The entity you choose shapes your taxes, liability, and growth potential. Here is a plain-English comparison every founder should read before filing.
Choosing a business entity is one of the earliest and most consequential decisions a founder makes. The choice affects your personal liability, how you are taxed, and how easily you can raise capital or bring on partners.
A Limited Liability Company (LLC) is the default for most small businesses. It is simple to form, flexible to operate, and provides a liability shield between your business and personal assets. By default, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC as a partnership.
An S-Corporation is not a separate entity type — it is a tax election available to an LLC or a C-Corporation. The S-election changes how profits are taxed: instead of all profit flowing through as self-employment income, you pay yourself a reasonable salary and take the remainder as distributions, which are not subject to self-employment tax.
The savings can be meaningful, but the S-election comes with obligations: payroll, stricter accounting, and reasonable-compensation requirements the IRS scrutinizes. As a rule of thumb, the election usually pays off once net profit reliably exceeds roughly $60,000–$80,000 per year.
The right answer depends on your profit, growth plans, and appetite for administrative work. Run the numbers with a professional before electing — and revisit the decision annually as your business evolves.
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