One of the most important decisions you'll make as a business owner happens before you ever open your doors: how to structure your business. The entity type you choose affects how you're taxed, how you pay yourself, what paperwork you file, and, critically, how much of your personal assets are at risk if something goes wrong.
There's no one-size-fits-all answer. The right structure depends on your income, your goals, how many people are involved, and your tolerance for complexity and risk.
Sole Proprietorship
A sole proprietorship is the simplest business structure. No formal setup required. You're the business. All income flows directly to your personal tax return on Schedule C, and you pay self-employment tax on your net profit in addition to regular income tax.
- Tax filing: Schedule C attached to Form 1040
- Self-employment tax: Yes, on all net profit
- Liability exposure: High, your personal assets are fully exposed to business debts and lawsuits
Single-Member LLC (Taxed as Sole Proprietorship)
A single-member LLC is a formal legal entity, but by default the IRS ignores it for tax purposes. It's treated as a "disregarded entity." Taxes work the same as a sole proprietorship (Schedule C, self-employment tax on all profit). However, the LLC structure does offer potential liability protection that a sole proprietorship doesn't.
- Tax filing: Schedule C, same as sole prop (unless you elect S corp status, see below)
- Self-employment tax: Yes, on all net profit
- Liability exposure: Better protection than a sole prop, but only if the LLC is properly maintained
Multi-Member LLC / General Partnership (Taxed as a Partnership)
When two or more people go into business together without a formal structure, it's a general partnership by default. A multi-member LLC is taxed the same way unless a different election is made. The business itself doesn't pay income tax. Instead, profits and losses "pass through" to each partner's personal return via a Schedule K-1.
- Tax filing: Form 1065 (partnership return) + Schedule K-1 for each partner
- Self-employment tax: Generally yes for active partners, on their share of net profit
- Liability exposure: General partnerships carry unlimited personal liability for all partners. Multi-member LLCs offer better protection if properly structured.
S Corporation (Including LLC Electing S Corp Status)
An S corporation is one of the most tax-efficient structures for profitable small businesses. Like a partnership, income passes through to shareholders' personal returns, but here's the key advantage: only the salary you pay yourself as an owner-employee is subject to self-employment (payroll) taxes. Distributions above your salary are not.
Both a traditional corporation and an LLC can elect to be taxed as an S corp. The tax treatment is the same either way; the difference lies in the legal structure and how ownership is managed.
- Tax filing: Form 1120-S + Schedule K-1 for each shareholder
- Self-employment tax: Only on your W-2 salary, not on profit distributions (this is the big tax savings)
- Requirement: You must pay yourself a "reasonable salary". The IRS scrutinizes S corps that pay little or no salary to avoid payroll taxes
- Liability exposure: Good protection when properly maintained
C Corporation
A C corporation is its own separate taxpaying entity. The corporation pays corporate income tax on its profits, and then if those profits are distributed to shareholders as dividends, shareholders pay tax again on that income. This is the well-known "double taxation" issue. You also have to consider your State income tax rules.
That said, C corps aren't always a bad choice. They're the preferred structure for businesses seeking outside investment, planning to go public, or wanting to retain profits inside the company for future growth. Certain employee benefits are also more tax-advantaged in a C corp.
- Tax filing: Form 1120
- Tax rate: Flat corporate rate, then dividend tax for distributions
- Salary: Owner-employees pay themselves a salary, which is a deductible business expense
- Liability exposure: Strong protection as a separate legal entity
Quick Reference: Entity Comparison
| Entity Type | Tax Return | Self-Employment Tax? | Pass-Through? |
| Sole Proprietorship | Schedule C (1040) | Yes, all profit | Yes |
| LLC (single-member) | Schedule C (1040) | Yes, all profit | Yes |
| LLC / Partnership | Form 1065 + K-1s | Yes, active partners | Yes |
| S Corp (or LLC as S Corp) | Form 1120-S + K-1s | Salary only | Yes |
| C Corporation | Form 1120 | No (salary is W-2) | No |
| General Partnership | Form 1065 + K-1s | Yes, all partners | Yes |
Tax Savings Are Only Part of the Equation: Don't Forget Liability
Here's something we stress to every business owner we work with: tax consequences are critically important, and we can walk you through every scenario in detail. But your entity choice isn't just a tax decision. It's a legal one.
If a customer sues your business, if an employee makes a claim, if a contract dispute arises, or if your business takes on debt it can't repay, the entity structure you chose will determine how much of your personal assets (your home, savings, retirement accounts) are on the line. A sole proprietorship or general partnership offers essentially no protection. An LLC or corporation, if properly maintained, can create a meaningful wall between business risk and personal risk.
This is why we always recommend working with both a CPA/Accountant and an attorney when choosing your business structure. We handle the tax side, making sure you understand what each entity means at tax time and helping you elect the structure that minimizes your tax burden. An attorney handles the legal side, drafting operating agreements, advising on liability protection, and making sure the entity is properly set up and maintained.
Neither side of this equation should be an afterthought. Both deserve real attention.
Ready to Choose the Right Structure? Let's Talk.
At Archer Lewis, we work through this analysis with business owners every day. Whether you're just starting out or considering a restructure of an existing business, we'll sit down with you, walk through the tax consequences of each option, run the numbers for your specific situation, and help you make an informed decision.
Contact us today to schedule a consultation. Choosing the right structure from the start can save you significant money, and significant headaches, for years to come.