US Business Entity Types Compared: Sole Proprietorship, LLC, S-Corp, C-Corp and Partnership

Choose a single-member or multi-member LLC if you are building a profitable business you will own and run, and a Delaware C-corp if you will raise money from venture investors or grant stock options to a team. That rule covers most founders. The rest of this guide explains the exceptions.

• Solo service or consulting business: single-member LLC. Add an S-corp election when profit reliably passes about $80,000 a year.
• Two or more owners, self-funded: multi-member LLC taxed as a partnership, with a written operating agreement.
• Venture-backed startup, or planning a SAFE or priced round: Delaware C-corp.
• Foreign founder raising US capital: Delaware C-corp. Foreign founder running a small online business with no US investors: often a single-member LLC, with strict filing duties.
• Rental real estate: an LLC per property or group of properties, taxed as a disregarded entity or partnership. Never a corporation.

Sole proprietorships and general partnerships still exist by default (you have one the moment you start selling without filing anything), but an LLC costs little more and adds liability protection, so we rarely recommend staying unincorporated past the first few months. If you are only comparing the LLC and the C-corp for a startup, our LLC vs C-corp page covers that decision in more depth; this page is the broader map.

The single most useful fact about entities is that your state filing and your IRS tax treatment are two different choices. The state decides what legal entity you are: a sole proprietorship (no filing), a general partnership (no filing required), a limited partnership or LLP, an LLC, or a corporation. The IRS then decides how that entity is taxed under the check-the-box regulations (Treas. Reg. §301.7701-3).

The defaults:

• An LLC with one member is a disregarded entity: taxed like a sole proprietorship on Schedule C, or like a branch if the owner is a company.
• An LLC with two or more members is a partnership filing Form 1065.
• A corporation formed under state law is a C-corp filing Form 1120.

Any LLC can file Form 8832 to be taxed as a corporation, and any eligible LLC or corporation can file Form 2553 to be taxed as an S-corp. An LLC that files Form 2553 is treated as having elected corporate status at the same time, so it does not also need Form 8832.

This is why the common search 'LLC vs S-corp' compares a legal form to a tax election. An S-corp is not something you form at the Secretary of State; it is a box you check with the IRS. It is also why an LLC is the most flexible starting point: you can change its tax treatment later without forming a new company. One caution for single-member LLCs: the IRS still treats them as separate entities for employment and certain excise taxes, so the LLC needs its own EIN once it has employees.

The tax difference between entities comes down to two questions: does the entity itself pay federal income tax, and how much of the owner’s share is hit by the 15.3% self-employment or payroll tax.

Three rules to remember:

1. Self-employment tax is 15.3% on 92.35% of net earnings. The 12.4% Social Security portion stops at the 2026 wage base of $184,500; the 2.9% Medicare portion has no cap, and an extra 0.9% applies above $200,000 (single).
2. Pass-through owners (sole proprietor, partnership, S-corp) can claim the 20% qualified business income deduction under §199A, made permanent by the July 2025 law. C-corp shareholders cannot.
3. Pass-through owners pay tax on their share of profit whether or not cash is distributed. A C-corp can retain earnings at 21% with no tax to the owner until a dividend or sale.

That third point is why growth companies that reinvest everything do not mind the C-corp ‘double tax’: the second layer only hits money paid out as dividends, and venture-backed companies rarely pay any.

Here is the 2026 federal tax for a single owner, filing single with no other income, whose business earns $150,000 before paying the owner. Figures use 2026 brackets, the $16,100 standard deduction and the QBI deduction where available. State tax is excluded.

• Sole proprietorship or single-member LLC: self-employment tax of $21,194 (15.3% x 92.35% x $150,000) plus income tax of about $16,413. Total: about $37,608.
• S-corp paying the owner a $75,000 salary: payroll tax (both halves) of $11,475 plus $42 of FUTA, income tax of about $19,640 on the salary and K-1 income, and an assumed $2,000 for payroll service and the extra 1120-S return. Total: about $33,157, or roughly $4,450 less than the LLC.
• C-corp paying no salary and distributing everything: corporate tax of $31,500 (21%). The remaining $118,500 paid as a qualified dividend produces taxable income of $102,400, of which $49,450 is taxed at 0% and $52,950 at 15%, or $7,943. Total: about $39,443. If the company keeps the money instead, the total today is $31,500, but the owner has received nothing.

The lessons: at this profit level the S-corp wins for an owner who takes cash out. The C-corp only wins when earnings stay inside the company or when QSBS will apply to a large exit. And the S-corp saving is smaller than the headline payroll tax math suggests, because the salary reduces the QBI deduction. Our LLC vs S-corp guide shows the break-even point at several profit levels.

