What Most Founders Get Wrong About Setting Up Their Business Structure

Starting a business feels exciting until you’re buried in forms, tax questions, and legal decisions you didn’t see coming. Choosing between an LLC, a C-Corp, or sticking with a sole proprietorship isn’t just a box to check. 

That decision shapes how you’re taxed and how much liability protection you get. It also affects your ability to raise funding and where you’re legally allowed to operate. 

And yet, most founders make this call by guessing or copying whatever structure someone else used. That shortcut can cost you later. So before you rush in, it’s worth understanding what each structure means for your future.

The Business Structure Isn’t Just a Formality

A lot of people treat business formation like checking a box. Pick a name, grab a domain, file an LLC, and move on. However, your structure determines whether your assets are protected. It also shapes how the IRS treats your income and how complicated things get as you grow.

Here’s what each common structure really means:

• Sole Proprietorship: Simple, but offers no personal liability protection. If your business gets sued, your house and savings could be on the line.
  
• LLC (Limited Liability Company): Gives you liability protection with fewer rules than a corporation. Ideal for freelancers, consultants, and small teams.
  
• C-Corp: More paperwork, but better for raising venture capital and issuing stock options. Profits are taxed twice—at the corporate and personal levels.
  
• S-Corp: Avoids double taxation, but has strict ownership rules. Works well for profitable, closely-held businesses.
  

The Most Common Mistake: Copy-Pasting Someone Else’s Setup

Founders love to copy what worked for someone else. Entrepreneur notes that many brands fall into the trap of imitation. They look at big, successful companies and assume copying their moves will guarantee similar results.

But in a business environment shaped by growing mistrust (and amplified by AI), authenticity matters more than ever. That applies not just to branding, but to the choices you make behind the scenes, like how you legally structure your business.

Before you pick, ask:

• Will you raise outside capital?
  
• Are you planning to hire full-time employees or just freelancers?
  
• Will you keep all profits or reinvest?
  
• Do you want to sell the business later?
  

The answers will tell you more about the structure you need than any Google search. And more importantly, they’ll help you build something that fits your goals, not someone else’s.

What About Taxes? Structure Changes Everything

The IRS treats each business structure differently, and the impact on your taxes can be major. Choose the wrong one, and you could end up overpaying or getting flagged for an audit. Here’s a quick breakdown:

• Sole Proprietor
  
  • Pays self-employment tax plus personal income tax on all profits
    
  • Easiest to manage, but expensive as your income grows
    
• LLC (default)
  
  • Treated as a pass-through entity
    
  • Income is taxed on your personal return, subject to self-employment tax
    
• LLC (S-Corp election)
  
  • Can reduce self-employment tax
    
  • Must pay yourself a reasonable salary, then take the remaining income as dividends
    
• C-Corp
  
  • Pays corporate income tax
    
  • Dividends are taxed again on your personal return (double taxation)
    
  • Common choice for startups planning to raise venture capital
    
• S-Corp
  
  • Avoids corporate tax profits passing through to your personal return
    
  • Still requires a reasonable salary to be paid to owners
    

Bottom line: structure isn’t just a formality. It directly affects how much you keep and how much goes to the IRS.

Multi-State? Remote Team? You’ll Need More Than Just a Filing

Let’s say you register your business in one state, but your team works remotely across multiple others, or your product reaches customers nationwide. That instantly opens the door to a patchwork of tax obligations, legal notices, and compliance headaches in more than one jurisdiction. Each state has its own rules. You can’t afford to miss a legal document or filing deadline just because your headquarters is in another zip code.

This is where a registered agent becomes more than a box to tick; they’re your first line of defense in staying compliant. Many startups, for example, choose to incorporate in Delaware because of its favorable corporate laws and court system. 

But here’s the catch: Delaware doesn’t care where you live or where your team works. If you incorporate there, you’re legally required to appoint a registered agent in Delaware with a physical address. 

The Firm Soho notes that the agent accepts service of process, legal correspondence, and tax documents on your behalf. Without one, you can’t legally operate, and if you let it lapse, you risk penalties or even administrative dissolution.

Even if Delaware isn’t your home base, the requirement stands. And if your business expands into other states, you’ll need registered agents in those, too. It’s not just about checking a legal box; it’s about building the foundation for long-term compliance as your company grows.

Your Business Will Grow. Can Your Structure Handle It?

Most founders pick a structure that fits their immediate needs. A sole proprietorship feels simple. An LLC seems like the safe middle ground. And early on, that’s often enough. 

As the business grows, new clients, partners, maybe investors, those choices can start to backfire. Your structure affects everything from taxes to equity to how fundable you look. And when growth comes fast, there’s little time to untangle a setup that no longer fits.

Consider this: in March 2024 alone, entrepreneurs launched 993,489 new businesses, as reported by Investopedia. Ambition is everywhere. But by the next year, nearly 200,000 of those had already failed. That’s one in five gone within months.

Not every failure is about structure, but many are. When complexity hits, businesses built for “small” often crack. Fixing it later means redoing legal documents, tax IDs, contracts, and it’s costly and chaotic. If you want to scale, don’t build for now. Build for what’s next.