The U.S. recognizes four primary business structures for solopreneurs and small business owners: sole proprietorship, limited liability company (LLC), S corporation (S-corp), and C corporation (C-corp). Each has a distinct tax treatment, liability profile, and operational overhead. A fifth option — the partnership — applies when there are two or more owners, but that's a separate conversation.

If you're doing business and you haven't formed any legal entity, congratulations — you're already a sole proprietor. There's no paperwork to form one, no state fees, and no ongoing compliance requirements beyond whatever licenses your industry or locality requires. Income flows directly to your personal tax return via Schedule C, and you pay self-employment tax (15.3%) on net profits.

The appeal is simplicity. The risk is that there's zero separation between your personal and business assets. If a client sues you, they can potentially come after your car, your house, your savings. For low-risk service businesses with minimal client interaction, this risk may be manageable. For anyone handling client money, providing professional services, or working in a litigious industry, it's a meaningful exposure.

Best for: Freelancers testing the waters, very low-revenue side hustles, or anyone who wants to start immediately with no overhead.

The LLC is the workhorse of small business formation — and for good reason. It gives you personal liability protection (your personal assets are shielded from most business debts and lawsuits) while keeping taxes simple. A single-member LLC is treated as a "disregarded entity" by the IRS by default, meaning income flows straight to Schedule C just like a sole prop. You get the legal shield without a complicated new tax structure.

State formation costs vary considerably. Delaware and Wyoming are popular for their business- friendly laws and low fees. California, on the other hand, charges an $800 annual franchise tax regardless of revenue — a real consideration for low-earning solopreneurs in that state. Most states charge between $50 and $200 to file Articles of Organization, plus annual report fees.

LLCs also offer flexibility. If your business grows and you want to change how you're taxed, you can elect to be taxed as an S-corp without dissolving the LLC. That optionality is valuable.

Best for: Most solopreneurs and small business owners who want liability protection with minimal complexity.

An S-corp isn't really a separate entity type — it's a tax election. You can elect S-corp status for either a corporation or an LLC (by filing IRS Form 2553). The defining feature is how you handle income. As an S-corp owner who works in the business, you pay yourself a "reasonable salary," which is subject to payroll taxes (FICA: 15.3%). Profits above that salary can be taken as distributions, which are not subject to self-employment tax.

Run the numbers and the savings can be substantial. If your LLC nets $200,000 and you're a sole prop, you owe self-employment taxes on the full $200,000. As an S-corp paying yourself a $90,000 reasonable salary, you owe payroll taxes only on $90,000. The remaining $110,000 in distributions skips that 15.3% hit — potentially saving you over $10,000 per year, though you'll offset some of that with payroll processing costs and accounting fees.

There are tradeoffs. S-corps require you to run actual payroll (including quarterly deposits and year-end W-2s), maintain corporate formalities, and file a separate business tax return (Form 1120-S). The administrative cost typically runs $1,000–$3,000 per year in accounting fees. This is why most tax advisors suggest the S-corp election doesn't make financial sense until you're clearing at least $50,000–$80,000 in net profit.

Best for: Solopreneurs consistently generating $80,000+ in net profit who want to reduce self- employment tax burden.

C-corps are the structure behind most venture-backed startups. They issue preferred stock, can have unlimited shareholders of any nationality, and are required by most institutional investors. The corporate tax rate was set at a flat 21% by the Tax Cuts and Jobs Act of 2017 and has remained there through 2025-2026.

The catch is double taxation: the corporation pays tax on profits, and shareholders pay tax again on dividends. For a solopreneur who isn't planning to seek outside investment or go public, this structure creates tax complexity without commensurate benefit. It's not the right tool for the average NoBossly reader — unless you're specifically building to raise a venture round.

Best for: Founders planning to raise venture capital, take on equity investors, or build toward a large exit.

1. What's your liability exposure? If you're a consultant, coach, or service provider and a client dispute could theoretically become a lawsuit, the LLC's liability shield is worth the modest formation cost. If you're selling handmade goods on Etsy with low risk of harm, the urgency is lower.
2. What are you earning (or expect to earn)? Under $40,000 in net profit, the sole prop or single- member LLC with default taxation is usually the most efficient setup. Between $40,000–$80,000, you're in the gray zone where an S-corp election starts to pencil out. Above $80,000 consistently, an S-corp election almost certainly saves more than it costs.
3. How much administrative overhead can you handle? Sole props and LLCs taxed as disregarded entities have minimal compliance burden. S-corps add payroll, a separate return, and annual formalities. C-corps require the most — formal board meetings, extensive record- keeping, and complex tax filings.

Federal tax treatment is only part of the picture. Some states don't recognize S-corp elections and treat those entities as regular corporations. Others impose franchise taxes, LLC fees, or gross receipts taxes that change the math considerably. California's $800 annual LLC minimum tax is the famous example, but Tennessee taxes LLC membership interest income, and New York City has its own business tax layer. Always factor in your state's specific rules before finalizing your decision.

For most people starting a business in the U.S. today, the answer is: form an LLC. It's not glamorous advice, but it's the right one. The liability protection is real, the tax treatment is simple, and you can always elect S-corp status later when your income justifies it. Don't let perfect be the enemy of done. Pick a structure, get it set up properly, and start building.

Ready to form your LLC? See our step-by-step guide: How to Form an LLC in Any State.

Once you've picked a structure, the practical work starts: forming your LLC step by step, getting an EIN, and understanding the self-employment taxes that come with your choice.