Which Business Structure Is Right for You?

We hear some version of this all the time: “I formed an LLC, so now I’m saving on taxes.” Usually, they’re not. Same tax bill as before, plus a state filing fee.

Picking a business structure is one of the first real decisions you make as an owner, and the S corp vs LLC question trips up more freelancers, consultants, and creators than almost anything else. Most people choose based on a comment thread or a friend’s advice instead of their actual goals.

That’s how you end up overpaying, underprotected, or buried in paperwork you never needed.

Here’s the step-by-step framework we use with clients at BizBud. It covers sole proprietorships, partnerships, LLCs, S-Corps, C-Corps, and nonprofits, so you can pick the structure that fits where your business is right now.

Step 1: Start With Your Goal

Before you file anything with your state, ask yourself one blunt question: what am I actually trying to do here?

Every structure solves a different problem. Some give you liability protection. Others are built to optimize your tax bill. A few exist mainly to make bringing in investors easier.

Most decisions come down to three tradeoffs:

• Simplicity: how much paperwork, filing, and ongoing maintenance you’re signing up for
• Liability protection: whether your personal assets are walled off from business problems
• Tax efficiency: how much of your profit actually stays in your pocket

You rarely get all three at once, at least not at the beginning.

But that’s fine. Your structure isn’t permanent. You can start simple and upgrade as your income and risk grow, which is exactly what we recommend for most people.

Goal first, paperwork second.

Step 2: Understand the Default, Sole Proprietorship

You might already have a business structure and not even know it.

The moment someone pays you for work — you start driving for a rideshare app, get hired to shoot photos, take on a design project on the side — you’re a sole proprietor by default. No filing, no forms, no fees.

That flexibility is the whole appeal. Open a bank account in your own name, or use one you already have, and start collecting.

The catch: zero liability protection

A sole proprietorship gives you no asset protection at all. You and the business are legally the same person.

Picture this. You’re a wedding photographer, and the bride hates how she looks in your photos. She decides to sue. If you own a house, a car, or an investment account, those personal assets are fair game, because nothing separates them from your business.

The tax side

From a tax perspective, sole proprietors pay the full self-employment tax, which covers Social Security and Medicare. That’s 15.3% on top of your federal income tax.

So if you net $100,000 as a sole proprietor, you’re paying federal income tax plus that self-employment tax. Not exactly optimized.

You report all of this on Schedule C of your Form 1040. If you file yourself in tax software, you add Schedule C, list your revenue and expenses, and that’s where your business income lives.

The most common pitfall we see

Sole proprietor is the most common setup we see when new clients come to us. It’s also where the worst habits form.

Because it’s so easy, a lot of people commingle funds. An online coach gets paid, the money lands in their everyday account, and it immediately goes toward personal spending. Business money, personal purchases, same account.

Keep business and personal expenses separate, even as a sole proprietor, for two reasons:

1. Recordkeeping gets dramatically easier. You won’t spend December digging through a year of mixed transactions trying to figure out what was what.
2. You’re ready for the next step. When it’s time to form an entity, you already have a business account and clean habits in place.

Our rule of thumb: stay a sole proprietor until you hit roughly $50,000 to $60,000 in net income. Then start looking at an entity.

Pro tip: Open a separate checking account for your business this week, even if you’re nowhere near that threshold. It costs you almost nothing and saves you a headache later.

Step 3: Know When a Partnership Makes Sense

Partnerships get tricky fast, so we’ll keep this practical.

There are a few flavors. You’ll typically see a general partnership, a limited partnership, and sometimes a limited liability partnership. Each one splits control and liability differently.

A general partnership is basically a sole proprietorship with two or more owners. Say two friends decide to start doing taxes together and split the fees. If they don’t register anything, they’re general partners by default, and just like a sole proprietor, they get no asset protection.

So why would anyone choose it on purpose?

Rental real estate is one place we’ve seen it work. Two buddies want to buy a property without registering an entity anywhere. They pick a simple partnership name, something like “CZ Partners” for two people with those initials, and buy the house under that name. When someone looks up the deed, they see CZ Partners and not two personal names.

But understand what that is. Privacy, not protection.

A determined person can still find out who’s behind it. It’s just an added layer. And because general partners are personally exposed, most people buying property together end up in an LLC instead.

Pro tip: If you’re going into business with anyone, put your agreement in writing on day one. Handshake partnerships are where friendships go to die.

