Updated January 2025 | By Jake Lawson
Let me guess—you’re sitting there with three business structure options swirling around in your head, and every article you’ve read makes them sound equally viable. Well, I’m about to save you a lot of time and potential heartache.
After guiding over 1,200 entrepreneurs through business formation decisions, I can tell you this upfront: for 95% of new business owners, an LLC is the clear winner. But let me explain why, because understanding these differences isn’t just academic—it could literally save your house, your car, and your life savings.
I’m Jake Lawson, and I’ve been in the business formation trenches for 15 years. I’ve seen entrepreneurs make brilliant structure choices that set them up for success, and I’ve watched others pick the wrong entity and pay for it dearly. Today, I’m giving you the straight story—no legal jargon, no theoretical nonsense, just real-world guidance from someone who’s seen it all.
The Bottom Line First (Because You’re Busy)
LLC: Best choice for 95% of new businesses. Protects your personal assets, avoids double taxation, flexible management structure.
Sole Proprietorship: Never recommended. Zero asset protection, unlimited personal liability. It’s essentially running your business naked in a legal thunderstorm.
Corporation: Complex, expensive, double taxation issues. Good for companies raising millions in investment or going public. Overkill for most entrepreneurs.
Now let me break down why these conclusions aren’t just opinions—they’re based on real-world consequences I’ve witnessed firsthand.
Sole Proprietorship: The “Structure” That Isn’t a Structure
Let’s start with the scariest option first. A sole proprietorship isn’t actually a business structure—it’s what happens when you don’t choose a structure.
What It Really Means
When you operate as a sole proprietor, you ARE your business in the eyes of the law. There’s no separation between Jake Lawson the person and Jake Lawson the business consultant. None. Zip. Zero.
Here’s the brutal reality: If your business gets sued, your personal assets are fair game. Your house, your car, your savings account, your kid’s college fund—all of it can be seized to pay business debts.
The “It Won’t Happen to Me” Trap
I’ve heard this countless times: “Jake, I’m just doing freelance graphic design from home. Who’s going to sue me?”
Let me tell you about Sarah, a freelance photographer I worked with. She thought the same thing. Then a client claimed her photos violated someone else’s copyright. The lawsuit was frivolous, but defending it cost $15,000 in legal fees. As a sole proprietor, that came directly out of her personal bank account.
Real-world liability scenarios that happen more than you think:
- Client claims your work caused them financial loss
- Someone gets injured visiting your home office
- You accidentally use copyrighted material
- A subcontractor you hired causes damage
- You miss a deadline and the client loses a major deal
- Data breach exposes customer information
The Tax “Advantage” That Isn’t
People often say sole proprietorships have “simple taxes.” That’s like saying getting punched in the face is “simple pain management.” Sure, you file everything on your personal return, but you’re also paying self-employment tax on every dollar of profit—15.3% right off the top.
My verdict: Sole proprietorship is never the right choice. The minimal paperwork savings aren’t worth risking everything you own.
Corporation: The Structure Most People Don’t Actually Need
Corporations aren’t bad—they’re just designed for a completely different type of business than most entrepreneurs are starting.
What Corporations Are Really For
Corporations make sense when you need to:
- Raise significant investment capital ($1M+)
- Go public through an IPO
- Have dozens or hundreds of employees
- Operate in heavily regulated industries
- Plan for multiple rounds of investor funding
Think: Google, Microsoft, your local bank, McDonald’s.
Don’t think: Your consulting business, online store, or service company.
The Double Taxation Nightmare
This is where corporations get expensive fast. Here’s how it works:
- Corporation pays taxes on its profits (corporate tax rate)
- You pay taxes again when those profits are distributed to you as dividends
- You effectively get taxed twice on the same money
Real example: Corporation makes $100,000 profit. Pays $21,000 in corporate taxes (21% rate). Distributes remaining $79,000 to you. You pay another $15,800 in personal taxes (20% dividend rate). Total taxes: $36,800 on $100,000 profit.
Compare that to an LLC where you’d pay taxes once at your personal rate—probably saving $10,000+ per year.
The Administrative Burden
Corporations require:
- Board of directors meetings (yes, even if it’s just you)
- Corporate resolutions for major decisions
- Stock certificates and ownership records
- Annual meetings with documented minutes
- Corporate officers (President, Secretary, etc.)
