Business entity selector

General guidance only. Entity selection depends on your specific tax situation, state law, and business goals. This tool provides general guidance for discussion with a business attorney and accountant - it doesn't replace tailored legal and tax advice. See our full disclaimer.

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What are the main business entity types?

A sole proprietorship requires no formal filing and offers no liability protection - your personal assets are fully exposed to business debts and lawsuits. It's the default structure if you do nothing else, and works fine for very low-risk, single-owner ventures without employees.

An LLC (limited liability company) shields personal assets from business liabilities while offering flexible tax treatment - by default taxed like a sole proprietorship (single-member) or partnership (multi-member), but able to elect corporate taxation if beneficial. It's the most common choice for small to medium businesses because of its combination of liability protection and administrative simplicity.

An S-Corp is a tax election (not a separate entity type) available to qualifying LLCs or corporations, allowing profits to pass through to owners while potentially reducing self-employment tax on a portion of income. A C-Corp is a separate taxable entity, standard for companies planning to raise venture capital or eventually go public, but subject to potential double taxation. Once you've chosen a structure, use the LLC operating agreement builder or corporate bylaws generator to formalize your internal governance.

How does liability protection actually work?

LLCs and corporations create a legal separation between the business and its owners - creditors and litigants generally can only pursue business assets, not the owners' personal assets, for business debts and liabilities. This protection isn't absolute: courts can "pierce the corporate veil" if owners don't maintain proper separation (commingling personal and business funds, failing to follow required formalities, or using the entity to commit fraud).

A sole proprietorship or general partnership offers no such separation - owners are personally liable for all business debts and any lawsuits against the business, without limit. This is often the single biggest factor pushing new business owners toward an LLC even before considering tax implications.

How does entity choice affect taxes?

Sole proprietorships, partnerships, and default-taxed LLCs are "pass-through" entities - business profit passes through to the owner's personal tax return, avoiding entity-level tax, but subject to self-employment tax on the full amount of profit in many cases.

An S-Corp election allows owner-employees to pay themselves a reasonable salary (subject to payroll tax) while taking remaining profit as a distribution not subject to self-employment tax - a meaningful tax savings for profitable small businesses, though it adds payroll administration complexity. A C-Corp pays corporate tax on profits, and shareholders pay tax again on dividends - "double taxation" - but C-Corps offer the cleanest structure for outside investors and stock-based compensation.

Frequently asked questions

Yes, but conversions can be administratively complex and sometimes trigger tax consequences. Converting from an LLC to a corporation, or electing S-Corp tax treatment for an existing LLC, is generally straightforward. Converting from a C-Corp back to an LLC or S-Corp is more complicated and can trigger significant tax liability in some cases, since it may be treated as a liquidation for tax purposes. This is exactly why getting the initial choice right - or at least choosing a flexible starting point like an LLC - saves significant cost and complexity later.

Not legally required in most states - you can file formation documents yourself through your state's Secretary of State office, often for a modest filing fee. However, an attorney adds significant value beyond the filing itself: drafting a proper operating agreement or bylaws, advising on the right entity type and state of formation for your situation, ensuring compliance with industry-specific licensing requirements, and structuring ownership and equity correctly from the start - especially important if you have co-founders, since poorly documented ownership splits are a common source of later disputes.

A single-member LLC has one owner and is generally disregarded for federal tax purposes (taxed like a sole proprietorship) while still providing the same liability shield as a multi-member LLC under state law. The tax treatment and the liability protection are separate questions - being a "disregarded entity" for tax purposes doesn't mean the entity is disregarded for liability purposes. That said, courts sometimes scrutinize single-member LLCs more closely for proper formalities (separate bank accounts, proper record-keeping) since there's no other member to enforce internal governance requirements, making it especially important to maintain clean separation between personal and business finances.

For most small businesses operating primarily in one state, incorporating in your home state is simpler and avoids the added cost of "foreign qualification" (registering to do business in your home state anyway, plus paying franchise taxes and maintaining a registered agent in the incorporation state). Delaware incorporation makes more sense for companies planning to raise venture capital, since investors and Delaware's well-developed corporate law are familiar to VCs and can simplify future financing rounds. See the state of incorporation guide for a more detailed comparison of the tradeoffs.

An LLC is a legal entity type; an S-Corp is a tax election that either an LLC or a corporation can make with the IRS (assuming eligibility requirements are met - generally no more than 100 shareholders, only one class of stock, and U.S. citizen/resident owners). A default-taxed LLC's owners pay self-employment tax on all business profit. An LLC that elects S-Corp taxation can split income between a reasonable salary (subject to payroll tax) and distributions (not subject to self-employment tax), often producing meaningful tax savings once the business is profitable enough to justify the added payroll and compliance complexity - typically once net profit exceeds roughly $40,000 to $60,000 per year, though this threshold varies by situation.