Step 4: The LLC Myth, Protection Not Tax Savings

This is the misconception we correct most often.

An LLC, or limited liability company, is a legal entity you form with your state. Its main job is liability protection. It separates your personal assets from your business, so if that unhappy bride sues, she’s generally going after the business and not your house.

Tax savings? That’s a different story.

By default, the IRS disregards a single-member LLC for tax purposes. You still file Schedule C. You still pay the same 15.3% self-employment tax on your profit. A multi-member LLC is taxed like a partnership by default, which works the same basic way.

So forming an LLC changes your legal situation, not your tax situation.

That’s not a knock on LLCs. Liability protection is worth a lot, especially if you work with clients in person, sign contracts, or carry real risk.

But the protection only holds up if you treat the LLC as a separate thing. Commingle funds, pay your personal bills from the business account, skip the basic formalities, and a court can pierce the veil, which means treating you and the LLC as one and the same again.

How Much Does It Cost to Start an LLC?

It depends on your state, and the range is wide. Your main costs usually include:

• State filing fee to form the LLC, which varies a lot from state to state
• Annual or biennial fees and reports that some states charge just to keep the LLC active
• Registered agent fees if you hire a service to receive legal documents for you
• Operating agreement drafting, which you can do yourself or have an attorney prepare

Watch out for formation companies that bundle a pile of add-ons into a premium package. Most single-owner service businesses need far less than they’re sold.

Pro tip: Check your state’s annual fee before you form, not after. In some states, the ongoing cost matters more than the setup cost.

Step 5: S Corp vs LLC, and When an S-Corp Election Pays Off

When people compare structures, they often treat an S-Corp as a separate kind of business. It isn’t.

An S-Corp is a tax election, not an entity type. An LLC or a corporation files with the IRS to be taxed as an S corporation. Your legal structure stays the same, while the way you pay taxes changes.

How the savings work

As an S-Corp owner who works in the business, you pay yourself a salary through payroll. That salary gets the usual payroll taxes withheld, which covers Social Security and Medicare.

Profit above that salary can come out as distributions, and distributions aren’t hit with self-employment tax. That gap is where the savings live.

Why forming an S-Corp too early backfires

An S-Corp comes with real costs and responsibilities:

• Running payroll for yourself, often through a payroll provider
• Filing a separate business tax return every year
• Tighter bookkeeping, because sloppy books don’t fly here
• Professional fees for someone who actually knows S-Corp rules

At a low income level, those costs can eat every dollar you’d save. We regularly meet people who elected S-Corp status because someone online told them to, then spent more on compliance than they saved in taxes.

And then there’s reasonable compensation. The IRS expects your salary to reflect what you’d pay someone else to do your job. Paying yourself a tiny salary and taking everything else as distributions is a well-known red flag, and it’s exactly the kind of thing that invites scrutiny.

When to start the conversation

Once your net income is consistently past that $50,000 to $60,000 range, it’s time to run the numbers on moving into an entity. For many service businesses, that means an LLC, and then a serious look at whether an S-Corp election pays off for you specifically.

S Corp vs C Corp: When Investors Enter the Picture

In the S corp vs C corp comparison, both are corporations for tax purposes, but they treat profit very differently.

An S-Corp is a pass-through. The business generally doesn’t pay income tax itself. Profit flows through to your personal return, and you pay tax there.

A C-Corp pays its own tax. The corporation is taxed on its profit, and then shareholders are taxed again when that profit is paid out as dividends. That’s the famous double taxation.

So why would anyone choose a C-Corp? Investors, mostly.

If you plan to raise money from venture capital or outside investors, a C-Corp is usually the expected structure. It can issue different classes of stock, bring in a large number of shareholders, and keep earnings inside the company to fund growth.

S-Corps, by contrast, come with ownership restrictions: a cap on the number of shareholders, limits on who can be one, and generally only one class of stock. Owners typically need to be U.S. citizens or residents, which matters a lot for foreign entrepreneurs, since nonresidents generally can’t hold S-Corp shares at all.

But for a freelancer, consultant, or local service business with no plans to raise capital, a C-Corp is usually overkill. Two layers of tax, more formalities, and little upside.

Step 6: Don’t Treat a Nonprofit as a Tax Hack

Nonprofits exist for a mission, not for owners to profit.

