Curated by: Rubric Advisors
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Business Entity Selection
Compare LLCs, S-Corps, C-Corps, and other entity types, learn how each structure affects taxes, liability protection, and operational flexibility.
Business Entity Selection
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Why Entity Selection Matters
- Your business structure determines how income is taxed at federal and state levels
- Liability protection varies, some structures shield personal assets, others do not
- The right entity can reduce self-employment tax, enable benefits, and simplify succession
- Changing structures later is possible but may trigger tax consequences
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Why Entity Selection Matters
- Your business structure determines how income is taxed at federal and state levels
- Liability protection varies, some structures shield personal assets, others do not
- The right entity can reduce self-employment tax, enable benefits, and simplify succession
- Changing structures later is possible but may trigger tax consequences
Sole Proprietorship and General Partnership
- A sole proprietorship requires no state filing and is the simplest structure to start
- All income flows to the owner's personal return and is subject to self-employment tax
- General partnerships split income among partners but expose each to unlimited liability
- Neither structure separates business debts from personal assets
Limited Liability Company (LLC)
- LLCs provide liability protection while defaulting to pass-through taxation
- Single-member LLCs are taxed as sole proprietorships; multi-member as partnerships
- An LLC can elect to be taxed as an S-Corp or C-Corp without changing its legal structure
- Operating agreements govern ownership, profit splits, and management flexibility
S-Corporation
- S-Corp income passes through to shareholders and avoids corporate-level federal tax
- Owners who work in the business must take a reasonable salary subject to payroll taxes
- Distributions above reasonable compensation avoid Social Security and Medicare taxes
- Limited to 100 shareholders, one class of stock, and only US individual shareholders
C-Corporation
- C-Corps pay corporate income tax at a flat 21% federal rate with double taxation on dividends
- Allows unlimited shareholders, multiple stock classes, and access to venture capital
- Certain small business stock (Section 1202 QSBS) may qualify for capital gains exclusions
- Double taxation can be managed through salary, benefit, and retention planning
Self-Employment Tax, QBI, and State Considerations
- Self-employment tax is 15.3% on net earnings, the combined employer and employee share
- Section 199A QBI deduction allows eligible pass-through owners to deduct up to 20% of income
- Some states impose franchise taxes, gross receipts taxes, or minimum fees on specific entities
- State tax treatment of S-Corps and LLCs varies, not all states follow federal rules
When to Convert or Restructure
- Sole proprietors often benefit from forming an LLC once revenue justifies the cost
- S-Corp election typically makes sense when net income exceeds $40,000 to $50,000 annually
- Converting from S-Corp to C-Corp may be warranted when seeking venture capital
- Review your choice periodically as the business evolves and consult a tax advisor first
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