TL;DR:

LLC is the most flexible and popular choice for small businesses thanks to its liability protection and tax options. S-Corp is best for tax savings when profits grow. C-Corp suits large or investor-backed businesses. Sole proprietorships and partnerships are easiest to start but offer no personal liability protection.

 

Why Your Business Entity Type Matters

Your business entity isn’t just a formality – it determines:

• Your legal liability
• How you’re taxed
• How much paperwork you face
• How investors see you

Choosing the wrong structure can expose you to lawsuits or higher taxes. Choosing the right one can protect your assets, simplify compliance, and set you up for growth.

 

Sole Proprietorship: Simple Startup, Personal Risk

Who it’s for: Freelancers, solo entrepreneurs just getting started and side gigs.

• Protection: None. Your personal assets are at risk if the business is sued or goes into debt.
• Tax Filing: Report income on Schedule C of your personal return. No separate tax return required.
• Startup Paperwork: None, unless filing a DBA (Doing Business As).
• Benefits:
  • Easiest and cheapest to start
  • No separate business tax return
  • Full control over decisions
• Drawbacks:
  • No legal separation between you and your business
  • No liability protection
  • Hard to raise capital

 

General Partnership: Shared Control, Shared Liability

Who it’s for: Two or more people running a business together

• Protection: None. Each partner is fully liable—even for the actions of the other partner.
• Tax Filing: Form 1065 + Schedule K-1 for each partner
• Startup Paperwork: Ideally a written partnership agreement (not always required but strongly recommended)
• Benefits:
  • Shared startup costs and responsibilities
  • Simple to set up
  • Pass-through taxation
• Drawbacks:
  • No liability shield
  • Partner disagreements can get messy
  • Each partner is personally responsible for the full debt

 

LLC: Flexibility with Built-In Legal Protection

Who it’s for: Most small to midsize business owners and really great for those short-term income projects – such as house flipping.

• Protection: Yes. An LLC separates your personal and business assets.
• Tax Filing:
  • Single-member LLC: Schedule C (like a sole prop)
  • Multi-member: Form 1065 + Schedule K-1
  • Option to elect S-Corp or C-Corp tax treatment
• Startup Paperwork:
  • File Articles of Organization with your state
  • Operating Agreement (especially for multi-member LLCs)
  • EIN (Employer Identification Number)
• Benefits:
  • Shields your personal assets from lawsuits and debts
  • Flexible taxation
  • Fewer formalities than corporations
• Drawbacks:
  • State filing fees
  • Varies by state (some require annual reports)

 

S-Corp: Tax Savings for Growing Businesses

Who it’s for: Business owners earning consistent profits and paying themselves a salary

• Protection: Yes. Like an LLC or C-Corp, it separates personal and business liability.
• Tax Filing:
  • File Form 1120-S
  • Each shareholder receives a Schedule K-1
  • Must run payroll and file employment tax returns
• Startup Paperwork:
  • Form an LLC or corporation first
  • Then file Form 2553 with the IRS for S-Corp status
  • Bylaws, shareholder meetings, and corporate minutes required
• Benefits:
  • Avoids double taxation
  • Can reduce self-employment taxes
  • Still a pass-through entity
• Drawbacks:
  • More compliance and paperwork
  • Must pay yourself a “reasonable salary”
  • IRS scrutiny is higher

 

C-Corp: Best for Venture Capital and Expansion

Who it’s for: Startups planning to scale or raise funding

• Protection: Yes. Provides a corporate veil between you and the business.
• Tax Filing:
  • Separate entity taxed via Form 1120
  • Subject to double taxation: company pays taxes on profits, then shareholders may pay tax on dividends
• Startup Paperwork:
  • Articles of Incorporation
  • Corporate bylaws
  • EIN, board of directors, annual shareholder meetings
• Benefits:
  • Unlimited shareholders and multiple stock classes
  • Ideal for attracting investors
  • Perpetual existence (even if ownership changes)
• Drawbacks:
  • Double taxation unless structured carefully
  • Most administrative complexity
  • Costlier to maintain

 

Quick Comparison of Business Entities

Type	Legal Protection	Taxes	Best For
Sole Proprietorship	❌ None	Personal return (Sch. C)	Solo service providers, side hustles
Partnership	❌ None	Pass-through (Form 1065)	Small business with 2+ founders
LLC	✅ Yes	Flexible (Sch. C, 1065, S-Corp)	Most small businesses
S-Corp	✅ Yes	Pass-through (Form 1120-S)	Profitable owner-run businesses
C-Corp	✅ Yes	Double taxation (1120 + dividends)	Startups, high-growth companies

 

Filing Requirements by Entity Type

Entity Type	Formation Docs	Ongoing Filings
Sole Proprietorship	Optional DBA	Schedule C with personal tax return
Partnership	Optional partnership agreement	Form 1065, K-1s
LLC	Articles of Organization, EIN, Operating Agreement	Annual reports, tax returns
S-Corp	Articles, EIN, Form 2553, Bylaws	Payroll filings, Form 1120-S, K-1s
C-Corp	Articles, EIN, Bylaws, Board setup	Form 1120, annual meetings, corporate minutes

 

What’s the Best Entity Type for You?

Here’s a simple way to think about it:

• Sole Proprietorship: Starting a hobby or freelance gig? Keep it simple.
• Partnership: Trust your partner? Share the ride—and the risk.
• LLC: Want liability protection and flexibility? This is your go-to.
• S-Corp: Making money and want to save on taxes? Time to upgrade.
• C-Corp: Looking for funding or planning an IPO? This is the path.

 

Let’s Set Your Business Up for Success

Choosing the right structure is one of the most important decisions you’ll make for your business. If you’re unsure what fits your goals—or want help filing and staying compliant—The Balance Sheet is here to help.

Schedule your consultation today and let’s build a solid foundation for your business success.