A nonprofit can qualify for tax-exempt status, but it has to apply with the IRS and follow strict rules about how money is used. Nobody owns it in the traditional sense, and nobody pulls profits out the way a business owner would.

Is it right for you? Only if your goal is genuinely charitable, educational, or community-driven.

People do sometimes ask about it as a way to shelter a regular business. That isn’t what it’s for, and it doesn’t work that way.

But if you’re building something mission-first, like a community program or a charitable cause, a nonprofit can be exactly the right fit. Just go in knowing that governance, reporting, and compliance are serious obligations, well beyond a quick tax trick.

Business Structures Side by Side

Step 7: Match the Structure to Your Business

Here’s the decision tree we walk clients through. Work it top to bottom and stop at the first yes.

1. Are you raising money from outside investors? Look at a C-Corp.
2. Is your goal a mission and not profit? Look at a nonprofit.
3. Is your net income consistently above $50,000 to $60,000? Move into an LLC and evaluate an S-Corp election.
4. Do you carry real liability risk, like in-person clients or physical work? Form an LLC, even before you hit that income range.
5. None of the above? Stay a sole proprietor, with a separate business bank account.

What that looks like in real life

• Freelance designer just getting started: Sole proprietor. Separate account, clean books, revisit as income grows.
• Wedding photographer: Liability is real here, so an LLC early on makes sense, paired with solid business insurance.
• Consultant or coach past the income threshold: LLC, then sit down with a tax pro to see whether S-Corp status actually pays off.
• Small service business with a team: You’re running payroll anyway, which makes an LLC with an S-Corp election a natural fit for many owners.
• Two friends buying a rental property: An LLC usually beats a general partnership, since you get the privacy plus actual protection.
• Startup planning to raise capital: C-Corp, almost always.

What if you fit more than one? Go with whichever answer protects you most at your current stage, then reassess every year.

Step 8: Lock In the Compliance Basics

Choosing a structure is the easy part. Keeping it clean is where most owners slip.

No matter which route you pick, nail these:

• Separate bank accounts. Business money in, business expenses out. Personal spending never touches it.
• An operating agreement. Even single-member LLCs should have one. It documents how the business runs and strengthens your liability protection.
• Payroll, if you’re an S-Corp. Your salary runs through payroll with taxes withheld, on a regular schedule, not whenever you remember.
• Reasonable compensation. Pay yourself a salary you could defend if the IRS asked.
• Monthly bookkeeping. Reconcile every month instead of cramming everything into tax season.
• State filings. Mark your annual report and fee deadlines on the calendar so your entity stays in good standing.

These aren’t bureaucratic busywork. They’re what makes your liability protection and tax savings actually hold up when it counts. Skip them, and you’ve paid for an LLC that behaves like a sole proprietorship.

The Process in a Nutshell

1. Start with your goal. Simplicity, protection, tax efficiency, or investors.
2. Sole proprietor is the default. Flexible and free, but no protection and the full 15.3% self-employment tax.
3. General partnerships offer privacy, not protection.
4. An LLC protects your assets. On its own, it doesn’t lower your taxes.
5. An S-Corp is a tax election. It can save real money once profit is high enough, but it brings payroll and reasonable compensation rules.
6. C-Corps are built for investors. Expect double taxation in exchange.
7. Nonprofits are for missions, not tax shortcuts.
8. Compliance is what makes it all work.

So what should you do first? Open a separate business bank account today, if you haven’t already. It’s the one move that helps you no matter which structure you end up choosing.

Then, once your net income is approaching that $50,000 to $60,000 range, talk to someone who can run your actual numbers. That’s exactly what we do at BizBud: we look at your income, your risk, and your goals, and help you pick the structure that saves you money without burying you in paperwork you don’t need.

About The Author:

Cameron Botes is the founder of BizBud, a tax and accounting firm built for content creators, influencers, digital nomads, and entrepreneurs building businesses across borders. A former professional soccer player across four continents, Cameron brings the same discipline, preparation, and pressure-tested execution from his athletic career into helping business owners plan ahead, stay compliant, and keep more control over their financial future.

Since founding BizBud in 2020, Cameron has grown the firm from a one-person practice into a team of CPAs and tax advisors serving hundreds of clients across the U.S. and around the world. With an MBA in finance and accounting, international business experience, and a team with backgrounds at firms like PwC, Deloitte, and EY, Cameron helps creators and founders simplify taxes, clean up their books, and build smarter systems so they can focus on the work they actually love.

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