A Simple Guide to Business Entity Types

Choosing an entity type shapes how your business runs, how you pay taxes, and how you pay yourself. Here is the clear, plain-spoken version so you can understand your options without the legal fog.

Sole Proprietorship

This is the simplest place to begin. You and your business are the same, and everything lands on your personal tax return. You pay taxes on your profit after your expenses.

There is no legal protection here, so your personal and business worlds are fully connected.

LLC (Limited Liability Company)

Same taxes as a sole proprietor, but now you have legal protection.
For most new business owners who are taking their work seriously, this is the option I recommend.

Once you become an LLC, make sure your business and personal finances stay separate. That separation is what keeps your protection in place if things ever get messy.

LLC Partnership

An LLC with more than one owner. You will file a 1065 return and take distributions based on your ownership percentage.

Still simple. Still flexible. Just shared between partners instead of carried alone.

LLC with an S-Corp Election

This is still an LLC. You are simply choosing a different tax path. You will file an 1120-S and you must be on payroll.

This setup usually makes sense once your business is profiting more than sixty to seventy thousand dollars a year or earning more than what you consider a reasonable salary for yourself.

S-Corps can save money on taxes, but they come with extra costs like:
• payroll
• payroll taxes
• a payroll service
• a separate tax return

You want steady cash flow before you make this move. The good news is that you can always elect S-Corp later when your business is ready.

Before You Go

This guide is for educational purposes only and is not legal or tax advice. Always check with a CPA or attorney before making entity decisions.