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-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-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

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

Business Entity Selection

Curated by: Rubric Advisors

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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

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

Our Approach

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Why Entity Selection Matters

Sole Proprietorship and General Partnership

Limited Liability Company (LLC)

S-Corporation

C-Corporation

Self-Employment Tax, QBI, and State Considerations

When to Convert or Restructure

Related Topics

Do I Need an LLC to Angel Invest?

Umbrella Insurance and Liability Protection

Earned Income vs Unearned Income

Why Entity Selection Matters

Sole Proprietorship and General Partnership

Limited Liability Company (LLC)

S-Corporation

C-Corporation

Self-Employment Tax, QBI, and State Considerations

When to Convert or Restructure

Related Topics

Do I Need an LLC to Angel Invest?

Umbrella Insurance and Liability Protection

Earned Income vs Unearned Income