Sole proprietorship, LLC, S-Corp, or C-Corp — the right answer depends on your income, liability exposure, and growth plans. This guide cuts through the noise.
Edmond Hui is a software engineer and serial entrepreneur based in New York who has founded multiple online businesses across e-commerce, media, and information publishing. Before transitioning into tech, he spent years as a commercial real estate professional closing deals totaling over 100,000 square feet, giving him firsthand experience with business formation and entity structuring. He built MyStateLLC to provide the free, state-specific LLC guidance he wished existed when forming his own companies.
The short answer for most people:Form an LLC in your home state. It takes 1–3 days, costs $50–$500, and protects your personal assets permanently. Add S-Corp tax election once your annual profit exceeds ~$60,000. Only consider a C-Corp if investors require it.
The 4 Business Structures at a Glance
Every U.S. business defaults to a sole proprietorship the moment you earn income. Each upgrade adds protection or tax efficiency — but also adds cost and compliance. Here's where each structure makes sense.
Sole Proprietorship
Formation cost: $0
Liability: None
Tax: Self-employment (15.3%)
Best for: Testing a side hustle with minimal risk
Start here, upgrade to LLC once you have clients or revenue.
LLCMost Popular
Formation cost: $50–$500
Liability: Personal assets protected
Tax: Pass-through (self-employment on profit)
Best for: Most freelancers, consultants, and small business owners
Best default choice. Protects assets with minimal compliance.
S-Corp (LLC election)
Formation cost: LLC cost + IRS Form 2553
Liability: Personal assets protected
Tax: Salary + distributions (saves SE tax above ~$60K)
Best for: Established businesses with $60K+ in annual profit
Add S-Corp election to your existing LLC — don't form a new entity.
Best for: Venture-backed startups raising institutional capital
Only makes sense if investors require it or you're retaining large profits.
How to Choose: A Simple Decision Framework
No clients or revenue yet? Stay a sole proprietor. Formation costs money and adds compliance — wait until you have something to protect.
Have clients, assets, or any liability exposure? Form an LLC in your home state now. The $50–$500 filing fee is a one-time cost for permanent personal asset protection.
LLC profit exceeding $60,000/year? Elect S-Corp tax status on your existing LLC. You'll pay yourself a reasonable salary and take the rest as distributions, saving 7.65–15.3% on the distribution portion.
Raising venture capital? Investors typically require a Delaware C-Corp with preferred stock. Convert your LLC or form a new C-Corp in Delaware before your first institutional round.
Retaining large profits inside the business? A C-Corp taxed at 21% may be more efficient than pass-through taxation at your personal marginal rate — consult a CPA.
Form an LLC once you have paying clients, own business assets, or face any liability risk. A sole proprietorship costs nothing to start but offers zero protection — one lawsuit or business debt can reach your personal savings, home, and car. The LLC filing fee ($50–$500 depending on state) is a one-time cost for permanent protection. Most freelancers and independent contractors should form an LLC before landing their first significant client.
An S-Corp is not a separate business entity — it's a tax election you make on an existing LLC (or corporation) by filing IRS Form 2553. Your LLC stays intact; you just change how it's taxed. With a standard LLC, all profit is subject to 15.3% self-employment tax. With S-Corp election, you pay yourself a reasonable salary (subject to SE tax) and take the rest as distributions (not subject to SE tax). At $60,000+ annual profit, the SE tax savings typically exceed the added cost of payroll.
A C-Corp makes sense in two scenarios: (1) you're raising venture capital and investors require a Delaware C-corp with preferred stock; or (2) your business retains significant profits inside the entity and benefits from the 21% corporate tax rate vs. your personal rate. For most small businesses, the double taxation of C-corps (21% corporate + dividend tax on distributions) makes them less efficient than an LLC taxed as a pass-through or S-Corp.
Yes. By default, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC is taxed as a partnership — both pass-through structures. You can elect S-Corp taxation by filing IRS Form 2553 within 75 days of forming your LLC or by March 15 of the tax year you want it to take effect. Once elected, your LLC must run payroll, pay yourself a reasonable salary, and file a corporate tax return (Form 1120-S). Most accountants recommend this once your LLC profit exceeds $60,000–$80,000/year.
For most purposes, yes — an LLC can do everything a corporation does. LLCs can have multiple members, issue membership interests, have operating agreements that function like bylaws, and elect corporate tax treatment. The main things LLCs cannot do: issue stock (they issue membership interests instead), go public on traditional stock exchanges, and meet the specific investor preference for Delaware C-corps in VC-backed deals. If none of those apply to your business, an LLC is typically simpler and more tax-efficient.
LLC vs S-Corp by State
S-Corp savings depend on your state's income tax and payroll rules. Find your state below for exact thresholds, break-even calculations, and filing instructions.
50 of 50 state guides published — more coming soon.
