Demystifying Business Entities: Sole Proprietorship, LLC, or S-Corp?
Sole Prop, LLC, S-Corp… Oh My! Which One Do You Need?
The #1 question I hear from brand-new business owners (usually asked with a mix of panic and caffeine jitters):
“I know what sole proprietorship, LLC, and S-Corp are… but which one do I actually need?!”
Listen, I get it! One reason I became a business coach is because it took me forever to dig through the internet swamp of legal jargon, half-truths, and “one-size-fits-all” advice. It felt like every article was just a copy-paste list of definitions without telling me what mattered in real life.
Here’s the thing: your business entity is not just some boring label. It affects your taxes, your liability (aka: can someone sue you personally or just your business?), and even what hoops you’ll have to jump through as you grow.
>>> So let’s skip the law-school lecture and break this down like real humans!
First, let’s set the record straight!
💡 Truth Bomb #1: Choosing an entity is both legal and financial.
Yes, you need to talk to a lawyer AND an accountant. (I know — ugh — but trust me, you’ll thank me when tax time doesn’t feel like a horror movie.)
💡 Truth Bomb #2: S-Corp is not a business entity — it’s a tax status.
Surprise! That’s right, you’ll still need to legally set up your business as an LLC or a Corporation first. Then, at tax time, you can elect for the IRS to treat it as an S-Corp. Think of it like a costume change — you’re still the same business underneath, but the IRS suddenly sees you in a new light. Sometimes that means saving big on taxes… if you’re ready! And that’s a big IF. Consult your accountant.
💡 Truth Bomb #3: Corporations and S-Corps sound fancy, but they’re not always right for you.
And here’s the kicker: no one stops you from setting one up even if it makes zero sense for your business. You’ll just find out the hard way when your tax bill hits like a wrecking ball.
💡 Truth Bomb #4: You can change your business entity later.
You’re not marrying your entity type. You can start as a sole prop, upgrade to an LLC, and later elect S-Corp status when it makes sense. You can also file a DBA as an LLC or a Corporation if you just want to change the name or run different businesses under a larger umbrella.
💡 Truth Bomb #5: DIY is totally fine… sometimes.
Filing as a sole prop or LLC? Easy. You can usually do it yourself at your courthouse or your local .gov site, the paperwork is pretty straight forward.
>>> PRO TIP: Don’t get scammed by overpriced or free “we’ll file for you” websites. And you’re definitely not legally registered in any US state, anywhere if it was free.
BUT: if you’re filing a corporation or partnership, lawyer up. Those logistics are messy and you do not want to screw it up. And as always, I recommend talking to 2-3 different lawyers making sure to find a good fit.
💡 Truth Bomb #6: Check your name first!
Before you drop $$$ on domains and custom merch with your brilliant brand name, make sure it’s actually available in your state. Nothing kills the vibe like finding out your dream name is already taken by another company 2 towns over, and it won’t matter if you didn’t see anything on Google maps or something like that. People file things all the time and then don’t use them but it will still stall your paperwork.
📚 STORY TIME:
Sometimes there are simple work-arounds. When I first filed my LLC in Texas I hit a wall with Crafts & Drafts and I just tacked on the word “Events” at the end to get it done. It’s not always that easy but it’s possible!
💡 Truth Bomb #7: Size doesn’t matter
No really, it doesn’t! (Now get your mind out of the gutter.) The type of entity you choose has nothing to do with how big your business is. An LLC doesn’t mean “tiny Etsy shop” and a corporation doesn’t automatically mean you’re Apple.
You could be a one-person freelance graphic designer who files as a corporation. (Yes, you’d be the board of one, complete with annual “meetings” with yourself and snacks.)
Or you could be running a seven-figure candle empire and still operate as an LLC.
Nonprofits? Same thing — they can be a local dog rescue (love y’all!) or the whole freaking Red Cross.
The structure isn’t about size — it’s about how you’re taxed, how much liability protection you get, and what compliance rules you have to follow.
Breaking Down the Business Types (With Less Yawn, More Real Talk)
Sole Proprietorship - DBA (Doing Business As)
The Good:
Cheapest, fastest way to start. Filing a DBA (“doing business as”) usually costs $20–$50ish depending on your state / city.
You can hire employees and contractors (contrary to what some bad blogs I actually found recently claim).
Perfect for testing the waters with a low-risk business idea.
REMEMBER: DBA’s are not just for sole proprietorships! If your LLC or Corporation wants to use a name other than your exact legal name (ex: “Smith Enterprises, LLC” doing business as “Unicorn Fart Candles”), you still need to file a DBA. Same rules apply—check your local requirements.
The Catch:
YOU are the business. If something goes wrong, your house, car, and retirement fund are all on the line.
No business credit. Getting loans or fancy credit cards is harder.
Local rules vary! In Austin, TX it’s as simple as filing a DBA for $20ish bucks. In Chicago? You’ll be publishing your name in a newspaper like it’s 1923. Yep, still cheap but you have to publish a public announcement about your new business in an actual newspaper for 3 weeks.
