When you’re starting or restructuring a business, choosing the right entity type isn’t just paperwork — it’s a financial decision that impacts taxes, liability, and how you pay yourself.
Here’s a breakdown of the three most common structures and how to decide what fits you best.
🔹 Sole Proprietorship
The simplest structure — but also the riskiest. There’s no legal separation between you and your business, which means you’re personally liable for debts or lawsuits.
💡 Best for: Freelancers or hobby businesses just starting out
💼 Tax treatment: Pass-through taxation — income reported directly on your personal return
⚠️ Watch out: No liability protection and limited tax planning options
🔹 LLC (Limited Liability Company)
LLCs are flexible and protect your personal assets from business liability. They’re simple to set up and maintain.
💡 Best for: Small business owners who want protection with minimal complexity
💼 Tax treatment: Default pass-through taxation (like a sole prop), but can elect S Corp status
⚠️ Watch out: Still requires proper separation between personal and business finances
🔹 S Corporation (S Corp)
An S Corp is a tax election, not a legal structure, often used by LLCs or corporations. It allows business owners to split income into salary + distributions, which can reduce self-employment taxes.
💡 Best for: Profitable businesses where the owner actively works in the business
💼 Tax treatment: Must pay yourself a “reasonable salary,” then take distributions
⚠️ Watch out: More IRS scrutiny and compliance requirements
So… Which One Is Right for You?
It depends on your goals, income, and risk tolerance. Choosing the wrong structure can lead to overpaying in taxes, personal liability exposure, or missed growth opportunities.
Final Thoughts
Your entity choice affects everything — taxes, protection, and how your business runs. Don’t guess your way through it. Get expert advice upfront and set your business up right.
🤝 Choose the Right Business Structure — with Confidence
Unsure if you should stay a sole prop, form an LLC, or elect S Corp status? Let’s walk through your options together.
📞 Book a business formation strategy call and we’ll help you make the right call for taxes, growth, and peace of mind.
👉 https://calendly.com/castlerocktax/30min
📲 Prefer to talk first? Call us at 786-686-6285
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