Tax Talk Thursday: Sole Prop, LLC, S Corp, or C Corp? Choosing the Right Business Entity for Tax Efficiency and Growth

One of the first decisions new business owners face is how to structure their business. The choice between a sole proprietorship, LLC, S corporation, or C corporation can impact everything from your taxes to your legal liability to your ability to grow.

There’s no one-size-fits-all answer, but as tax professionals, we can break down the pros and cons of each based on how they’re treated by the IRS — so you can make a decision grounded in strategy, not guesswork.

1. Sole Proprietorship: Simple, But Limited

A sole proprietorship is the default structure for a solo business owner who hasn’t registered an entity with the state. It's easy to set up, but offers no liability protection.

• Taxes: Business income is reported directly on your personal tax return (Schedule C, Form 1040).

• Self-employment tax applies to all net earnings (15.3%).

• No separate legal entity — you’re personally liable for all debts and legal claims.

• Best for: Freelancers or service providers just starting out with minimal risk exposure.

2. LLC: Flexible Structure, Pass-Through Taxation

A Limited Liability Company (LLC) is a popular choice because it offers liability protection while maintaining tax simplicity.

• Single-member LLCs are taxed like sole proprietors.

• Multi-member LLCs are taxed like partnerships (Form 1065 with K-1s).

• Can elect to be taxed as an S corp or C corp, depending on your goals.

• Best for: Small business owners who want liability protection without complex compliance rules.

  
  

3. S Corporation (S Corp): Tax Savings with Formalities

An S corp is not a legal structure but a tax election made by an LLC or corporation under IRC §1361. It helps reduce self-employment tax on profits, but requires payroll and reasonable compensation.

• Pays no entity-level tax; income flows through to shareholders’ 1040s via K-1s.

• Shareholders who work in the business must pay themselves a reasonable salary (W-2).

• Remaining profits may be distributed as dividends, which are not subject to self-employment tax.

• Best for: Profitable businesses (typically netting $60k+) that want to reduce self-employment taxes.

• Not for: Foreign owners, large shareholder counts, or businesses needing venture capital.

4. C Corporation (C Corp): Full Separation, Scalable Growth

A C corporation is a separate legal and tax entity under IRC §11. It’s taxed at the corporate level (flat 21% rate) and again when dividends are paid to shareholders.

• Files Form 1120 and pays taxes at the entity level.

• Double taxation applies if profits are distributed.

• Allows for unlimited owners, including foreign individuals and entities.

• Can issue multiple classes of stock and offer employee benefit plans more favorably than other structures.

• Best for: Businesses seeking to reinvest profits, offer stock incentives, or raise capital.

• Not ideal for: Small businesses paying out all profits each year (due to double tax).

Quick Comparison Table

Feature	Sole Proprietor	LLC	S Corporation	C Corporation
Liability Protection	❌	✅	✅	✅
Tax Filing	Schedule C	Schedule C or 1065	1120-S + K-1	1120
Self-Employment Tax	Full income	Full income	Wages only	None on dividends
Fringe Benefits	Limited	Limited	Limited for 2%+ owners	Generous
Foreign Ownership	✅	✅	❌	✅
Ideal For	Beginners	Flexible setups	Growing small businesses	Scalable enterprises

Which One Is Right for You?

Here's a quick cheat sheet based on your business goals:

If you...	Then consider...
Just starting solo with minimal risk	Sole Proprietor or Single-Member LLC
Want liability protection without complexity	LLC
Want to save on self-employment tax and earn over ~$60K	LLC taxed as S Corp
Plan to raise capital or retain profits	C Corporation
Are a non-resident or want multiple investors	C Corporation

Bottom Line: Choose Based on Strategy, Not Popularity

The “best” entity depends on more than just taxes. Think about your income level, plans for growth, ownership structure, and liability concerns. Many businesses start as an LLC and later elect S corp or C corp status as their needs evolve.

At MKHS Tax Group, we help entrepreneurs and business owners make smart entity choices from the start—and revisit them as your business grows. Because structure matters. And so does strategy.

Need assistance? We’ll walk you through the tax and compliance side of each option so you can build a strong foundation for your business—without the financial jargon. Send an email to info@mkhstaxgroup.com.