If you’re launching or running a small business, one of the earliest – and often most stressing – decisions you’ll face is entity selection. Sole proprietor, LLC, S-Corp, C-Corp, it all feels so permanent and official. In other words, it feels like it’s easy to make a mistake.

I’ve had more than a few clients walk in as one-person, service-based businesses operating as C-Corporations.

When I ask why they chose that structure, the answer is almost always the same:

“My accountant told me to.”

That doesn’t mean it was the wrong choice, but it there’s still not much clarity in whether it was the right option. Entity selection isn’t about sounding official or checking a box. It’s a tool. And like any tool, it works best when it matches where your business is today and where it’s actually going.

Let’s walk through the most common entities, starting with the simplest.

Sole Proprietorship: The Default Setting

If you earn money from a side hustle, freelance work, or a one-person business and haven’t formed anything else, congratulations, you’re already a sole proprietor.

This structure is simple and flexible. You can operate loosely, deduct ordinary business expenses, and even obtain an EIN (employer identification number) if you don’t want to use your Social Security number. From a tax perspective, all income flows directly onto your personal return.

The downside? There’s no liability protection and no tax protection. You’re exposed personally, and all profits are subject to self-employment taxes.

For very early stages, that may be fine. But as income grows or risk increases, most people look for something more robust.

LLCs, PLLCs, and Partnerships: Early-Stage Structure

An LLC (or PLLC for licensed professionals) is often the next step. They’re relatively easy to set up, allow for multiple owners, and provide some limited liability protection.

From a tax standpoint, these entities are pass-throughs. Income still flows to your personal return, and there’s no inherent tax savings built in. But the structure creates separation between you and the business, which can matter both legally and operationally.

For many businesses in their early years, especially those without significant revenue yet, this is a solid, flexible option. It gives you structure without complexity.

Some very successful businesses use this structure for years to come, so it can also work for larger organizations as well.

S-Corporations: Where Taxes Start to Matter More

S-Corps get a lot of attention among the self-employed, and for good reason. But they’re not automatically a good idea. Instead, they become more relevant as income increases.

The primary benefit is protection against self-employment taxes, which cover Social Security and Medicare. That amounts to 15.3% of whatever you’re paid as an employee (i.e, your salary). In an LLC, anything that is profits goes to you in the form of salary, so you pay 15.3% on all of your income (Social Security has a maximum limit, while Medicare does not).

In an S-Corp, you pay yourself a salary as an employee. That’s the part that is exposed to the 15.3%. But as an employer, you can pay yourself the additional profits and avoid the 15.3% charge. You simply have to ensure that you pay yourself a reasonable salary.

The trade-offs matter. S-Corps come with added costs, payroll requirements, and administrative complexity. You must run payroll. You must pay yourself a reasonable wage. And you need to stay compliant. You also need profits well above the reasonable salary you’re paying yourself to make it work.

You can elect S-Corp status from an LLC, meaning you don’t have to start there. It’s often something you grow into, rather than lead with.

C-Corporations: Powerful, but Often Misused

C-Corps are taxed twice: once at the corporate level and again at the personal level when dividends are paid. They come with significant reporting requirements, formal governance, and a required board of directors.

So why would anyone choose one?

C-Corps are designed for businesses that plan to grow, raise capital, add investors, and potentially be sold. For service-based businesses, this only works when the business can be marketed and scaled without the owner being the product.

That’s why a one-person consulting or professional services business is often a poor fit even if someone was told it was “more legitimate.”

Entity Selection Is a Tool, Not a Trophy

Your business entity isn’t something to achieve. It’s not a badge of success. It’s a tool meant to protect your business and support your goals.

The right choice depends on where you are today and where you’re realistically headed. It’s not what sounds impressive or what someone else is doing.

As your business evolves, your entity can evolve too. What matters most is understanding why you’re choosing what you’re choosing.

Because when entity selection is intentional, it supports growth. When it isn’t, it quietly creates complexity you didn’t need.