Business Formation Services: Choose the Right Entity for Your Business

Limited Liability Company (LLC)

An LLC, or limited liability company, is a flexible business structure that separates personal assets from business liabilities and allows profits and losses to pass through directly to the owner's personal tax return — without the complexity of a corporation. No board of directors is required, and there are no restrictions on the number or type of owners (called members). The LLC is the most widely used structure for small businesses, freelancers, and real estate investors because it provides meaningful liability protection while keeping administrative requirements manageable.

Pass-through taxation means LLC profits are reported on the member's individual tax return rather than being taxed at both the corporate and individual level. Members can also elect S corp tax treatment once the business reaches sufficient profitability — giving LLCs long-term tax flexibility.

LegalNature's LLC formation documents include the LLC operating agreement and articles of organization, both of which are generated through a state-specific questionnaire and reviewed by attorneys to meet your state's requirements. LegalNature also offers guidance on LLC management structure and can help you obtain your Employer Identification Number (EIN) — the tax ID your LLC needs to open a bank account and hire employees.

Best for:

• Solo entrepreneurs and freelancers who want liability protection without corporate formalities
• Small business owners who want flexible management and pass-through taxation
• Real estate investors holding property in a separate legal entity

S Corporation (S Corp)

An S corp is a tax election available to eligible LLCs and corporations that allows business profits to pass through to shareholders' personal tax returns, avoiding double taxation while enabling owner-employees to receive a salary and reduce self-employment tax exposure. When an LLC or corporation elects S corp status with the IRS, the owner can split income between a reasonable salary (subject to payroll taxes) and a distribution (not subject to self-employment tax), which reduces the overall tax burden at higher income levels.

S corp election typically becomes financially advantageous when a business generates an annual net profit above a certain threshold: the point at which self-employment tax savings typically outweigh any added payroll compliance costs.

LegalNature's S corp election resources help LLC and corporation owners understand the requirements, timing, and documentation involved in choosing the right tax treatment for your company.

Best for:

• Profitable LLCs or corporations whose owners want to reduce self-employment tax
• Small business owners consistently generating ~$50,000+ in annual net profit
• Established businesses that have already formed an LLC and want to optimize their tax position

C Corp (C Corporation)

A C corp is an independent legal entity that pays taxes at the corporate level and is subject to double taxation: profits are taxed at the corporate rate, and any dividends paid to shareholders are taxed again at the individual rate. Despite this, the C corp often remains the structure of choice for businesses seeking outside investment, planning an initial public offering (IPO), or issuing multiple classes of stock to investors and employees.

Venture capital firms typically require C corp status before investing because C corps allow preferred stock issuance, unlimited shareholders, and foreign ownership — features that LLCs and S corps cannot accommodate. Delaware is the most common state of incorporation for C corps seeking institutional investment.

Best for:

• Startups seeking venture capital or angel investment
• Businesses planning to go public or issue stock options to employees
• Companies with complex ownership structures, multiple share classes, or international shareholders

Sole Proprietorship

A sole proprietorship is the simplest business structure where the owner and the business are legally the same entity. This means personal assets are not protected from business debts, lawsuits, or judgments. No formal state registration is required in most states beyond a local business license or a "doing business as" (DBA) filing if operating under a trade name.

The absence of liability protection is the defining limitation of a sole proprietorship. If a client sues your business or a vendor goes unpaid, your personal bank accounts, property, and assets are typically all reachable. For this reason, a sole proprietorship is best treated as a starting point — not a permanent structure for any business with meaningful liability exposure.

Best for:

• Freelancers and side-business owners testing a concept before formalizing
• Individuals with minimal revenue and no meaningful liability risk
• Anyone evaluating whether to register a business before committing to a formation cost

If your business has any exposure to lawsuits, contracts, or employee relationships, consider forming an LLC for liability protection.

General Partnership

A general partnership is formed automatically when two or more people carry on a business together without filing formal registration, and like a sole proprietorship, all partners typically are personally liable for the business's debts and legal obligations. State filing is generally not required to create a general partnership, but a written partnership agreement is strongly recommended to define each partner's contributions, responsibilities, profit share, and exit rights.

The liability exposure in a general partnership is particularly significant: each partner may be held personally responsible not only for business debts but also for the actions of the other partners taken in furtherance of the business. For most multi-founder businesses, an LLC or limited liability partnership (LLP) offers the same simplicity with meaningful liability protection.

Best for:

• Two or more co-founders testing a business together before committing to a formal structure
• Professional service businesses in states that require LLP registration for licensed professions
• Short-term joint ventures with defined scope and low liability risk

What is a business formation service?

A business formation service helps entrepreneurs register a legal business entity — such as an LLC, corporation, or S corp — with the state government and prepare the foundational documents required to operate legally. Services typically include state filing assistance, document preparation, registered agent setup, and EIN application support. Business formation services provide attorney-reviewed documents and state-specific compliance guidance for founders who want to form their business correctly without hiring a lawyer.

What business entity should I choose?

For most small business owners, an LLC is the right starting point — it provides liability protection, pass-through taxation, and minimal administrative requirements. If you plan to raise venture capital, a C corp is typically required. If your LLC is generating $50,000+ in annual net profit and you want to reduce self-employment tax, consider electing S corp status. Sole proprietorships and general partnerships offer no liability protection and are best treated as temporary structures.

What is the best business structure for a small business?

An LLC is the best business structure for most small businesses because it separates personal assets from business liabilities, allows profits to pass through to the owner's personal tax return, and does not require the formalities of a corporation. Most freelancers, service businesses, retail operations, and real estate investors benefit from LLC protection. As the business grows and becomes consistently profitable, the LLC can elect S corp tax treatment to further reduce the tax burden.

What is the difference between an LLC and a sole proprietorship?

The primary difference between an LLC and a sole proprietorship is liability protection. A sole proprietorship treats the owner and business as the same legal entity — personal assets are exposed to business debts and lawsuits. An LLC, or limited liability company, creates a separate legal entity that shields the owner's personal assets from business obligations. Both structures use pass-through taxation, but only the LLC provides the legal separation that protects personal wealth.

What is the difference between an LLC and an S corp?

An LLC is a business structure; an S corp is a tax election that an LLC or corporation can make with the IRS. By default, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC is taxed as a partnership. When an LLC elects S corp status, the owner can split income between a salary (subject to payroll taxes) and a distribution (not subject to self-employment tax), which reduces overall tax exposure at higher income levels. Most business owners form an LLC first, then elect S corp treatment once profitability warrants it.

How much does it cost to form a business?

Business formation service costs range from $0 to $500 or more depending on the service provider, entity type, and state filing fee. State filing fees for an LLC range from $40 in Kentucky to $500 in Massachusetts — costs vary significantly by state. Formation service fees vary by provider and package. Ongoing costs — registered agent fees, annual report fees, and any state franchise taxes — should also be factored into your total cost of business formation. LegalNature offers a 30-day money-back guarantee. If you're not happy, then we're not happy — give us a call and let us help.

Can I change my business structure after forming?

Yes, you can change your business structure after forming, though the process and cost depend on what change you are making. The most common post-formation change is electing S corp tax treatment on an existing LLC — this requires filing IRS Form 2553 and does not require reforming the entity itself. Converting from an LLC to a C corp (or vice versa) involves a more formal statutory conversion or merger process with your state. Consulting with a tax professional before changing your structure is strongly recommended, as the timing of elections and conversions can have significant tax consequences.