What is the best business structure for a small business?

For most small businesses and freelancers, a single-member LLC is the best starting structure. It separates your personal assets from business liabilities, requires minimal ongoing compliance in most states, and files taxes almost identically to a sole proprietorship — just add a Schedule C to your personal return. The LLC formation cost of $35–$520 is a one-time expense that buys permanent liability protection. If your annual net profit consistently exceeds $60,000–$80,000, layer an S-Corp election on top to reduce self-employment tax on the income above your salary. You would only choose a C-Corp over an LLC if you specifically need to raise venture capital, issue preferred stock to institutional investors, or want access to the IRC Section 1202 qualified small business stock exclusion.

What is the difference between an LLC and a corporation?

An LLC and a corporation are both state-registered legal entities that protect owners from personal liability, but they differ in taxation, structure, and investor compatibility. By default, an LLC is a pass-through entity — all profit flows to the owner's personal return and is taxed at personal income tax rates. A corporation (C-Corp) is taxed as a separate entity at a flat 21% federal rate, and profits are taxed again when distributed as dividends (double taxation). An S-Corp is a tax election that can be applied to either an LLC or a corporation, enabling pass-through taxation with a salary-plus-distribution split to reduce self-employment tax. Corporations issue stock and are governed by more formal rules; LLCs use membership interests and are governed by an operating agreement.

Can I change my business structure after forming an LLC?

Yes, and it is common. The two most frequent transitions are: (1) electing S-Corp status for an existing LLC by filing IRS Form 2553 — this is purely a tax change with no state filing required; and (2) converting an LLC to a corporation if you later need to raise venture capital. Most states allow statutory conversion from LLC to corporation by filing a conversion document with the Secretary of State, though the conversion is typically a taxable event federally, and you should consult a tax professional before proceeding. You can also add members to a single-member LLC to create a multi-member LLC by amending your operating agreement and notifying the IRS of the classification change. The reverse — converting a corporation back to an LLC — is less common and more complex.

Do I need a lawyer to choose a business structure?

Not for most small business formations. If you are forming a standard single-member LLC or multi-member LLC with straightforward ownership, you can use a formation service or file directly with your state's Secretary of State for the filing fee alone. A lawyer adds value in three scenarios: (1) you have multiple founders with complex ownership splits or vesting schedules; (2) you are forming a C-Corp to raise venture capital and need a capitalization table and preferred stock terms; or (3) you are in a regulated profession where state law requires a Professional LLC or Professional Corporation. For the vast majority of freelancers, consultants, and small business owners, choosing between a sole proprietorship and an LLC is a straightforward cost-benefit decision — liability protection worth $100–$500.

Entity Selection

Business Entity Types: How to Choose the Right Structure

Choosing the wrong business structure costs you money — through unnecessary taxes, personal liability, or investor incompatibility. This guide walks through the four main entity types (sole proprietorship, LLC, S-Corp, and C-Corp), compares them across six key dimensions, and gives you a 4-question framework to find the right fit for your situation.

By Edmond Hui · Last updated: July 2026

Edmond Hui · Founder, MyStateLLC

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.

Quick answer: Most small business owners and freelancers should form an LLC. It protects your personal assets, taxes identically to a sole proprietorship by default, and gives you the option to elect S-Corp status later when profit justifies it. Only choose a C-Corp if you are raising venture capital.

4-Question Decision Framework

Answer these four questions to narrow down the right structure before reading the full comparison.

Q1Are you a solo owner or do you have co-owners?

Solo owner

→ Single-member LLC → consider S-Corp election if profit exceeds $60K/yr

Multiple owners

→ Multi-member LLC → operating agreement required; S-Corp available if ≤100 owners

Q2Do you need outside investors (venture capital or angel investors)?

Yes

→ C-Corp in Delaware — investors expect preferred stock and convertible notes

→ LLC is almost always the right choice — simpler and avoids double taxation

Q3Is your annual net profit consistently above $60,000?

Yes

→ Consider S-Corp election — saves $3K–$10K/yr in self-employment tax

→ Default LLC taxation — no payroll complexity, straightforward Schedule C

Q4Are you in a licensed profession (law, medicine, accounting, engineering)?

