How to Choose the Right Business Structure: LLC, S-Corp, C-Corp, or Sole Proprietorship?
A clear, simple guide for new small business owners
Starting a business comes with excitement, ideas, and plans — but one of the most important decisions you’ll make early on is choosing the right business structure. The structure you choose affects your taxes, personal liability, how you pay yourself, and even how easily you can grow. At Connell Tax & Advisory, we help new entrepreneurs choose the structure that protects them, maximizes tax benefits, and aligns with their long-term goals. This guide breaks down the major business structures in plain language so you can feel confident moving forward.
1. Sole Proprietorship
Best for: Simple one-person businesses, side hustles, early-stage testing
A sole proprietorship is the simplest form of business — and the most common for new entrepreneurs.
Pros:
Easiest and cheapest to start
Very little paperwork
You report everything on your personal tax return
Great for testing a business idea before formalizing it
Cons:
No liability protection — your personal assets are at risk
Harder to separate business and personal finances
No real tax planning flexibility
Insight:
If you’re making more than a few thousand dollars or working with customers regularly, it’s usually time to upgrade to an LLC for protection.
2. Limited Liability Company (LLC)
Best for: Small to midsize businesses, service businesses, real estate investors, contractors
An LLC is the most popular structure for small businesses — and for good reason.
Pros:
Liability protection (your personal assets are shielded)
Flexible tax treatment
Minimal ongoing paperwork
Can have one or multiple owners
Professional and credible for customers
Cons:
You still pay self-employment taxes unless you elect S-Corp status
Rules vary slightly by state
Not ideal for businesses seeking outside investors
Tax Flexibility
An LLC can choose how it wants to be taxed:
As a sole proprietor (default for single-member)
As a partnership (default for multi-member)
As an S-Corporation (tax election)
As a C-Corporation
This flexibility makes LLCs extremely powerful for tax planning.
Insight:
For most early-stage service businesses or consultants, LLC + S-Corp election is often the sweet spot (depending on your income level).
3. S-Corporation (S-Corp)
Best for: Active businesses earning ~$60k+ in profit; service businesses; contractors; freelancers with steady income
An S-Corp is not a type of business entity — it’s a tax election available to LLCs and corporations.
It allows you to split your income between:
Reasonable salary (subject to payroll taxes)
Distributions (not subject to payroll taxes)
This split can significantly reduce your overall tax burden.
Pros:
Reduced self-employment taxes
Owners can take tax-advantaged distributions
Good for growing service businesses
Still provides liability protection (through an LLC or corporation structure)
Cons:
You must run payroll
More IRS scrutiny around “reasonable compensation”
Additional filings and bookkeeping
Insight:
If your business earns enough to pay yourself a reasonable salary and still produce extra profit, an S-Corp can save thousands annually.
4. C-Corporation (C-Corp)
Best for: High-growth companies, startups seeking investors, companies planning to reinvest profits
A C-Corp is a more complex structure designed for scalability and investment.
Pros:
Unlimited owners
Attractive to investors and venture capital
Lower flat federal corporate tax rate
Can retain earnings in the company for growth
Cons:
Double taxation (the corporation pays taxes, then shareholders pay taxes on dividends)
More regulatory requirements
Higher accounting cost
When a C-Corp makes sense:
You plan to raise money
You want to offer stock to employees
You plan to reinvest profits rather than distribute them
Insight:
Most small local service businesses do not need a C-Corp — an LLC or S-Corp is usually the better fit. But for scalable ventures, this is often the right choice.
Key Questions to Ask Before Choosing
Before selecting a structure, consider these important questions:
✅ Do you want liability protection? If yes, eliminate sole proprietorship immediately - LLCs could be the best option.
✅ How much profit do you expect in year one? Higher profits often favor an S-Corp for tax benefits.
✅ Do you plan to add partners? LLCs and corporations handle multi-owner structures best.
✅ Do you need outside investors? Investors almost always prefer C-Corps.
✅ How important is tax flexibility? LLCs offer the broadest range of options.
Our Recommendation Framework
Here’s a simple way Connell Tax & Advisory typically guides new entrepreneurs:
💼 Side hustle or early testing
→ Start as a sole prop, move to LLC when income stabilizes.
🧰 Local service business (contractor, consultant, handyman, designer, etc.)
→ LLC with option to elect S-Corp when profits rise.
🏢 Growing small business with steady profit
→ LLC taxed as S-Corp for maximum tax efficiency.
🚀 Scalable or investor-focused startup
→ C-Corp from day one.
This framework ensures entrepreneurs choose the structure that fits both their current needs and future ambitions.
Final Thoughts
Choosing the right business structure doesn’t just affect taxes — it influences your protection, credibility, and long-term financial success. The good news? You don’t have to figure it out alone.
At Connell Tax & Advisory, we help entrepreneurs and small business owners select the structure that protects their personal assets, minimizes taxes, and sets a stable foundation for long-term growth.
Whether you’re launching your first business or transitioning an existing one, we’re here to guide you with clarity and confidence.
