Business Entity Guide
Sole proprietorship, LLC, S-Corp, C-Corp — the entity you choose determines how much profit you keep.
The entity structure you select determines your tax bill, personal liability exposure, and administrative overhead. This guide explains each structure, compares real tax costs, and shows exactly when an S-Corp election makes financial sense.
Includes savings examples at different income levels, a decision framework, and the most common entity mistakes we see in client engagements.
Sole Proprietorship
The default structure when you start without filing anything. You and the business are legally the same. All profits flow to your personal tax return as self-employment income.
Pros
- Simplest to start
- Minimal paperwork
- No annual tax return (uses Schedule C)
Cons
- No liability protection
- 15.3% SE tax on all profits
- Higher audit risk
Best for: Side income, testing a business idea, revenue under $30K
Single-Member LLC
Gives you liability protection — your personal assets are shielded from business debts and lawsuits. But by default, the IRS treats it exactly like a sole proprietor for tax purposes. You get legal protection without changing your tax bill.
Pros
- Liability protection
- Flexibility in management
- Same tax treatment as sole prop (no additional complexity)
Cons
- SE tax on all profits (same as sole prop)
- No tax savings vs. sole prop
- Still elevated audit risk on Schedule C
Best for: Most small businesses starting out — gives protection without complexity
Partnership (Multi-Member LLC)
A multi-member LLC taxed as a partnership by default. The business files an informational return (Form 1065) and issues K-1s to each member. Each member pays SE tax on their share of profits.
Pros
- Multiple owners with pass-through taxation
- Liability protection for all members
- Flexible profit sharing
Cons
- SE tax on all active members' distributive share
- Partnership-level audit scrutiny
- No tax savings without additional election
Best for: Two or more owners wanting simplicity and pass-through taxation
S Corporation
Not a separate entity type — a tax election made by an LLC or C-Corp. Key benefit: split income into W-2 salary and owner distributions. You pay payroll taxes only on salary; distributions are not subject to SE tax. This is where real savings happen.
Pros
- Significant SE tax savings ($7,650–$14,110+ annually at higher incomes)
- Salary and distribution split reduces tax exposure
- QBI deduction still available
Cons
- Requires payroll processing and quarterly filings
- Must pay reasonable salary or face audit
- Higher bookkeeping and tax return costs ($2,500–$3,000/year overhead)
Best for: Business owners with net profit consistently above $40,000–$50,000
C Corporation
A separate taxable entity paying corporate income tax (21% flat rate). Shareholders pay tax again on dividends — the double taxation problem. However, C-Corps have advantages: no shareholder limits, easier venture capital access, certain fringe benefits fully deductible.
Pros
- No shareholder limit
- Simpler to raise venture capital
- Certain employee fringe benefits fully deductible
- Flat 21% corporate tax rate allows retained earnings
Cons
- Double taxation on dividends
- No QBI deduction for corporation
- Higher complexity and cost
Best for: Businesses planning outside investment, IPO, or many shareholders; rarely recommended for small businesses
When the S-Corp election makes sense
The breakeven for S-Corp election is typically $40,000–$50,000 in net profit. Below that, overhead exceeds savings. At $60K net profit with moderate overhead, likely not yet worthwhile. At $120K, clear annual savings. At $200K+, significant savings make not electing S-Corp equivalent to leaving real money on the table.
State taxes must be evaluated separately — some states have entity-level taxes that affect the calculation. We model your specific situation in every tax planning engagement.
Frequently asked questions
Need help picking the right structure?
A tax planning engagement models your specific income, state, and overhead — so the entity decision is based on numbers, not rules of thumb.
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