesn’t care that your structure was “good enough” when you started. If you’re in the wrong bucket, you will pay more.

An LLC taxed as a sole prop? Expect to pay full freight on self-employment taxes.
Operating as a C Corp? Get ready to pay taxes on both corporate profits and shareholder dividends—unless you have a rock-solid reason to justify it.
Misclassified S Corp? You may miss out on QBI deductions, reasonable compensation strategies, or find yourself in hot water with the IRS.

You need to earn your tax savings by choosing a structure that supports them.

2. Growth Flexibility

Your entity type affects how you raise capital, admit new owners, and share profits. Some structures are simple. Others are rigid.

Want to bring on investors? LLCs can make this cumbersome, especially when issuing different classes of equity.
Need to retain key employees with equity incentives? The entity choice changes how and if you can offer options.
Trying to merge with another company? Some structures make that a legal and tax mess.

If your business goals include scale, capital, or succession, your entity needs to flex with you.

3. Legal Protection

Some entities offer better protection than others—but it’s not just about liability shields. It’s about how you run the business.

For example, you might think your LLC protects you personally... but if you’re co-mingling funds or ignoring corporate formalities, a court can pierce that veil in a heartbeat.

The structure is only as strong as the systems behind it.

4. Exit & Succession

Planning to sell someday? Pass the business to your kids? Get acquired? Your entity plays a huge role in how much you actually get to keep.

Some structures make asset sales more tax-efficient than stock sales — and vice versa.
A wrong move here can result in capital gains, ordinary income, or even penalties.
For family businesses, poor structure can lead to forced buyouts, ugly tax bills, or estate issues.

We’ve seen exit deals fall apart entirely because of bad structural choices made a decade earlier.

So... What’s the “Right” Entity?

There’s no one-size-fits-all answer—and that’s the whole point.

The right structure depends on:

Your current revenue and profit mix
How you pay yourself and your partners
Whether you’re reinvesting or distributing profits
If you’re planning to raise money or sell someday
What your long-term business and personal goals are
The number and type of owners (especially if any are non-US residents or other entities)

It’s a strategic decision, not a formality. And it’s one that should be revisited every few years—because your business isn’t static. Your entity structure shouldn’t be, either.

What To Do Now

Here’s a simple test:

When was the last time you had a serious conversation about your entity setup with a tax strategist or business advisor?

If it’s been a while—or never—it’s time.

At BGW, we’ve helped hundreds of business owners restructure their entities in ways that reduced tax liability, improved growth flexibility, and smoothed the path to succession or sale. Sometimes the fix is simple. Other times, it’s a full-on overhaul. But either way, we don’t believe in letting our clients leave money on the table.

Don’t let your business structure be the silent killer of your growth.

Let’s talk. A quick conversation today could save you hundreds of thousands tomorrow.

Wrong Business Entity Setup