Business Entity Types — FAQs

What is the simplest business structure?

A sole proprietorship — you and the business are one, so there is no separate filing beyond your normal tax return and maybe a DBA. The trade-off is unlimited personal liability.

Does an LLC protect my personal assets?

Yes. An LLC is a legal entity separate from you, so business creditors generally cannot reach your home, personal bank accounts, or savings. You still need to keep business and personal money separate to preserve that shield.

What is the 15.3% self-employment tax?

It is the combined Social Security and Medicare tax that self-employed owners pay on net profit. It equals the 12.4% Social Security portion plus 2.9% Medicare, and applies to sole props, partnerships, and default LLC members.

How does an S-Corp reduce self-employment tax?

An S-Corp owner pays themselves a reasonable W-2 salary (hit with payroll tax) and takes the remaining profit as a K-1 distribution, which is not subject to the self-employment portion. The saving appears only on the distributed profit, not the salary.

What counts as a reasonable salary for an S-Corp?

It is what similar work pays in your market — the IRS expects you to pay yourself what you would pay an employee doing the same job. Document it with market data; paying yourself near-zero to dodge payroll tax is a common audit trigger.

Is an S-Corp a type of company I form?

No. It is a tax election (IRS Form 2553) placed on an LLC or corporation you already formed. You keep the same liability shield; only the tax treatment changes.

What is C-Corp double taxation?

The corporation pays 21% federal tax on its profit, then shareholders pay tax again on dividends. An S-Corp avoids this by passing profit through to shareholders untaxed at the entity level.

Why would anyone choose a C-Corp then?

If you reinvest profit in the company, the 21% rate can beat high individual rates, and only a C-Corp can issue preferred stock and accept foreign or institutional capital — which is why VCs require it.

Can an LLC have investors?

An LLC can admit members, but its flexible structure is awkward for venture capital. Most VC-backed startups use a C-Corp because of stock-class and shareholder-limit rules.

When should I switch from an LLC to an S-Corp?

Once net profit is steady and high enough (often around $40,000–$60,000) that payroll and filing cost is less than the self-employment tax saved. Below that, the election usually costs more than it saves.

Do I need an LLC for a side hustle?

Not at first. Many start as a sole proprietorship to test the idea cheaply, then form an LLC once revenue or liability risk makes the shield worth the annual fee.

Are these rules the same in every state?

The federal tax framework is consistent, but state filing fees, franchise taxes, and LLC formalities vary widely. Always check your state's specific requirements.