LLC vs S-Corp vs Sole Proprietorship: How to Incorporate (2026)

Choosing a business structure feels like a huge, permanent decision. It isn't. It's an important decision, but you can change it later, and for most people the right answer is boringly obvious once you understand the tradeoffs.

Here's everything you actually need to know, minus the legalese.

The three structures at a glance

Structure	Liability protection	Taxed how	Paperwork	Best for
Sole Proprietorship	❌ None	Personal return	Almost none	Testing an idea
LLC	✅ Yes	Pass-through	Light	Most small businesses
S-Corp*	✅ Yes	Pass-through + payroll	Moderate	Profitable businesses

*An S-corp isn't a structure — it's a tax election you make on top of an LLC or corporation. More on that below.

Sole Proprietorship: the default nobody chooses on purpose

A sole proprietorship is what you automatically become the moment you start doing business without forming anything else. No filing, no fee, no ceremony.

The good: It's free and instant. Perfect for a weekend experiment or a tiny side hustle.

The bad: There is zero legal wall between you and the business. If the business gets sued or owes money, that's your house, your car, your savings. One bad lawsuit can wipe out your personal life.

Verdict: Great to start. Dangerous to stay. Upgrade the moment there's real money or real risk.

LLC: the sweet spot

A Limited Liability Company is the most popular structure in America, and for good reason. It gives you the "limited liability" wall — your personal assets are generally protected — without the heavy machinery of a corporation.

The good:

• Personal asset protection
• Cheap to form ($50–$500 depending on your state)
• "Pass-through" taxation by default: profits flow to your personal return, so there's no separate corporate tax
• Flexible and simple to run

The bad:

• You pay self-employment tax on all your profit (this is where the S-corp comes in)
• Some states charge annual fees

Verdict: For the overwhelming majority of freelancers, side hustlers, and small businesses, the LLC is the answer. Start here.

S-Corp: the tax hack for when you're winning

Once your LLC starts making real money, the S-corp election can save you serious cash. It lets you split your income into two buckets:

1. A reasonable salary (which pays payroll/self-employment tax)
2. Distributions (which don't)

Since you only pay self-employment tax on the salary portion, you can save thousands per year.

The catch: More paperwork, actual payroll, and higher accounting costs. The rough rule of thumb is that the S-corp starts making sense when your business nets around $60,000–$80,000+ per year. Below that, the admin overhead usually eats the savings.

Verdict: Not a starting point — a milestone. When your accountant says it's time, it's time.

How to actually incorporate (the steps)

Whichever you choose, forming an LLC looks like this:

1. Pick your state. Usually your home state. (Ignore "form in Delaware!" advice unless you're raising venture capital.)
2. Name your business and check it's available.
3. File Articles of Organization with your state — this is the actual "incorporation."
4. Get a free EIN from the IRS (never pay a third party for this).
5. Open a business bank account and keep personal and business money strictly separate.
6. File any required annual reports to stay in good standing.

The whole thing usually takes a day of effort and a modest fee. You can do it yourself or use a formation service.

The decision, simplified

• Just testing? Sole proprietorship. Move fast.
• Real business, real risk? LLC. This is you.
• LLC netting $60k+? Talk to an accountant about the S-corp election.

Don't overthink it. The most expensive structure is the one you never form because you were too busy researching structures. Get protected, get an EIN, get a bank account, and get back to the actual work.

It's just business — but at least make it your business, legally speaking.