Sole Proprietorship, LLC, S Corp or C Corp? Choosing a Business Structure
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How we wrote this: A summary of SBA and IRS guidance (linked below). It is general information, not legal or tax advice. State rules and fees vary a lot, and the SBA itself recommends talking to business counselors, attorneys and accountants before you choose.
Your business structure affects, in the SBA's words, "how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability". You choose it before you register with your state. You can change it later, but the SBA warns that converting can have restrictions and tax consequences.
The main options at a glance
Based on the SBA's business structure guide:
| Structure | Personal liability | How profits are taxed | Paperwork | SBA's "can be a good choice for" |
|---|---|---|---|---|
| Sole proprietorship | Not separate: you're personally liable for business debts | On your personal return | Least. It's automatic if you do business without registering another structure. | Low-risk businesses and testing an idea |
| Partnership (LP / LLP) | LP: one general partner has unlimited liability. LLP: limited liability for every owner | Passed through to the partners' returns | Partnership agreement; state registration | Multiple owners, professional groups |
| LLC | Protects personal assets "in most instances" | Passed through by default; members pay self-employment tax | State filing; some states limit an LLC's life | Medium- or higher-risk businesses, owners with significant personal assets |
| C corporation | Strongest protection | Corporation pays tax; dividends can be taxed again | Most: extensive record-keeping and reporting | Raising money, going public or being sold |
| S corporation | Like a corporation | Passed through to shareholders' returns | Corporate formalities plus an IRS election | Businesses that would otherwise be C corps but meet the S corp criteria |
How the IRS treats an LLC
An LLC is a state-law entity. The IRS LLC page explains its federal tax treatment:
- One member: treated by default as a "disregarded entity", meaning its income goes on the owner's return. For employment tax and certain excise taxes it's still a separate entity.
- Two or more members: treated by default as a partnership.
- Either kind can file Form 8832 to elect to be taxed as a corporation. The election generally can't take effect more than 75 days before it's filed, or more than 12 months after.
That's why "LLC vs. S corp" is a slightly mixed comparison: an LLC is a legal form, while S corp status is a tax election.
S corporation requirements
Per the IRS S corporations page, to elect S status a corporation must:
- Be a domestic corporation.
- Have only allowable shareholders: individuals, certain trusts and estates, but not partnerships, corporations or non-resident aliens.
- Have no more than 100 shareholders and only one class of stock.
- Not be an ineligible corporation, such as certain financial institutions or insurance companies.
It elects by filing Form 2553, signed by all shareholders. The SBA adds that some states tax S corps differently, and a few don't recognize the election at all.
Questions to ask before you file
- How much risk does the work carry? Liability protection matters more for higher-risk services. It isn't a substitute for business insurance, which the SBA covers as a separate step.
- Will you have partners or investors? Investors who want stock point toward a corporation.
- How much paperwork will you actually keep up with? Corporations require the most.
- What does your state charge and require? Formation and annual fees, and the treatment of LLCs and S corps, vary by state.
Once you've formed the entity, the next steps are usually an EIN, a business bank account and, for pass-through owners, estimated quarterly taxes. The SBA lists these steps in the same guide, in order.