top of page

What's the Best Type Of Entity To Form For Your Small Business?

How you set up your business will affect your legal liability, the amount of paperwork you'll have to deal with, and your tax liabilities.

We're professional nerds, not accountants or lawyers, so this isn't tax or legal advice. Now let's jump into it.


Each of the 3 (s-corps, c-corps, and llcs) offers some protection against liability for the owner(s). A sole proprietorship does not offer liability protection because a sole proprietorship isn't considered its own legal entity. If someone does choose to operate as a sole proprietor they can often purchase business liability insurance for some protection but they still wouldn't be as protected as they likely would be with one of the other 3 entity types.

For a corporation (s-corp or c-corp) people often cite the extra administrative burden of versus an LLC, but small administrative differences shouldn't be what you base your decision on. Often times people like the flexibility that comes with an LLC, but generally I see people forming LLCs because they hear it's just the thing to do.

For this post we'll focus on the money each entity type may save you or cost you.

A.K.A. the tax consequences.


When someone has a jobby-job the employer and the employee both pay FICA (7.65% each).

If folks are self-employed there’s no FICA so Uncle Sam tries to make up for it with self-employment tax. Self-employment tax is 15.3%. It’s applies to ordinary income (versus passive income like real estate rents). That’s in addition to Federal and State income tax.

Here’s what that means…

For this example: Let’s say someone earns $100k.


If someone is a sole proprietor, in addition to the Fed and State they'll pay 15.3% self-employment tax on that = $15,300.


LLCs are considered pass through entities by the IRS, so while an LLC offers liability protection, it is taxed much like a sole proprietor (or partnership). So the 15.3% self-employment tax = $15,300.


If someone has an S corp they are required to pay themselves a “reasonable” salary. The salary should be at least 30% of the income, so in the $100k example let’s say the owner pays herself $30,000 in salary. (Regular payments don’t need to be made - it can come all in one check on Dec 31.) The 15.3% self-employment tax is paid on the $30,000, so this equals $4,590. The rest of the $70,000 ($100k - $30k salary) can be paid out in a "disbursement” which is not subject to self-employment tax.

So this would save $15,300-$4,590 = $10,710.

This doesn’t work for C-corps because C-corps are taxed on earnings before disbursements, so a C-corp would pay income tax then pay the owner who would also pay income tax. That’s the double-taxation you always hear about.

There are a few other differences.

Like, corporations and LLCs both have to pay a minimum annual tax in California of $800. (Sole proprietors don't.)

And personal and corporate tax rates are slightly different at the state and federal levels. As of the time of this writing:

  • CA State Income Tax PERSONAL 9.30%

  • CA State Income Tax CORPORATE 8.84%

  • Federal Income Tax PERSONAL 24.00%

  • Federal Income Tax CORPORATE 21.00%

So an S corp isn’t necessary the best. It depends a bit on things like income level and the amount paid out in the form of “reasonable" salary… but those are the basics.

Since none of this is tax or legal advice, it's a great idea to consult with an accountant or attorney -- maybe use this to outline some of your questions and present your specific scenario. Most people call a CPA or EA when it's time to file their taxes, but doing some pre planning before tax season (or before your structure your business) is well worth the investment!


bottom of page