Yes

→ Check if your state requires a Professional LLC (PLLC) or PC instead

→ Standard LLC formation — no special requirements

Entity Type Comparison: All Five Structures

Factor	Sole Prop	LLC	S-Corp	C-Corp	Partnership
Liability protection	None — personal assets at risk	Yes — personal assets protected	Yes (same LLC, tax election only)	Yes — personal assets protected	General partners personally liable
Formation cost	$0	$35–$520 state fee	Same as LLC + IRS form	$50–$500 + registered agent	$0–$200
Federal taxation	Pass-through (Schedule C)	Pass-through (default)	Pass-through, salary + distribution split	21% flat rate (double taxation risk)	Pass-through (Form 1065 + K-1s)
Self-employment tax	15.3% on all net profit	15.3% on all net profit	15.3% on salary only — distributions exempt	N/A — owner pays via W-2 wages	15.3% on each partner's share
Investors / outside equity	Not feasible	Membership units (less VC-friendly)	Max 100 shareholders; no non-US owners	Preferred stock — standard for VC	Limited partners can invest passively
Annual complexity	None — Schedule C on personal return	Annual report in most states	Payroll + Form 1120-S annually	Form 1120 annually + more compliance	Form 1065 + K-1 for each partner

The S-Corp column is a tax election, not a separate entity — and it only helps once profit is established. Across the 5.3 million active S-corporation returns the IRS counted for tax year 2022, average business net income was $144,924 per return, and only about 66% reported a net profit that year. See the full S-corp statistics → (Source: IRS Statistics of Income, Form 1120-S, tax year 2022.)

Deep-Dive Guides

Each guide below covers one entity comparison or topic in full detail — taxes, state costs, and the math.

Why Most Small Businesses Choose an LLC

The LLC hits a sweet spot no other structure matches: it gives you personal liability protection, keeps taxes as simple as a sole proprietorship by default, and leaves every advanced tax option (S-Corp election, C-Corp conversion) available to you later as your business grows. The filing fee of $35–$520 is a one-time cost.

A sole proprietorship costs nothing to start, but every client contract, employee dispute, or slip-and-fall in your workspace can reach your personal savings and home. One lawsuit can wipe out everything you have built outside the business.

And you need that protection for years, not months: nationally, about 51.4% of new private-sector establishments are still operating five years after opening. (U.S. Bureau of Labor Statistics, Business Employment Dynamics) The liability shield of an LLC covers exactly those years — the ones where a single claim is most likely to end the business.

A C-Corp is worth the extra complexity only if you need institutional investors, preferred stock, or the IRC Section 1202 QSBS exclusion (which lets qualifying C-Corp founders exclude up to $10 million in capital gains from federal tax). For everyone else, the 21% corporate tax rate and double taxation on dividends make the C-Corp a poor fit.

Frequently Asked Questions

: For most small businesses and freelancers, a single-member LLC is the best starting structure. It separates your personal assets from business liabilities, requires minimal ongoing compliance in most states, and files taxes almost identically to a sole proprietorship — just add a Schedule C to your personal return. The LLC formation cost of $35–$520 is a one-time expense that buys permanent liability protection. If your annual net profit consistently exceeds $60,000–$80,000, layer an S-Corp election on top to reduce self-employment tax on the income above your salary. You would only choose a C-Corp over an LLC if you specifically need to raise venture capital, issue preferred stock to institutional investors, or want access to the IRC Section 1202 qualified small business stock exclusion.
: An LLC and a corporation are both state-registered legal entities that protect owners from personal liability, but they differ in taxation, structure, and investor compatibility. By default, an LLC is a pass-through entity — all profit flows to the owner's personal return and is taxed at personal income tax rates. A corporation (C-Corp) is taxed as a separate entity at a flat 21% federal rate, and profits are taxed again when distributed as dividends (double taxation). An S-Corp is a tax election that can be applied to either an LLC or a corporation, enabling pass-through taxation with a salary-plus-distribution split to reduce self-employment tax. Corporations issue stock and are governed by more formal rules; LLCs use membership interests and are governed by an operating agreement.
: Yes, and it is common. The two most frequent transitions are: (1) electing S-Corp status for an existing LLC by filing IRS Form 2553 — this is purely a tax change with no state filing required; and (2) converting an LLC to a corporation if you later need to raise venture capital. Most states allow statutory conversion from LLC to corporation by filing a conversion document with the Secretary of State, though the conversion is typically a taxable event federally, and you should consult a tax professional before proceeding. You can also add members to a single-member LLC to create a multi-member LLC by amending your operating agreement and notifying the IRS of the classification change. The reverse — converting a corporation back to an LLC — is less common and more complex.
: Not for most small business formations. If you are forming a standard single-member LLC or multi-member LLC with straightforward ownership, you can use a formation service or file directly with your state's Secretary of State for the filing fee alone. A lawyer adds value in three scenarios: (1) you have multiple founders with complex ownership splits or vesting schedules; (2) you are forming a C-Corp to raise venture capital and need a capitalization table and preferred stock terms; or (3) you are in a regulated profession where state law requires a Professional LLC or Professional Corporation. For the vast majority of freelancers, consultants, and small business owners, choosing between a sole proprietorship and an LLC is a straightforward cost-benefit decision — liability protection worth $100–$500.

🧮

See exactly how much you would owe as an LLC, S-Corp, or C-Corp

Enter your income, state, and filing status to compare estimated annual taxes side by side.

Compare my taxes →