Choosing a US Business Entity: LLC, S Corp, C Corp, and Sole Proprietorship

This guide is general information only — not legal or tax advice. Consult a qualified attorney and accountant before making any entity decision.

The entity you choose affects liability protection, how you are taxed, and your ability to raise outside capital. Most founders spend too little time on this early and pay for it later when converting becomes complicated or expensive.

A sole proprietorship is the default if you do nothing. There is no legal separation between you and the business — your personal assets are fully exposed to business liabilities. Income flows directly to your personal return. It is appropriate only for the very early stages of testing an idea, before there is meaningful business activity or any outside parties involved.

A limited liability company (LLC) provides a liability shield at relatively low administrative cost. Profits pass through to the owner's personal tax return by default, avoiding corporate-level taxation. Single-member LLCs and multi-member LLCs are treated differently for tax purposes. Formation and maintenance costs vary by state; some states (Delaware, Wyoming) are popular for their predictable legal frameworks and low franchise taxes, though you may also need to register in your home state.

An S corporation is a tax election, not a separate entity type. An LLC or a corporation can elect S-corp treatment. The primary benefit is payroll tax savings: owners who actively work in the business can take a portion of their income as a distribution rather than salary, which is not subject to self-employment tax. This only makes sense above a certain income threshold, and the rules around reasonable compensation add administrative complexity.

A C corporation — particularly a Delaware C corp — is what investors expect. Venture capital funds are legally structured in ways that make it difficult or impossible to invest in pass-through entities. If you plan to raise equity funding from angels or institutional investors, forming a Delaware C corp early avoids a costly and complicated conversion later. C corps are subject to corporate income tax, and distributions to shareholders are taxed again on personal returns. This double taxation is the trade-off for the fundraising flexibility.

Converting from one entity type to another is possible but involves legal costs, potential tax events, and administrative overhead. Founders who start as an LLC and later want to raise venture funding typically convert to a Delaware C corp, which requires careful handling to avoid triggering unexpected taxes. The cleaner path, if you believe fundraising is likely, is to form a Delaware C corp from the start.