Pick the wrong business structure and you'll either overpay in taxes, expose yourself to lawsuits, or shut yourself out of funding. The good news: most small businesses fit neatly into one of four buckets, and the decision usually isn't permanent.
Sole proprietorship
No formation paperwork. You and the business are legally the same. Income flows to your personal tax return on Schedule C. You can add a DBA if you want to operate under a brand name.
- Best for: side hustles, freelancers, very low-liability work, testing an idea.
- Drawback: unlimited personal liability — your home, car, and savings are on the hook if you get sued.
Limited liability company (LLC)
The default modern small-business structure. Separate legal entity. Personal assets are shielded from business debts and lawsuits (as long as you don't commingle funds). Taxed as a sole prop (single-member) or partnership (multi-member) by default, with the option to elect S-corp taxation later.
- Best for: most small businesses, real estate holdings, professional services, e-commerce.
- Drawback: self-employment tax on all profit unless you elect S-corp status.
S corporation (or LLC taxed as S-corp)
Not a separate entity type — it's a tax election. Lets you split your income between salary (subject to payroll tax) and distributions (not). Usually only worth electing once profit is consistently above ~$50K/year because of payroll and accounting overhead.
- Best for: profitable LLCs whose owners are taking out more than a reasonable salary.
- Drawback: must run payroll, file Form 1120-S, pay yourself a 'reasonable salary' the IRS will accept.
C corporation
Separate legal and tax entity. Pays its own income tax. Used by businesses that intend to raise venture capital or have many shareholders. Profits can be 'double taxed' — once at the corporate level, again when distributed as dividends.
- Best for: startups raising priced rounds from VCs, businesses planning an IPO, companies with foreign owners.
- Drawback: double taxation, heavier compliance, more expensive to maintain.
A simple decision framework
- Will you raise VC or issue stock? → C-corp.
- Is profit over ~$50K/year and consistent? → LLC taxed as S-corp.
- Any liability risk or contracts in the business name? → LLC.
- Truly low-risk side income with no contracts? → Sole proprietorship (consider an LLC anyway).
Frequently asked questions
Can I change my business structure later?+
Yes. The most common path is sole prop → LLC → LLC taxed as S-corp. Changing entity types has tax implications — talk to a CPA before converting.
Do LLCs save on taxes?+
Not by default. A single-member LLC is taxed the same as a sole prop. The tax savings come from electing S-corp status once you're profitable enough.
Do I need a lawyer to choose?+
For most small businesses, no. A CPA conversation is more valuable than a lawyer at this stage.