What kind of entity should you buy a business through?

What do most first-time buyers use?

A new limited liability company, formed for the purchase. It buys the assets of the seller's business and becomes the operating company. A new entity has no history, no old debts and no old tax filings. Lenders and future auditors like that.

The tax choice sits on top of the legal form. These are general rules. Your CPA will apply them to your facts.

• LLC taxed as a partnership or disregarded entity. The default. Profits flow to the owners' personal returns. Flexible for adding investors.
• LLC or corporation taxed as an S-corporation. Profits also flow through, and owners who work in the business can split income between salary and distributions. S-corporations have strict rules on who can own shares and allow only one class of stock. That limits how you can bring in investors later.
• C-corporation. The company pays its own income tax, and dividends are taxed again to owners. It is required for a 401(k) rollover structure (ROBS). It is the usual form for institutional investors and for public companies.

Why think about a holding company from day one?

A holding company is an entity whose job is to own other companies. The simple structure looks like this: you own the holding company, and the holding company owns Operating Company 1. When you buy a second business, Operating Company 2 sits beside the first, not inside it.

• Liability separation. A lawsuit or failure at one operating company is less likely to reach the other.
• Clean financing. Each acquisition can carry its own debt and its own lender documents.
• Moving later is harder. Placing a business that already has an SBA loan under a new holding company changes its ownership structure. That generally needs lender consent and fresh legal work. See how to move an existing business under a holding company.
• Investors invest in the platform. A holding company lets investors own a share of every future deal, not one deal at a time.
• Options stay open. Going public is realistic only for holding companies with real earnings, auditable books and an acquisition program. Most buyers never get there. Building in a holding company from the start keeps that door open at little cost.

The cost is mostly administrative: another entity, another tax return, intercompany agreements and separate books. For a buyer who will only ever own one business, a single LLC is enough.

What does the SBA lender require of your entities?

As of October 2026, under SBA SOP 50 10 8.1:

• Owners of 20% or more must personally guarantee the loan. That can include your holding company as an entity guarantor, and you as its owner.
• A trust that owns any percentage must guarantee, and the trustor must guarantee personally.
• The 7(a) maximum is $5 million per borrower including affiliates. Every business your holding company controls counts toward one cap. Combined 7(a) and 504 capacity is $10 million.
• Since March 1, 2026, SBA loans are available only to businesses owned by U.S. citizens or U.S. nationals with a U.S. principal residence.
• When an existing business buys another, the loan may qualify as a Business Expansion, with a 1.15x coverage test instead of 1.25x and an injection the lender may reduce. Lenders typically look for the same or a related industry and two full fiscal years under current ownership. Ask your lender how it treats a holding company and its subsidiaries before you set them up.

If you have partners, investors or a 401(k) rollover

• Passive investors. Passive minority investors holding under 20% in aggregate can help fund the down payment. If their equity counts toward the SBA injection, they generally receive only tax distributions until the SBA loan is repaid. Write that into the operating agreement.
• Partners. The operating agreement needs vesting, a buy-sell clause, deadlock rules and transfer restrictions. See buying a business with a partner.
• ROBS. A rollover as business startup requires a C-corporation, roughly $60,000 or more of rollable pre-tax retirement funds, and the owner working as a bona fide employee. A C-corporation at the top of your structure affects every later layer, so plan the holding company around it.

Worked example: a holding company with passive investors

Illustrative figures, using SBA rules as of October 2026.

• You form Holdco LLC. You own 85%. Three passive investors own 15% combined, under the 20% limit.
• Holdco forms OpCo 1 LLC, which buys the assets of a business. Total project costs: $2,500,000.
• Minimum injection: 10% × $2,500,000 = $250,000.
• Most the investors' equity can supply as a limited source: half, or $125,000. They put in $100,000. You put in $150,000.
• SBA loan to OpCo 1: $2,500,000 − $250,000 = $2,250,000.
• Guarantees: you personally, as an 85% owner, and Holdco as OpCo 1's 100% owner. The passive investors, each under 20%, do not guarantee.
• Investors receive tax distributions only until the SBA loan is repaid.
• Later, Holdco forms OpCo 2 to buy a related business. Its 7(a) loan counts against the same $5 million affiliate cap as OpCo 1's. Ask your lender how much room remains.

Where these numbers come from: SBA guarantee, injection, Business Expansion and coverage rules are from SOP 50 10 8.1, summarized by Beancount's SOP 50 10 8.1 guide and Starfield & Smith on equity injection. The citizenship rule is from Cantrell Firm. Loan caps are from the SBA 7(a) program page. ROBS requirements are from Guidant Financial. Tax descriptions are general. Confirm them with a CPA. SOP 50 10 8.1 applies to loans numbered on or after October 1, 2026; lender practice under it is still settling and these are secondary summaries, so confirm current terms with your SBA lender.

Related questions

Can I buy the business in my own name?

In an asset purchase you technically can. You would lose the liability separation an entity gives you, and lenders expect an operating entity as the borrower. Almost every buyer uses an entity.

Should the holding company be an LLC or a C-corporation?

It depends on your taxes, your investors and whether a listing is a real possibility. See whether a holding company should be an LLC or a C-corp, and confirm with a CPA.

Does a holding company protect me from the personal guarantee?

No. As of October 2026, SBA rules require a personal guarantee from every owner of 20% or more, and that generally looks through the holding company to you as its owner.

When should I form the entities?

Before you sign the purchase agreement, and ideally before the letter of intent names the buyer. Your lawyer can name the buyer "or its assignee" in the letter of intent if the entity isn't ready.

What comes next

Forming the entities is cheap. The lawyers and accountants who paper the deal are not: what do lawyers and accountants cost when you buy a business? The buyers who end up with the most valuable companies decide what the business goes into before they buy it.

Related articles

• What is purchase price allocation (Form 8594), and why does it matter?
• What do lawyers and accountants cost when you buy a business?
• How do you set up a holding company for multiple LLCs?
• Should a second business sit under my company, a sister LLC, or a new holding company?
• How do you build a holding company for acquisitions?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.