- Strict separation between personal and business finances
Miss any of these requirements, and you could lose your liability protection anyway.
My experience: I’ve seen single-person corporations spend $2,000+ annually just on compliance paperwork. That money is better invested in growing your business.
LLC: The Goldilocks Solution That’s “Just Right”
LLCs were specifically created to solve the problems with sole proprietorships and corporations. They’re the business structure equivalent of getting the best of both worlds without the downsides.
Liability Protection That Actually Works
Unlike sole proprietorships, LLCs create a legal wall between your personal assets and business liabilities. When someone sues your LLC, they can only go after business assets—not your house, car, or personal savings.
Real protection example: My client Tom runs a small construction LLC. A homeowner sued him claiming his work caused foundation damage. The lawsuit was settled for $50,000, but it came from the LLC’s insurance and business assets. Tom’s personal house and retirement accounts were completely protected.
Pass-Through Taxation (No Double Tax)
LLCs use “pass-through taxation,” meaning:
- LLC doesn’t pay corporate taxes
- Profits and losses “pass through” to your personal tax return
- You pay taxes once at your personal rate
- No dividend taxes or corporate tax returns
Tax simplicity: Most single-member LLCs just add a Schedule C to their personal tax return. That’s it.
Management Flexibility
Unlike corporations, LLCs don’t require:
- Board meetings or corporate resolutions
- Stock certificates or shareholder meetings
- Rigid management hierarchies
- Annual compliance rituals
You decide: How the LLC is managed, who makes decisions, how profits are distributed. It’s all spelled out in your Operating Agreement.
Growth-Friendly Structure
As your business grows, LLCs can adapt:
- Add members (owners) easily
- Change management structure
- Elect different tax treatment (like S-Corp taxation)
- Convert to other entity types if needed later
The Real-World Decision Matrix
Here’s how I help clients choose based on their actual situations:
Choose LLC If You:
- Want liability protection for your personal assets
- Don’t want to deal with corporate formalities
- Plan to keep most profits in the business initially
- Might want to add partners or investors later
- Want flexibility in management and taxation
- Are starting any service business, online business, or most retail businesses
Choose Corporation If You:
- Are raising significant investment capital (think Silicon Valley startup)
- Plan to go public within 5-10 years
- Need to attract institutional investors
- Are in a heavily regulated industry that requires corporate structure
- Have specific tax reasons (rare, and you’d know this from your CPA)
Never Choose Sole Proprietorship If You:
- Have any assets worth protecting (house, savings, etc.)
- Interact with customers, clients, or vendors
- Have any business that could conceivably be sued
- Want to be taken seriously by banks, vendors, or customers
State-by-State Considerations
Not all states treat business entities equally. Here’s what matters:
Tax-Friendly LLC States
- Wyoming: No state income tax, low fees
- Nevada: No state income tax, strong privacy protections
- Delaware: Business-friendly courts, but higher costs
- Florida: No state income tax, reasonable fees
States to Consider Carefully
- California: $800 minimum annual tax for LLCs
- New York: High filing fees and ongoing costs
- New Jersey: Complex tax requirements
My advice: Don’t get cute trying to save a few hundred dollars by forming in a different state than where you live and operate. The complications usually cost more than the savings.
The International Entrepreneur Angle
As someone who works with entrepreneurs from 40+ countries, I get this question a lot: “Jake, I’m not a U.S. citizen. Can I still form an LLC?”
Answer: Yes, and you should.
Why LLCs work for international entrepreneurs:
- No citizenship or residency requirements
- Provides liability protection for global operations
- Allows access to U.S. banking and payment systems
- Creates credibility with U.S. customers and partners
- Offers potential tax advantages depending on your situation
Special considerations:
- You’ll need an ITIN or SSN for tax purposes
- Banking can be more complex but definitely doable
- Some states are more foreigner-friendly than others
- Consider hiring a formation service experienced with international clients
Industry-Specific Guidance
Some industries have special considerations:
Professional Services (Lawyers, Doctors, CPAs)
- May require Professional LLC (PLLC) formation
- Licensing requirements vary by state
- Some states don’t allow certain professionals to use LLCs
Real Estate Investment
- LLCs are perfect for holding rental properties
- Provides liability protection for each property
- Can elect different tax treatment as portfolio grows
E-commerce and Online Businesses
- LLCs provide protection against product liability claims
- Necessary for payment processor relationships
- Required by most business insurance policies
Consulting and Freelancing
- LLC protects against professional liability claims
- Provides business credibility with corporate clients
- Allows for easier business banking and bookkeeping
The S-Corp Election: LLC’s Secret Weapon
Here’s where LLCs get really smart. Once your LLC is profitable, you can elect to be taxed as an S-Corporation without changing your entity structure.
