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Vol. II · Chapter 02 · The Entities

Six ways
to be a business.

LLC, S-corp, C-corp, sole prop, partnership, nonprofit. Each trades liability, taxation, ownership, and paperwork in a different way. We'll tell you which one you need — honestly, and without an affiliate lean.

6
primary entity types
2.3M
LLCs formed per year
$0–$875
setup cost range
3
tax treatments
Jump to →
SP
Sole Prop
GP
Partnership
LLC
LLC ★
S
S-Corp ★
C
C-Corp ★
NP
Nonprofit
Figure 01 · How each one taxes you

The real difference between entities is where the tax knife cuts.

Forget "pick an LLC for simplicity, a C-corp for growth." The actual decision is about how money flows from your business into your pocket — and how much the IRS takes on the way.

Pass-through
Sole prop · Partnership · LLC · S-corp
Business revenue
$100
Business expenses
−$30
Profit to owner
$70
Personal income tax
≈ −$20
You keep
≈ $50
Taxed once
At your personal rate only.
Double taxation
C-Corporation
Business revenue
$100
Business expenses
−$30
Profit at corp
$70
Corporate tax (21%)
−$15
Dividend to you
$55
Dividend tax (15–20%)
−$10
You keep
≈ $45
Taxed twice
Once at the corporation. Again when distributed.
Tax-exempt
Nonprofit (501c3)
Donations + grants
$100
Program expenses
−$80
Reserves
$20
Federal tax
$0
Mission output
$100
Not taxed
Revenue serves the mission. No owner takes profit.

Numbers are illustrative. Actual liability depends on state tax, entity basis, distributions, and a dozen other things your CPA gets paid to know.

Editor's TL;DR

Pick your entity in 30 seconds.

There is almost always one obvious answer for your situation. Here's the decision tree we'd walk a friend through, without the affiliate incentives.

— The Incorporator Desk

If
You earn under $40k/yr from a side hustle
→ Then
Sole proprietorship.
Why
Adding an LLC is overhead until the liability or income is real. File a Schedule C and revisit in 18 months.
If
You're freelancing full-time or own any real estate
→ Then
LLC.
Why
Personal-asset protection kicks in the moment a client or tenant decides to sue you. $100 once-and-forever is a bargain.
If
You're a profitable LLC clearing >$80k/yr in active income
→ Then
LLC + S-corp election.
Why
Pay yourself a reasonable salary, take the rest as distributions. Saves 15.3% SE tax on the distribution portion. Do the math with your CPA.
If
You've signed a term sheet or are raising from VCs
→ Then
Delaware C-corp.
Why
Investors don't negotiate on entity type — they want standardized docs, preferred stock, and a board. The $300/yr franchise tax is a rounding error.
If
You're 2+ people running a passion project for good
→ Then
Nonprofit (501c3).
Why
Only worth the 3–12 month IRS wait if you need grants and tax-deductible donations. For a mission-driven LLC, there's no reason to give up equity.
If
You want the simplest, cheapest, most flexible entity
→ Then
LLC.
Why
Default answer for ~80% of new U.S. businesses. You can elect S-corp later. You can convert to C-corp later. You can dissolve for $50. Start here.
Chapter 02 · The six entities

One at a time, in plain English.

Every entity is a bundle of four things: liability, taxation, ownership rules, and paperwork burden. Here's how each one packages them.

SP
Entity 01 of 06

Sole Proprietorship

The default. You are the business.

If you're earning money as yourself and haven't filed anything, you're a sole proprietor. It's free. It offers no liability protection. It's what most side hustles start as.

Advantages
  • + Free to start
  • + No paperwork
  • + Simple taxes (Schedule C)
  • + Full control
Trade-offs
  • − Unlimited personal liability
  • − Harder to raise money
  • − Self-employment tax on every dollar
  • − Dies when you do
“Fine for a weekend lemonade stand. Not fine if a customer can sue you.”
★ Editor's take
Sole Prop at a glance
Setup cost
$0–$50
DIY possible
Setup time
0 days
Liability shield
None
Taxation
Personal (Schedule C)
Ownership
1 owner only
Formalities
None
Fundraise-ready
Not possible
✗
★ Best for

Side hustles, freelancers testing an idea.

Avoid if

You have real liability exposure or expect >$50k in profit.

GP
Entity 02 of 06

General Partnership

Two or more people, no paperwork filed.

