LLC vs. Corporation vs. Sole Proprietorship — Which Is Right for You?

The LLC is the most common choice for small business owners. It combines liability protection with pass-through taxation and fewer ongoing requirements than a corporation. Most solo founders and small teams find it gives them the right balance of protection and simplicity without the overhead of corporate formalities.

A sole proprietorship is technically more common by raw count — because it exists automatically — but most business owners who think through the liability question choose to form an LLC instead.

An LLC is a state-registered business entity. An S corporation is a tax election — a corporation (or sometimes an LLC) that has filed Form 2553 with the IRS to be taxed as a pass-through entity. The key difference in practice: S corporation owner-employees can split income between a W-2 salary and distributions, which can reduce self-employment tax. LLCs don't have that option unless they elect S-corp taxation.

S corporations also come with stricter rules: no more than 100 shareholders, 1 class of stock, and all shareholders must be U.S. citizens or residents. LLCs have none of those restrictions.

Yes, but only if you treat the LLC as a separate entity. An LLC shields your personal finances from business debts and lawsuits — your personal bank account, home, and savings aren't on the line if the business is sued. That protection holds as long as you keep business and personal finances separate, follow your state's requirements, and don't personally guarantee business debts.

If you mix personal and business money or ignore your state's compliance requirements, a court could decide the LLC isn't really a separate entity — and at that point your personal finances are fair game.

Double taxation means the business pays income tax on its profits, and then shareholders pay income tax again on any dividends they receive from those same profits. Only C corporations face double taxation. The federal corporate tax rate is currently 21%, and shareholders then owe personal income tax on dividends at their individual rate.

Sole proprietorships, partnerships, LLCs (by default), and S corporations are all pass-through entities — income flows directly to the owners' personal returns and is only taxed once.

Yes, in most cases. An LLC can elect to be taxed as an S corporation by filing Form 2553 with the IRS without dissolving and re-forming the entity. Converting from an LLC to a corporation (or vice versa) is more involved and varies by state — some states allow statutory conversions, others require you to dissolve one entity and form a new one.

A tax professional can help you figure out the right timing and method for your situation, since conversions can have tax consequences depending on how the business is structured.

Yes. Every LLC and corporation is required to have a registered agent — a person or business with a physical address in the state where you're registered, available during business hours to receive legal documents and official state correspondence. You can serve as your own registered agent if you have a physical address in the state, or you can use a registered agent service.

Sole proprietorships and general partnerships don't require a registered agent because they aren't formally registered entities.