How S-Corp Taxation Works
- Reduces self-employment taxes on profits above your salary
- You become an employee of your own LLC
- Must pay yourself a “reasonable salary”
- Only the salary portion is subject to payroll taxes
When It Makes Sense
Rule of thumb: Consider S-Corp election when your LLC profit consistently exceeds $70,000+ per member.
Example: LLC makes $100,000 profit. Instead of paying 15.3% self-employment tax on the full amount ($15,300), you pay yourself a $60,000 salary (subject to payroll taxes) and take the remaining $40,000 as distributions (no self-employment tax). Savings: approximately $6,000 annually.
The catch: Added complexity, payroll requirements, and administrative costs. But for many growing LLCs, the tax savings are worth it.
Formation Costs: What You’ll Actually Pay
Let’s talk real numbers, because this affects your decision:
Sole Proprietorship
- Formation cost: $0 (you just start operating)
- Ongoing costs: Business licenses, potential DBA filing
- Hidden costs: Unlimited liability exposure, higher insurance premiums
LLC
- State filing fees: $50-500 depending on state
- Registered agent: $100-150/year if you hire one
- Operating Agreement: Free templates available or $200-500 for professional drafting
- Annual fees: $0-800/year depending on state
Corporation
- State filing fees: $100-500 depending on state
- Registered agent: $100-150/year
- Corporate kit and bylaws: $200-500
- Annual compliance: $500-2,000+ for professional help
- Tax preparation: $800-3,000+ annually
My take: The few hundred dollars extra to form an LLC instead of operating as a sole proprietor is the best insurance policy you’ll ever buy.
Common Myths I’m Tired of Hearing
Myth 1: “LLCs Are Too Complicated for Small Businesses”
Reality: LLC formation takes 30 minutes online. Ongoing requirements are minimal.
Myth 2: “Sole Proprietorships Have Better Tax Benefits”
Reality: LLCs have the same tax treatment as sole proprietorships, plus liability protection.
Myth 3: “You Need a Lawyer to Form an LLC”
Reality: Most states have simple online filing. Formation services can handle it for under $300 total.
Myth 4: “Corporations Are More Professional”
Reality: Fortune 500 companies increasingly use LLC structures. It’s about what works, not what sounds fancy.
Myth 5: “I Don’t Need Liability Protection for My Type of Business”
Reality: Everyone thinks this until they get sued. Better to have protection and not need it.
Red Flags: When People Make Bad Choices
I’ve seen these mistakes repeatedly:
The Penny-Wise, Pound-Foolish Mistake
Choosing sole proprietorship to save $300 in LLC formation costs, then losing $50,000 in a lawsuit that would have been covered by LLC protection.
The Premature Corporation
Forming a corporation because it “sounds more professional,” then spending $5,000+ annually on unnecessary compliance and double taxation.
The Wrong State Formation
Forming in Delaware because “that’s where big companies incorporate,” despite living and operating in California, resulting in double filing requirements and higher costs.
The DIY Disaster
Trying to form a corporation without understanding the ongoing requirements, losing liability protection due to non-compliance.
Making the Decision: Your Action Plan
Here’s how to choose the right structure for your situation:
Step 1: Assess Your Risk
- What’s your potential liability exposure?
- Do you have personal assets worth protecting?
- What industry are you in?
Step 2: Consider Your Goals
- How big do you want to grow?
- Will you need investors?
- Do you want maximum simplicity or planning flexibility?
Step 3: Run the Numbers
- What are the formation and ongoing costs in your state?
- How much are you likely to earn in year one?
- What’s your expected growth trajectory?
Step 4: Plan for the Future
- Structure changes are possible but expensive
- Start with what makes sense now
- Don’t over-engineer for hypothetical future scenarios
The International Perspective
Working with entrepreneurs globally has taught me that business structures aren’t just about liability and taxes—they’re about credibility and access.