A partnership forms automatically when 2+ people do business together without filing anything. Every partner is personally liable for what every other partner does. Rarely the right choice.

Advantages
  • + No filing fees
  • + Pass-through taxation
  • + Simple profit-sharing
Trade-offs
  • − Each partner is liable for all partner debts
  • − Every partner can bind the partnership
  • − Disagreements end businesses
  • − No separation between you and the entity
“An LLC costs $50–$500 once and solves the entire liability problem. There's no reason to be a general partnership in 2026.”
★ Editor's take
Partnership at a glance
Setup cost
$0–$50
DIY possible
Setup time
0 days
Liability shield
None (joint + several)
Taxation
Pass-through (K-1s)
Ownership
2+ partners
Formalities
Partnership agreement recommended
Fundraise-ready
Limited
✗
★ Best for

Two spouses running a cash-based side business.

Avoid if

Your partner has questionable judgement or deep pockets you'd rather not share.

LLC
Entity 03 of 06
★ Popular

Limited Liability Company

The modern default. Liability protection with tax flexibility.

The LLC is America's most-formed entity — roughly 2.3M new ones per year. It gives you personal-asset protection, pass-through taxes by default, and almost no ongoing formalities. For most small businesses, this is the right answer.

Advantages
  • + Personal-asset protection
  • + Pass-through taxation (no double tax)
  • + Tax-election flexibility (S-corp, C-corp)
  • + Minimal ongoing paperwork
  • + Fits almost every use case
Trade-offs
  • − Self-employment tax on all profit (without S-election)
  • − Banks occasionally ask for personal guarantees
  • − Not the standard vehicle for venture capital
“If you're asking whether you need an LLC, you need an LLC. Start here.”
★ Editor's take
LLC at a glance
Setup cost
$35–$500
state filing fees
Setup time
1–10 days
Liability shield
Full (personal assets protected)
Taxation
Pass-through by default (can elect S or C)
Ownership
1+ members
Formalities
Operating agreement + annual report
Fundraise-ready
Limited (not VC-standard)
✓
★ Best for

Freelancers, consultancies, small agencies, holding property, most e-commerce.

Avoid if

You're raising priced venture rounds — VCs strongly prefer C-corps.

S
Entity 04 of 06
★ Popular

S-Corporation

A tax election, not an entity. Shrinks your self-employment tax bill.

An S-corp isn't an entity — it's a tax election filed on IRS Form 2553 by an existing LLC or C-corp. It lets profitable owners pay themselves a "reasonable salary" and take the rest as distributions, avoiding self-employment tax on the distribution portion.

Advantages
  • + Can save thousands in self-employment tax annually
  • + Pass-through taxation (no double tax)
  • + Inherits liability protection from underlying LLC/C-corp
  • + Legitimizes owner as "employee" for benefit plans
Trade-offs
  • − Must run real payroll (costs $400–$1,200/yr)
  • − IRS "reasonable salary" scrutiny
  • − 100-shareholder cap + US-residents only
  • − Only one class of stock allowed
“The math usually works once you're clearing $80k in self-employment profit. Below that, the payroll overhead eats the savings.”
★ Editor's take
S-Corp at a glance
Setup cost
$35–$500
state filing fees
Setup time
1–10 days + election
Liability shield
Full (inherits from LLC/C-corp)
Taxation
Pass-through, with payroll
Ownership
1–100 US citizens/residents only
Formalities
Payroll, reasonable-salary rule, Form 1120-S
Fundraise-ready
Limited by shareholder rules
✗
★ Best for

Profitable LLCs earning >$80k/yr from active work (not investment).

Avoid if

Your profit is under $50k, you have non-US owners, or you plan to raise VC.

C
Entity 05 of 06
★ Popular

C-Corporation

The venture-backed startup default. Shares, stock options, board.

A C-corp is the standard entity for raising venture capital. Its shares can be sliced into preferred and common classes, issued as options, and owned by foreign investors — all features VCs require. The trade-off is double taxation and real governance overhead.

