You're ready to make your business official. You open your state's Secretary of State website. It asks: "What type of entity are you forming?"

LLC? Corporation? S-Corp? Partnership? The options blur together. You close the tab.

Here's the truth: for most founders, the decision is simpler than it looks. You're choosing between two main options: sole proprietorship or LLC. Everything else is either for specific situations or can come later.

Let's break it down.

The Two Options That Matter for Most Founders

Sole Proprietorship: You ARE the Business

A sole proprietorship means there's no legal separation between you and your business. You're one entity.

How it works:

  • Report business income on your personal tax return (Schedule C)
  • Personally liable for all business debts and lawsuits
  • No formal registration required
  • Pay self-employment tax on all profits

Best for:

  • Freelancers and consultants testing an idea
  • Very low-risk businesses (blogging, coaching, design services)
  • Founders validating demand before formalizing

The big downside: No liability protection. If your business gets sued, your personal assets (house, car, savings) are at risk.

LLC (Limited Liability Company): The Sweet Spot

An LLC creates legal separation between you and your business. Most popular structure for small businesses—offers liability protection without corporate complexity.

How it works:

  • File Articles of Organization with your state ($50-$500)
  • Personal assets protected if business gets sued
  • Taxed as "pass-through" entity (profits flow to personal tax return)
  • Can elect S-Corp or C-Corp tax treatment for potential savings

Best for:

  • SaaS businesses handling customer data
  • Ecommerce stores selling physical products
  • Service businesses with employees or contractors
  • Any business with meaningful revenue or risk

Costs: $50-$500 to form, plus annual fees in some states. California charges $800/year franchise tax regardless of revenue.

For most online businesses, LLC is the sweet spot

Affordable, flexible, and protective. Unless you're raising venture capital (need C-Corp) or making $60k+ profit (consider S-Corp election), start with a standard LLC.

Other Structures (for Specific Situations)

Partnership: For Co-Founders

Like a sole proprietorship but with multiple owners.

Types:

  • General Partnership: All partners share liability equally
  • Limited Partnership: Some partners have limited liability (investors)
  • LLP: All partners have limited liability (common for professionals)

Reality check: If you have co-founders, most advisors recommend forming a multi-member LLC instead. Better liability protection and clearer structure.

Corporation (C-Corp or S-Corp)

Separate legal entity from its owners. Most formal and complex structure.

C-Corporation:

  • Can have unlimited shareholders
  • Subject to double taxation (corporation pays tax, then shareholders pay tax on dividends)
  • Required for venture capital funding
  • Best for high-growth startups planning to IPO or sell to large acquirer

S-Corporation:

  • Pass-through taxation (no double taxation)
  • Limited to 100 shareholders (must be US citizens/residents)
  • Potential tax savings on self-employment tax
  • More paperwork than LLC

When S-Corp makes sense: You're profitable ($60k+ annual profit) and want to save on self-employment taxes by paying yourself a salary and taking distributions. Most people elect S-Corp tax treatment while keeping LLC entity structure.

Decision Framework

Your Situation Best Choice
Testing an idea, no revenue yet Sole proprietorship (or just get started)
Making revenue, handling customer data LLC
Co-founders with shared ownership Multi-member LLC
Raising venture capital C-Corporation (Delaware C-Corp specifically)
Profitable ($60k+), want tax savings LLC elected as S-Corp

When to Formalize

You don't need to incorporate on day one. Formalize when:

  • You're making real revenue
  • You sign contracts with customers or vendors
  • You hire people
  • You handle customer data
  • You accept payments online
  • You want credibility
  • You're raising money

You can wait if you're still validating with zero revenue, running a very low-risk side project, or not ready to spend $100-$500 on filing fees.

Quick Comparison

Feature Sole Prop LLC Corporation
Liability Protection None Yes Yes
Setup Cost $0 $50-$500 $100-$800+
Annual Cost $0 $0-$800 $800+
Tax Filing Personal return Personal return Separate return
Complexity Very low Low High

The Bottom Line

If in doubt, form an LLC. It's affordable, flexible, and gives you liability protection. You can always change later.

Most founders overthink this decision. The truth is:

  • If you're just testing: Sole proprietorship is fine
  • If you're committed: LLC
  • If you're raising VC: C-Corp
  • If you're profitable and want tax optimization: LLC elected as S-Corp

Pick one and move forward. Your business structure matters less than actually building and shipping.