This is an illustration, not a recommendation for a particular salary. The S-corp salary must be reasonable for the work performed, and an underpaid salary is the first thing an IRS examiner adjusts.

LLCs, corporations (C or S), limited partners in an LP and partners in an LLP are generally not personally liable for the business’s debts and lawsuits. Sole proprietors and general partners are. That is the main legal reason to form something.

What liability protection does not cover:

• Your own negligence or malpractice. A consultant who gives bad advice, or a doctor in a PLLC, is still personally liable for their own work. Insurance handles this, not the entity.
• Personal guarantees. Banks, landlords and many SaaS vendors will ask small-business owners to guarantee the lease or loan personally. Once you sign, the entity does not shield you.
• Unpaid payroll trust fund taxes. The IRS can assess the withheld employee taxes against responsible owners personally under IRC §6672.
• A pierced veil. Courts can disregard the entity when owners commingle funds, ignore formalities, or leave the company undercapitalized.

The protection is roughly equal between an LLC and a corporation. Single-member LLCs are the weakest version in some states because creditor protection rules (charging orders) vary for one-owner companies. If asset protection is a real concern, get a state-specific legal opinion; it is not a reason to choose a corporation over an LLC by itself.

A checklist that keeps protection intact: separate bank account and card, contracts signed in the company’s name with your title, an operating agreement or bylaws, and annual state filings kept current.

If you plan to sell equity to investors, the entity decision is largely made for you. Venture funds invest in C-corps because preferred stock, option pools, SAFEs and convertible notes are built for them, and because many fund investors (tax-exempt endowments, foreign LPs) cannot receive K-1 income from an LLC without tax problems.

QSBS is the reason founders should care. Under §1202, a non-corporate shareholder who acquires C-corp stock at original issuance can exclude gain on sale if the company is a qualified small business. For stock issued after July 4, 2025, the July 2025 law allows a 50% exclusion after 3 years, 75% after 4 years and 100% after 5 years, with a per-issuer cap of $15 million (indexed for inflation after 2026) or 10 times basis, and the company’s gross assets must not exceed $75 million when the stock is issued. Stock issued on or before July 4, 2025 keeps the old rules: 100% after 5 years, $10 million cap, $50 million asset test.

QSBS excludes many service businesses (health, law, accounting, consulting, financial services, and others where the main asset is employees’ skill), so a consulting firm gets no benefit. For a software startup, the 5-year holding clock starts when the stock is issued, which is a strong argument for forming the C-corp early instead of converting just before the Series A.

The federal comparison is only half the cost. State fees and entity-level state taxes can erase an S-corp saving or make a particular state a poor place to form.

• Delaware: LLCs pay a flat $400 annual tax due June 1, with no annual report. Corporations file an annual report ($50 fee) and pay franchise tax by March 1; the minimum is $175 under the authorized shares method and $400 under the assumed par value method, and a startup with 10 million authorized shares should always calculate both because the default method can show a bill of tens of thousands of dollars.
• California: LLCs, LPs and corporations pay an $800 minimum franchise tax each year. LLCs add a separate fee once California gross receipts reach $250,000. S-corps pay 1.5% of California net income (minimum $800) at the entity level, and C-corps pay 8.84%. Newly formed or qualified corporations skip the $800 minimum in their first taxable year; LLCs do not.
• New York City: the city does not recognize the S election. A federal S-corp pays the city General Corporation Tax on its income as if it were a C-corp, and New York State requires its own separate S election.
• New York State LLCs: must publish notice of formation in two newspapers for six weeks within 120 days of formation, and the cost depends heavily on the county. Missing it suspends the LLC’s authority to do business in the state.
• Texas: LLCs and corporations are both subject to franchise tax, but no tax is due for 2026 reports at or below $2.65 million of annualized revenue. Sole proprietorships and general partnerships owned directly by individuals are not subject to it.
• Washington: business and occupation tax on gross receipts applies to every entity type, so entity choice does not change it.

If you form in Delaware but operate elsewhere, you pay both Delaware’s fees and your home state’s registration and taxes. For a small LLC that will never raise money, forming in your home state is usually cheaper.

Work through these in order and stop at the first one that applies.