Advantages
  • + The entity VCs actually fund
  • + Multiple stock classes (preferred + common)
  • + Unlimited shareholders, including foreign
  • + QSBS (§1202) can exempt $10M+ in gains
  • + Stock options for employees
Trade-offs
  • − Double taxation on distributed profits
  • − Real governance: board, bylaws, minutes
  • − Higher annual compliance costs ($1k–$5k+)
  • − Franchise taxes even at zero revenue (Delaware: $400+ minimum 2026)
“Don't form one because your cousin told you to. Form one when you have a term sheet — not before.”
★ Editor's take
C-Corp at a glance
Setup cost
$100–$500
state filing fees
Setup time
1–5 days
Liability shield
Full (personal assets protected)
Taxation
Entity taxed + dividends taxed (double)
Ownership
Unlimited shareholders, any nationality
Formalities
Board, bylaws, minutes, annual report, 1120
Fundraise-ready
VC-standard
✓
★ Best for

Venture-backed startups, companies planning multiple stock classes, future IPO or M&A.

Avoid if

You're a consultancy, solo founder, or just want a tax-efficient structure.

NP
Entity 06 of 06

Nonprofit (501c3)

Mission over profit. Tax-exempt, but heavily regulated.

A 501(c)(3) is a corporation formed under state law and then granted federal tax-exempt status by the IRS. Donations are tax-deductible for the donor. In exchange, you give up personal ownership, accept a board's oversight, and file an annual Form 990 on the public record.

Advantages
  • + Federal tax-exempt on mission-related revenue
  • + Donors get a tax deduction
  • + Access to grants, foundations, PRIs
  • + Perpetual existence
Trade-offs
  • − 3–12 month IRS approval (Form 1023)
  • − No personal ownership — you can't sell it
  • − Reasonable-compensation rule limits salaries
  • − Form 990 is public record
“Becoming a 501(c)(3) is a mission decision, not a tax trick. Most founders don't need one.”
★ Editor's take
Nonprofit at a glance
Setup cost
$275–$875
state filing fees
Setup time
3–12 months (IRS)
Liability shield
Full (personal assets protected)
Taxation
Federal tax-exempt
Ownership
No owners (board-governed)
Formalities
Board, bylaws, Form 990, state charity registration
Fundraise-ready
Grants + donations
✓
★ Best for

Charitable, religious, educational, or scientific missions. Grant-funded work.

Avoid if

Your mission is commercial. Nonprofits can't pay out profit.

Chapter 03 · Side by side

The matrix.

Everything from the cards, in one table. Scroll horizontally if your screen's narrow.

Metric
SP
Sole Prop
GP
Partnership
LLC
LLC
★ POPULAR
S
S-Corp
★ POPULAR
C
C-Corp
★ POPULAR
NP
Nonprofit
Setup cost $0–$50$0–$50$35–$500$35–$500$100–$500$275–$875
Setup time 0 days0 days1–10 days1–10 days + election1–5 days3–12 months (IRS)
Liability shield None None (joint + several) Full (personal assets protected) Full (inherits from LLC/C-corp) Full (personal assets protected) Full (personal assets protected)
How it's taxed Personal (Schedule C)Pass-through (K-1s)Pass-through by default (can elect S or C)Pass-through, with payrollEntity taxed + dividends taxed (double)Federal tax-exempt
Ownership rules 1 owner only2+ partners1+ members1–100 US citizens/residents onlyUnlimited shareholders, any nationalityNo owners (board-governed)
Paperwork burden NonePartnership agreement recommendedOperating agreement + annual reportPayroll, reasonable-salary rule, Form 1120-SBoard, bylaws, minutes, annual report, 1120Board, bylaws, Form 990, state charity registration
VC-ready Not possible Limited Limited (not VC-standard) Limited by shareholder rules VC-standard Grants + donations
Best for Side hustles, freelancers testing an idea.Two spouses running a cash-based side business.Freelancers, consultancies, small agencies, holding property, most e-commerce.Profitable LLCs earning >$80k/yr from active work (not investment).Venture-backed startups, companies planning multiple stock classes, future IPO or M&A.Charitable, religious, educational, or scientific missions. Grant-funded work.
—— The conversion path

You can change your entity later.

Almost every entity decision is reversible. Most founders start as one thing and convert once their needs grow. Here's the honest path.