Why U.S. LLCs Matter Globally
- Opens doors to U.S. banking system
- Provides credibility with international partners
- Allows participation in U.S. payment systems (Stripe, PayPal, etc.)
- Creates legal presence for U.S. business activities
Common International Mistakes
- Assuming home country structure is sufficient for U.S. operations
- Not understanding U.S. tax obligations
- Choosing the wrong state for international business
- Underestimating banking and compliance requirements
Technology and Modern Business Structures
The digital economy has changed how we think about business structures:
Online Business Considerations
- E-commerce platforms often require formal business entities
- Digital products create global liability exposure
- Subscription models need formal business structure for banking
- International sales complicate tax obligations
Remote Work Impact
- More businesses operating across state lines
- Nexus rules for taxes and registration
- Home office liability considerations
- International team members and compliance
The Bottom Line: My Recommendation
After 15 years and over 1,200 clients, here’s my advice:
For 95% of new business owners: Form an LLC.
It provides the liability protection you need, the tax efficiency you want, and the flexibility to grow. The minimal additional cost compared to sole proprietorship is the best investment you’ll make in your business.
The exception: If you’re launching the next Facebook and already have investors lined up, consider a corporation from day one. Otherwise, start with an LLC and convert later if needed.
Taking Action: What to Do Next
If You Choose LLC (Recommended)
- Pick your state (usually where you live and operate)
- Choose a registered agent (yourself or a service)
- File Articles of Organization online
- Get an EIN from the IRS (free)
- Draft an Operating Agreement (templates available)
- Open a business bank account
Formation Service Recommendations
I’ve tested all the major formation services. For most people, I recommend:
- Northwest Registered Agent: Excellent service, fair pricing, no upsells
- ZenBusiness: Good for basic formation, watch for add-on costs
- Avoid: LegalZoom (overpriced), Incfile (aggressive upselling)
Professional Help When You Need It
- Accountant: For tax planning and ongoing compliance
- Attorney: For complex ownership structures or high-risk businesses
- Formation Service: For standard LLC formation and registered agent services
Final Thoughts: The Structure That Grows With You
The beautiful thing about LLCs is they can evolve as your business grows. Start simple, then add complexity only when it makes financial sense.
I’ve seen entrepreneurs agonize over business structure decisions for months. Don’t be one of them. For most businesses, LLC is the clear choice. Form it, focus on growing your business, and adjust as needed later.
Remember: The best business structure is the one that protects your assets, minimizes your taxes, and doesn’t get in the way of building your business. For most entrepreneurs, that’s an LLC.
Frequently Asked Questions
Can I change my business structure later?
Yes, but it’s not always simple or cheap. Converting from sole proprietorship to LLC is straightforward. Converting between LLCs and corporations can involve tax consequences and additional costs. It’s better to choose correctly upfront.
What if I want to add partners later?
LLCs make this easy. You can add members by amending your Operating Agreement. Sole proprietorships would need to convert to a partnership or LLC. Corporations require issuing new stock and updating corporate documents.
Do I need a business license regardless of structure?
Business licenses are separate from business structure. You might need federal, state, or local licenses depending on your industry and location. Your entity choice (LLC vs. corporation) doesn’t typically affect licensing requirements.
Can I deduct business expenses with each structure?
Yes, all business structures allow legitimate business expense deductions. The difference is how and where you report them on your tax returns.
What about workers’ compensation and business insurance?
These requirements are typically based on having employees or operating in certain industries, not your business structure. However, having a formal business entity (LLC or corporation) often makes it easier to obtain business insurance.
Can foreign nationals form U.S. LLCs?
Yes, there are no citizenship or residency requirements for LLC ownership in most states. However, tax obligations and banking can be more complex for non-U.S. persons.
Ready to form your LLC? I’ve negotiated special pricing with the formation services I recommend most. Check out my top picks and get your business protected today.
Still have questions about choosing your business structure? Email me at [Jake’s email]. I personally read and respond to every message, usually within 24 hours.
Remember: Choosing your business structure isn’t just a legal formality—it’s one of the most important decisions you’ll make as an entrepreneur. Choose wisely, but don’t let the decision paralyze you. The cost of inaction is almost always higher than the cost of taking imperfect action.