What should I register my business as? A Sole Proprietor, LLC, S-Corp…?
Great question! As always, the right answer depends on your specific revenue, risk profile, and state. You should always loop in a CPA before making the decision on an LLC or S-Corp based on timing rules and ongoing compliance requirements.
Here's a practical framework:
Sole Proprietorship — Simplest, but most exposed
Makes sense when:
You're just testing a business idea or in early stages
Revenue is low and risk of liability is minimal
You have no employees and work alone
You want zero administrative overhead
The catch: your personal assets are fully exposed to business liability, and all profit flows to your personal taxes as self-employment income (15.3% self employment tax on everything).
LLC — The sweet spot for most small businesses
Makes sense when:
You want liability protection without corporate complexity
You're generating consistent revenue but not yet at a level where S-Corp tax savings justify the added cost
You have business assets, contracts, or client-facing risk worth protecting
You want flexibility — an LLC can be taxed as a sole prop, partnership, or elect S-Corp status later. LLCs enjoy pass-through taxation by default, meaning business income passes through to the members' personal tax returns, avoiding the double taxation faced by C Corporations. Members report their share of profit or loss on their personal tax returns.
The LLC is often the right default for most small business owners, especially in the $0–$80K net profit range and for owners (members) to have their personal assets protected from business debts and claims. This means personal property, like homes and savings, are generally safe if the business incurs debt or is sued. Additionally, for some businesses forming an LLC can boost your business’s credibility with potential customers, suppliers, and lenders, as it shows a formal commitment to your business.
Cons include: Initial formation and ongoing fees can be higher than other business structures, such as sole proprietorships. Requirements vary by state but generally include filing fees and annual reports. Visit the California Secretary of State's Business Entities Section for California based businesses to see requirements.
S-Corporation — The tax optimization play
Makes sense when:
Your net profit is consistently above $50,000–$80,000/year (the threshold varies by advisor, but this is the general consensus)
You can pay yourself a reasonable salary and take the remainder as distributions — distributions are NOT subject to self-employment tax
You're willing to run payroll, file a separate corporate tax return (Form 1120-S), and handle added compliance
An LLC and an S-Corp are not mutually exclusive. Many business owners form an LLC and then elect S-Corp tax treatment with the IRS — giving you the liability protection of the LLC with the tax efficiency of the S-Corp. This is an increasingly common structure for established small businesses.
The core math: As a sole prop or single-member LLC, you pay 15.3% SE tax on all net profit. As an S-Corp, you pay self employment tax only on your salary, distributions are exempt. On $150K net profit with a $80K salary, you could save $10,000+ annually. But payroll costs, bookkeeping, and tax prep fees typically run $2,000–$5,000/year, so the savings need to outweigh the overhead.
A quick decision matrix:
SITUATION. —> RECOMMENDATION
Side hustle, early stage —> Sole Prop
Established business, any client-facing risk —> LLC
Net profit $50K–$80K+ consistently —> LLC taxed as S-Corp
Multiple owners —> LLC (with operating agreement) or S-Corp
Seeking outside investment —> consider C-Corp
NEXT STEP:
Review your business goals, financial situation, and growth plans to determine if an LLC is the right choice for you. If you decide to proceed, the next step is to research the specific requirements and process in your state, which may include choosing a business name, filing articles of organization, and creating an operating agreement.