Limited Liability Company (LLC)
The Good:
Think of it as “sole prop, but make it safer.” You get liability protection without the corporate headaches.
The IRS gives LLCs flexibility: single-member LLCs are taxed like sole props by default, multi-member like partnerships. But you can also elect corporate or S-Corp taxation later—just be careful, because some elections can be hard (or impossible) to reverse. Talk to your accountant first.
Much less red tape than a corporation.
The Catch:
Costs more than a sole prop. Fees vary wildly: $350 in Austin, TX vs. $850 in Chicago (last I checked / remember from my own filings, don’t come at me. I’m not trying to spend 10 years researching this one blog post.)
Most states also require annual reports or renewal fees (usually $100–$300). Miss it, and you’ll get late fees or even risk your LLC being dissolved. Not really a catch, just the cost of doing business, but a lot of people miss this.
Corporation (C-Corp)
The Good:
Owners (shareholders) aren’t personally liable. 🙌
More tax deductions and potential funding options through stock.
Potential tax advantages — like avoiding self-employment tax on dividends (but you’ll still pay payroll taxes on your salary)
The Catch:
Hello, red tape! You need bylaws, stock, annual meetings, minutes… it’s a whole circus.
More expensive to set up, and you’ll definitely want a lawyer.
Double taxation is a thing (profits get taxed, then dividends get taxed again).
S-Corp (I know I just said it’s not a business entity but here’s what you want to know!)
The Good:
No double taxation—profits “pass through” to you like a sole prop or LLC. (THIS is why you keep hearing S-Corps being talked about like they’re the Holy Grail!)
Liability protection.
The Catch:
You must pay yourself a “reasonable” salary (and yes, the IRS will absolutely question what “reasonable” means).
Limits on stock.
Still has all the red tape of a corporation.
Oh, and it’s not an entity at all — it’s just a tax status. You still need to form an LLC or Corporation first.
📚 STORY TIME:
I know people who own 6 figure businesses that are crossing their fingers they can switch to an S-Corp designation next tax year. They are waiting for the kind of consistency in their businesses that won’t mean they regret it later because you can always change TO an S-Corp, but if you revoke or lose that status, the IRS makes you wait a long time before switching back. Translation: don’t rush it.
Partnerships
The Good:
Super easy to set up — sometimes as simple as a handshake agreement (though please, PLEASE don’t stop there).
Flexible structure: can be general (everyone shares equally), limited (some partners just invest and don’t manage), or LLP (limited liability partnership, gives some legal protection - not available in all states.)
Great if you’re teaming up with someone who brings different skills or cash to the table.
The Bad:
Without a rock-solid partnership agreement, things can get messy fast. Think: who owns what, who makes decisions, what happens if someone bails, or—worst case—dies. (Sorry, morbid but true.)
In a general partnership, every partner is personally liable for debts and lawsuits. Translation: if your partner racks up debt, creditors can come after YOUR assets too.
Raising money can be harder since investors usually prefer LLCs or corporations.
The Reality Check:
If you go this route, absolutely get a lawyer to help draft a proper partnership agreement. It’s worth every penny to avoid future “well technically” fights. And no I don’t care how long you’ve been besties, DO IT!
Nonprofits - Just a quick note!
Nonprofits are their own category and work totally differently than the entities we just covered. You don’t “make an LLC and slap a nonprofit sticker on it.” If your goal is to run a charity, foundation, or other mission-based orginzation, you’ll need to form a nonprofit corporation at the state level AND then apply for tax-exempt status (like 501(c)(3)) with the IRS. Whole different playbook.
If that’s you, consult a lawyer who specializes in nonprofits—there are way more rules and requirements than a regular small business.
So…Back to your question: Which one do YOU need?
Just starting, low risk, low money? If you’re just getting started and trying to keep costs low, low, low, and you do NOT have a lot of risk involved.
>>> Sole prop (DBA) is fine - for now. Upgrade to an LLC when you can.Just starting, have some funds? You ultimately want at least an LLC if you’re taking your business seriously at all and have some starting funds saved up.
>>> Go ahead and start out with your shiny new LLC.
Risky business? Not the movie! Your business involves risk where something could go wrong and the angry customer sues you for everything you’ve got. Selling knives? Working with people’s kids or pets? Going into people’s houses? You know, risky business.
>>> Start with an LLC. (And definitely get insurance! Seriously.)
Making bank? Getting millions of dollars in investment money, business already making money and growing fast, inherited your family business that’s been around for 50 years and makes good profits?
>>> Time to chat with your lawyer and accountant about whether a Corporation or S-Corp is the better fit.
The Bottom Line
Bottom line: don’t find your way into an IRS horror story. DIY file sole props (DBA’s) or LLC’s only on your official local .gov sites.
For anything else, talk to a few lawyers, talk to a few accountants, book a session with your favorite business coach, then get back to doing what you actually love — running your business.
And always — always — double check information with legit sources like the IRS website and your state’s and city’s official .gov pages.
Business is already stressful enough — you don’t need to mess up and add drama!
