Pros & Cons of Sole Prop, Partnership, S Corp and C Corp

Understanding the Long-Term Impact of Your Business Structure

When you’re starting a business - or restructuring one - the entity type you choose has long-term consequences. It affects how you’re taxed, how you pay yourself, how you raise money, and how much liability protection you have.

Quick clarification: An LLC (Limited Liability Company) is a legal structure, not a tax classification. The IRS allows LLCs to choose how they’re taxed: as a sole proprietorship, partnership, S corporation, or C corporation. This flexibility is powerful - but only if you understand your options.

Note: This content is for informational purposes only and does not constitute legal, financial, or tax advice. Always consult with a CPA or attorney before making decisions that affect your business.

 Sole Proprietorship

Tax Treatment:

• Default IRS structure if you don’t register anything

• Income reported on personal tax return (Schedule C)

• Subject to 15.3% self-employment tax on all net income

Financial Implications:

• Simple and inexpensive to manage

• No liability protection - personal assets are at risk

• Difficult to raise capital or scale

• Even with an LLC, courts may pierce the veil if finances are commingled

Best for: Freelancers or very small businesses with minimal risk

 Partnership

Tax Treatment:

• Pass-through entity

• File Form 1065 and issue K-1s to partners

• Partners pay self-employment tax on their share

Financial Implications:

• Flexible income allocation

• Shared resources and risk

• Requires strong trust and clear agreements

• Disputes can derail the business

• One partner’s financial missteps can affect everyone

Caution: Many partnerships start with friendship and optimism - but money and stress can change dynamics fast. A partner’s poor decisions or lack of effort can leave you exposed.

Best for: Aligned partners with clear roles and strong legal agreements

 S Corporation

Tax Treatment:

• Pass-through entity

• File Form 1120-S

• Owners take a reasonable salary (subject to payroll tax)

• Remaining profits can be taken as distributions (not subject to self-employment tax)

Financial Implications:

• Potential tax savings

• Liability protection

• Requires payroll setup and compliance

• Must meet IRS eligibility rules (e.g., U.S. citizens, ≤100 shareholders, one class of stock)

Common mistake: Forming an S Corp too early. If profits are low, payroll costs may outweigh tax benefits.

Best for: Businesses with stable income and owners ready for administrative responsibility

 C Corporation

Tax Treatment:

• Separate legal entity

• Pays corporate tax (18–28%)

• Dividends taxed again on personal return (“double taxation”)

Financial Implications:

• Can retain earnings for reinvestment

• Offers better fringe benefits (health insurance, retirement plans, stock options)

• Preferred by investors - can issue multiple classes of stock

• Requires Form 1120, corporate formalities, and may face state franchise taxes

Best for: Startups, tech companies, or businesses planning to raise capital

 Final Thoughts

Choosing the right entity depends on your income, goals, and growth strategy:

Entity Type	Pros	Cons
Sole Proprietorship	Simple, low-cost	High self-employment tax, no liability protection
Partnership	Flexible, shared resources	Risky if trust breaks, shared liability
S Corporation	Tax savings, liability protection	Requires payroll, compliance, eligibility limits
C Corporation	Scalable, investor-friendly, strong benefits	Double taxation, complex formalities

Changing your structure later can be complicated - and expensive. The tax consequences can last for years. A good CPA can help you weigh the trade-offs and choose the path that fits your business - not just today, but in the long run.