Launching Your Business: Entity Types Explained and Tax Pros & Cons

Article | April 21, 2026

Authored by Your Firm LLC

What's the first big financial decision you'll make as a business owner? It's not your pricing strategy or your first hire—it's choosing your business entity. This single choice will determine how much you pay in taxes, how complex your compliance obligations are, and how flexible you can be as your business grows.

"We see business owners struggle with entity selection all the time because they don't fully understand the trade-offs," says TThomas W. Reynolds, CPA, Partner at Your Firm LLC. "Each structure has distinct advantages and disadvantages, and the right choice depends entirely on your specific situation and goals."

Here's what you need to know about the five main business entity types:

Sole Proprietorship

The simplest business structure, owned and operated by one individual. There's no legal separation between you and your business, income flows directly to your personal tax return via Schedule C.

Pros: Easiest and cheapest to set up; minimal paperwork; complete control; may qualify for the 20% QBI deduction

Cons: You pay 15.3% self-employment tax on all income; no separation between personal and business liability; limited growth potential

Partnership

A business owned by two or more people who share profits, losses, and management responsibilities. Partnerships can be structured as general partnerships, limited partnerships, or limited liability partnerships (LLPs).

Pros: Pass-through taxation; flexible profit-sharing arrangements; relatively simple to establish; eligible for QBI deduction

Cons: General partners pay self-employment tax; requires detailed partnership agreement; potential for partner disputes; more complex recordkeeping

Limited Liability Company (LLC)

A hybrid structure that combines the liability protection of a corporation with the tax flexibility of a partnership. By default, single-member LLCs are taxed as sole proprietorships and multi-member LLCs as partnerships, but owners can elect different tax treatment.

Pros: Exceptional flexibility—can choose how you're taxed; liability protection for owners; less formal than corporations; easier to maintain

Cons: State-specific filing requirements and fees; members may pay self-employment tax depending on tax election; requires operating agreement

S Corporation

A tax designation (not a legal entity type) that allows businesses to avoid double taxation while enabling owners to split income between salary and distributions. Only the salary portion is subject to payroll taxes, creating significant tax savings opportunities.

Pros: Significant self-employment tax savings on distributions; pass-through taxation; eligible for QBI deduction; liability protection

Cons: Must pay yourself "reasonable" salary (IRS scrutiny); limited to 100 U.S. shareholders; requires payroll processing; strict corporate formalities and recordkeeping

C Corporation

A separate legal and tax entity from its owners, offering the most robust structure for growth and investment. The corporation pays taxes on profits, and shareholders pay taxes again on dividends they receive—resulting in double taxation.

Pros: Unlimited shareholders; multiple stock classes; attractive to investors; can retain earnings; tax-deductible employee benefits

Cons: Double taxation (21% corporate rate plus personal tax on dividends); extensive compliance requirements; most expensive to maintain; not eligible for QBI deduction

"The key is matching your entity to your business goals," Thomas explains. "A solo consultant might start as an LLC and elect S corp status once income reaches $75,000 to $100,000. A tech startup seeking venture capital needs a C corp from day one. There's no one-size-fits-all answer."

Ready to choose the right structure for your business? Your Firm LLC has helped businesses navigate entity selection for over 50 years. Contact us today to discuss your specific situation and discover which entity type will position you for tax-efficient growth.