Set up entity hierarchy

We have a requirement to set up entity hierarchy i.e., upstream and downstream hierarchies

we have 5 levels of processes (in the business process table in CMDB), we are thinking of creating an entity only at Level 5, and hence we are creating an entity only for the processes that will be at Level 5

What are the pros and cons of setting up entity hierarchy using

1. entity at level 5 and then adding L1 to L4 process as an attribute of the entity form (reference field to the Business process table)

2. Creating an entity for all levels of process. from CMDB and then creating hierarchy using upstream and downstream entities?