1. Will you raise money from venture funds or accelerators, or issue stock options to employees in the next two years? Form a Delaware C-corp now. Do not start as an LLC to save a few hundred dollars; the conversion later costs more in legal fees and resets the QSBS clock.
2. Is any owner a nonresident alien, or a corporation or partnership? You cannot use an S-corp. Use an LLC (if no US investors) or a C-corp (see the international section below).
3. Is the main asset real estate that will appreciate? Use an LLC taxed as a partnership or disregarded entity. Taking appreciated property out of a corporation is taxable, and partnership debt adds to the owners’ tax basis in a way S-corp debt does not.
4. Are you a solo owner with steady profit above about $80,000 after expenses? Form an LLC and elect S-corp status. Below that, stay a default single-member LLC; payroll and the extra return cost more than you save.
5. Are there two or more owners in a profitable, self-funded business? Use a multi-member LLC taxed as a partnership. It allows special allocations and different economic deals between partners. Consider an S election only if all owners are US individuals and profits split strictly by ownership percentage, because an S-corp must make distributions pro rata.
6. Is the business a licensed profession (law, medicine, accounting, architecture)? Your state may require a professional LLC or professional corporation. The tax analysis is the same as above.
7. None of the above? A single-member LLC is the default answer for a new small business.

Revisit the choice when profit doubles, a new owner joins, or you start talking to investors.

A nonresident founder can own 100% of either a US LLC or a US C-corp, but not an S-corp. The choice turns on whether the business has US-source income connected to a US trade or business (effectively connected income, or ECI) and whether you will raise US capital.

Single-member LLC owned by a nonresident. The LLC is disregarded, so its income is treated as the owner’s. If the business has no US office, employees or dependent agents, it may owe no US income tax at all. It still must file a pro forma Form 1120 with Form 5472 every year, reporting transactions between the LLC and its owner, by April 15 (extendable). The penalty for not filing is $25,000 per form per year. If the LLC does have ECI, the owner files a US personal return (Form 1040-NR) and pays US tax on it.

Multi-member LLC with foreign members. The partnership must withhold US tax on ECI allocable to foreign partners under §1446 at the highest rate, whether or not cash is distributed, and each foreign partner files a US return.

Delaware C-corp owned by a nonresident. The company pays 21% federal tax on its own income and files Form 1120 (plus Form 5472 if a foreign person owns 25% or more). The founder files nothing in the US unless they receive salary or dividends; dividends face 30% withholding unless a treaty lowers it. A nonresident who sells C-corp stock generally owes no US capital gains tax unless the company is mainly a US real estate holder.

The decision rule we use: if you will raise money from US investors, open a US bank account with a mainstream bank, or hire in the US, choose the Delaware C-corp. If you are selling a digital product or services from abroad with no US investors and want minimal US tax, a single-member LLC can work, but only if you will file Form 5472 every year without fail and confirm how your home country taxes the LLC’s income.

Most entity changes are possible, but they are not symmetrical. Moving toward a corporation is usually cheap; moving away from one is usually expensive.

• Sole proprietorship to LLC: form the LLC and move the business into it. No tax. A single-member LLC can keep the owner’s SSN for income tax but needs an EIN for payroll and banking.
• LLC to S-corp: file Form 2553. No new entity, no tax. The election must be filed within 2 months and 15 days of the start of the year it should apply to, with late relief available under Rev. Proc. 2013-30.
• LLC to C-corp: a statutory conversion or a contribution of the LLC to a new corporation under §351. Usually tax-free if done correctly. For QSBS, the stock’s basis equals the value of the business at conversion, so only growth after that date can qualify, and the 5-year clock starts then. Liabilities in excess of basis can trigger gain, so get the balance sheet checked first.
• C-corp to S-corp: file Form 2553. Built-in gain on assets held at conversion is taxed at the corporate rate if those assets are sold within 5 years (§1374), and old C-corp earnings can create passive income problems.
• S-corp back to C-corp: revoke the election (shareholders holding more than 50% of shares consent). You generally cannot re-elect S status for 5 years.
• Corporation to LLC: treated as a liquidation. The corporation pays tax on the appreciation in its assets and shareholders pay tax on what they receive. This is the expensive one.

The practical consequence: an LLC keeps every option open, and a C-corp is the right choice only when you know you need what it offers.

The errors that cost founders the most money later:

• Forming an S-corp, or electing S status, before profit justifies payroll.
• Forming an LLC for a venture-backed startup, then paying for a conversion months later when the first investor insists on a C-corp.
• Electing S status with a foreign co-founder or an entity as a shareholder, which terminates the election.
• Forming in Delaware or Wyoming for a local business that will never raise money, then paying two states’ fees.
• Assuming the LLC protects you from a personal guarantee you signed.
• Skipping the operating agreement in a two-owner LLC, so there is no rule for what happens when one owner leaves.

Next steps, in order: decide whether you will raise outside equity in the next two years; check which owners are US persons; estimate next year’s profit; then form the entity in the state where you operate (or Delaware for a fundable startup), get an EIN, open a business bank account, and calendar your first state and federal filings. If you are on the line between options, our team can model the federal and state cost of each for your numbers. This page describes general rules as of October 2026 and is not tax or legal advice for your specific facts.