Small Business vs. Corporation: How Your Entity Type Affects Your Taxes

Thank you for the clarification! Here’s a clean, SEO-friendly, revised version of the section for the blog post “Small Business vs. Corporation: How Your Entity Type Affects Your Taxes”, without icons or hyphens, and with Partnership removed since it’s covered elsewhere:

Common Business Entity Types

Choosing the right structure for your business affects how you’re taxed, how profits are reported, and how much legal protection you have. Below are the four primary business structures covered in this post:

1. Sole Proprietorship

Overview:
This is the simplest and most common business structure. It does not create a separate legal entity, and there’s no formal registration required in most states.

Taxes:

• Business income is reported on Schedule C of your personal tax return (Form 1040)

• Income is subject to income tax and self-employment tax (15.3%)

Pros:

• Easy to start and manage

• Minimal cost and paperwork

• All profits go directly to the owner

Cons:

• No liability protection

• Cannot access corporate tax rates

• Limited funding options

Best suited for: Freelancers, solo entrepreneurs, and individuals running low-risk side businesses.

2. Limited Liability Company (LLC)

Overview:
An LLC is a flexible structure that offers personal liability protection while allowing income to pass through to the owners for tax purposes. It can be set up as a single-member or multi-member entity and is recognized in every state.

Taxes:

• By default, taxed like a sole proprietorship (single-member) or partnership (multi-member)

• Can elect to be taxed as an S corporation or C corporation

• Single-member LLCs file Schedule C

• Multi-member LLCs file Form 1065, and each member receives a K-1

Pros:

• Offers liability protection

• Flexible tax treatment options

• Seen as more professional than a sole proprietorship

Cons:

• Annual fees and filing requirements vary by state

• Subject to self-employment tax unless taxed as an S corporation

Best suited for: Small businesses seeking legal protection with room for growth or partnership.

3. S Corporation (S corp)

Overview:
An S corporation is a tax election, not a business entity itself. It allows qualifying corporations and LLCs to avoid double taxation while benefiting from limited liability protection.

Taxes:

• Income is passed through to shareholders and reported on their individual tax returns

• Files Form 1120-S and issues K-1s to shareholders

• Owners must receive a reasonable salary, which is subject to payroll taxes

• Remaining profits can be distributed as dividends, avoiding self-employment tax

Pros:

• Potential savings on self-employment taxes

• No corporate income tax at the entity level

• Liability protection remains intact

Cons:

• More complex reporting and compliance

• Requires payroll setup for owners

• Restrictions on number and type of shareholders

Best suited for: Profitable businesses with active owners looking to reduce self-employment tax and maintain liability protection.

4. C Corporation (C corp)

Overview:
A C corporation is a legal entity separate from its owners. It can issue multiple classes of stock, raise capital from investors, and exists independently of its shareholders.

Taxes:

• Pays federal corporate tax on profits (Form 1120)

• The flat corporate tax rate in 2025 is 21 percent

• Shareholders pay personal taxes on dividends, resulting in double taxation

Pros:

• Access to the lowest corporate tax rate

• Ability to issue stock and attract investors

• No restrictions on ownership structure

• Can offer fringe benefits and stock options

Cons:

• Double taxation on profits and dividends

• More complex compliance and governance requirements

• Annual reports, meeting minutes, and corporate recordkeeping are mandatory

Best suited for: Businesses planning to scale quickly, seek venture capital, or operate nationally or internationally.