Business Entity Selection Guide | Benton Bray PLLC

💡 Important: Choosing the right business entity can save you thousands in taxes annually. This decision impacts liability protection, tax treatment, administrative burden, and future growth options.

Entity Comparison at a Glance

Feature	Sole Proprietor	LLC	S-Corporation	C-Corporation
Liability Protection	✗ None	✓ Yes	✓ Yes	✓ Yes
Self-Employment Tax	15.3% on all profit	15.3% on all profit	Only on W-2 wages	Not applicable
Tax Filing	Schedule C	Schedule C or 1065	Form 1120-S	Form 1120
Pass-Through Taxation	✓ Yes	✓ Yes	✓ Yes	✗ No (double tax)
QBI Deduction (20%)	✓ Yes	✓ Yes	✓ Yes	✗ No
Setup Cost	$0	$200-500	$200-500 + legal	$500-1,500
Annual Compliance	Minimal	Low	Moderate	High
Ownership Restrictions	1 owner only	Unlimited	Max 100, US only	Unlimited
Best For	Side hustles	Small businesses	Profitable businesses	High-growth startups

Detailed Entity Breakdown

Sole Proprietorship

Best for: Side hustles, freelancers, testing business ideas with minimal revenue

✓ Advantages

Easiest and cheapest to start
Complete control
Simple tax filing (Schedule C)
No separate business tax return

✗ Disadvantages

No liability protection
15.3% self-employment tax on all profit
Personal assets at risk
Harder to raise capital

Limited Liability Company (LLC)

Best for: Small businesses, rental properties, consultants wanting liability protection

✓ Advantages

Liability protection for owners
Flexible tax treatment (can elect S-Corp)
Less formality than corporations
Pass-through taxation
Unlimited owners allowed

✗ Disadvantages

15.3% self-employment tax on all profit
State filing fees and annual reports
May need operating agreement
Varies by state regulations

S-Corporation

Best for: Profitable businesses ($60k+ net income) wanting to reduce self-employment tax

✓ Advantages

Save on self-employment tax (only pay on wages)
Liability protection
Pass-through taxation (no double tax)
QBI deduction eligible
Can be LLC or Corporation

✗ Disadvantages

Must run payroll and pay "reasonable" salary
More compliance (separate tax return)
Max 100 shareholders, US residents only
One class of stock only
Higher accounting costs

C-Corporation

Best for: High-growth startups seeking venture capital, businesses planning to go public

✓ Advantages

Unlimited shareholders, foreign investors OK
Multiple classes of stock
Easier to raise capital
21% flat corporate tax rate
More fringe benefit options

✗ Disadvantages

Double taxation (corporate + personal)
Most complex and expensive
Extensive compliance requirements
Board of directors required
No QBI deduction