Business structure is one of those decisions that seems abstract until it matters. For your first year, the structure you choose probably won't matter much — you'll pay roughly similar taxes whether you're a sole proprietor or an LLC. But structure determines your personal liability, your ability to raise money, and your administrative burden. Make an informed choice, not a default one.
The four structures most new entrepreneurs encounter: sole proprietorship, LLC, S-Corp, and C-Corp. Each has different implications for taxes, liability, and complexity. The right choice depends on your specific situation — how much money you're making, whether you have employees, whether you need to raise investment, how much risk is in your business.
Sole Proprietorship: The Default
A sole proprietorship is what you are automatically if you do business without forming another entity. You're the business. All profits are yours, all losses are yours, and critically — all liability is yours. If someone sues your business and wins, they can come after your personal assets. For a business with any meaningful risk, this is a problem.
The tax simplicity is appealing: you just file a Schedule C with your personal return. No separate business tax return, no separate bank account legally required (though strongly recommended for accounting purposes). For very low-risk businesses earning modest income, sole proprietorship is fine.
LLC: The Most Popular Choice
A single-member LLC gives you liability protection with minimal complexity. It costs $50-$500 to form depending on your state, requires an annual report filing (usually $50-$100), and otherwise stays out of your way. Profits and losses pass through to your personal return — you don't pay business income tax, just income tax on the profit. For most entrepreneurs in most situations, this is the right choice.
Use the Legal Structure Tool to think through your specific situation.