"Don't optimize for the entity you'll be in five years. Optimize for the one you are today." — Editor's rule of thumb

From
Sole Prop
To
LLC
Triggered when: "I have liability now."
TIME · 1 day
COST · $50–$500
File Articles of Organization. Keep the old bank account records for transition.
From
LLC
To
LLC + S-election
Triggered when: "I'm clearing >$80k profit."
TIME · Same year
COST · Form 2553 (free)
File with IRS by March 15, or within 75 days of formation. Start running payroll.
From
LLC
To
Delaware C-corp
Triggered when: "I signed a term sheet."
TIME · 2–4 weeks
COST · $1,500–$5,000 legal
Statutory conversion or new Delaware C-corp with a merger. Your lawyer handles it. Do NOT DIY.
From
LLC
To
Nonprofit 501(c)(3)
Triggered when: "Mission shifted to charitable."
TIME · 3–12 months
COST · $275–$875 IRS
Dissolve LLC, form new nonprofit corp, file Form 1023. Cannot transfer assets to new entity without careful tax planning.
Frequently asked

What founders actually ask us.

Is an LLC always better than a sole proprietorship?
Almost always, once you have any real liability exposure or steady income. A sole prop costs nothing, but offers zero personal-asset protection. An LLC costs $35–$500 once and protects your house, car, and savings from business lawsuits. The exception: a weekend craft business earning $2k/yr — LLC overhead isn't worth it yet.
What's the difference between a sole proprietorship and a general partnership?
Exactly one thing: the number of owners. A sole proprietor is one person earning untitled business income on Schedule C. A general partnership is two or more people doing the same thing together without filing anything. Both are automatic, both skip filing fees, and neither gives you any liability protection at all. The partnership adds one extra annual chore — Form 1065 with a K-1 for each partner.
What's the difference between an S-corp and a C-corp?
An S-corp is a tax election on an existing LLC or C-corp — it's pass-through taxation with a 100-shareholder US-only limit. A C-corp is an entity type where the corporation pays its own tax (21% federal) and distributions are taxed again as dividends. Venture capital requires C-corps; profitable single-owner operators usually prefer S-corp elections.
Do I need an LLC if I'm freelancing part-time?
It depends on liability and income. If a client could sue you (writers, developers, consultants: usually yes), form an LLC. If your income is under ~$20k/yr and your work has minimal liability exposure (say, tutoring), Schedule C as a sole prop is fine until the income grows.
Can I convert my LLC to a C-corp later?
Yes, and it's routine. Most states allow a "statutory conversion" or you can use a Delaware merger. Budget $1,500–$5,000 in legal fees. The best time to convert is right before you need to — typically when a term sheet is imminent, not years earlier.
Why do venture capitalists require Delaware C-corps?
Three reasons: Delaware's corporate law is the most developed and predictable, standardized legal docs (YC SAFE, NVCA) assume Delaware C-corp, and preferred stock structures are cleaner under C-corp than under an LLC's member-managed structure. It's not about taxes — VCs pay capital gains either way.
Can I have an LLC with just myself as the owner?
Yes. It's called a single-member LLC (SMLLC) and it's the most common LLC form in America. It's still a pass-through for taxes (default: "disregarded entity" on your Schedule C) but gives you real personal-asset protection. Most states treat SMLLCs identically to multi-member.
When does a 501(c)(3) nonprofit actually make sense?
When the mission is charitable, religious, educational, or scientific and the revenue model is grants and tax-deductible donations — not product sales. Expect 3–12 months of IRS review on Form 1023, a board that actually meets, a public Form 990 each year, and a reasonable-compensation cap on salaries. It is a commitment to a mission, not a tax loophole.
What is a DBA, and is it the same as an LLC?
No. A DBA ("doing business as", also called a trade name or fictitious name) is a public registration that lets a person or an existing entity operate under a name that isn't its legal one. It is not a business entity, creates no separate tax identity, and offers zero liability protection. It's the cheapest way for a sole proprietor to bill and bank under a brand name — or for an existing LLC to run a second product line — but it does not shield your personal assets from business lawsuits.
Can I upgrade a DBA to an LLC later?
Yes, and it's the most common reason people form an LLC. File Articles of Organization in your home state, open a bank account in the LLC's name, and either retire the DBA or re-register it under the new LLC so the brand carries over. The DBA itself doesn't "convert" — you're really moving the underlying business from Schedule C (sole prop) into a new entity.
Do I need a lawyer to form any of these entities?
No, except for C-corp conversions and 501(c)(3) applications. LLCs, sole proprietorships, partnerships, and DBAs can be formed DIY or via a $39 formation service like Northwest. Lawyers are worth it when you have co-founders, investors, complex equity, or are creating the nonprofit.
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