🔑 How to Form a Business

The structure you choose for your business sets the foundation for how it functions legally, financially, and operationally. It affects your taxes, liability, funding, and growth potential.

1. Sole Proprietorship

• Function: You and your business are the same legal entity. Income and expenses pass directly to your personal taxes.

• ✅ Pros:

  • Easiest and cheapest setup.

  • No paperwork other than local business licenses.

• ❌ Cons:

  • No liability protection — your personal assets are exposed.

  • Limited ability to raise capital or business credit.

• 👉 Best for: Freelancers, gig workers, or testing an idea.

2. LLC (Limited Liability Company)

• Function: Creates a legal shield separating you from your business. Your business can own property, open bank accounts, and enter contracts independently of you.

• ✅ Pros:

  • Protects personal assets from lawsuits or debts.

  • Flexible tax options (sole prop, partnership, or S-Corp).

  • Builds credibility with banks and partners.

• ❌ Cons:

  • State filing and renewal fees.

  • Compliance paperwork required yearly.

• 👉 Best for: Most entrepreneurs — flexible, protective, and professional.

3. S-Corporation (S-Corp)

• Function: A tax status election (made after forming an LLC or corporation). Allows profits to be split between salary and distributions to save on self-employment taxes.

• ✅ Pros:

  • Major tax savings at $50k+ profit.

  • Avoids double taxation of corporations.

• ❌ Cons:

  • Requires payroll system and IRS compliance.

  • More admin and accounting.

• 👉 Best for: Growing businesses ready to scale with steady profits.

4. C-Corporation (C-Corp)

• Function: A separate legal entity at the federal level. The business itself pays taxes, can issue stock, and continues to exist beyond its founders.

• ✅ Pros:

  • Unlimited growth potential, ability to raise venture capital.

  • Strongest legal protection for owners.

  • Easier to expand nationally and internationally.

• ❌ Cons:

  • Double taxation (corporate income + shareholder dividends).

  • Higher costs and complex compliance.

• 👉 Best for: Large-scale companies, startups seeking investors, or corporations planning IPOs.

⚡ Recommended Path for Entrepreneurs

1. Start with an LLC → low cost, liability protection, credibility.

2. Elect S-Corp status later when profits grow → save on taxes.

3. C-Corp only if you’re chasing major investors or going public.