When I started my first business, I spent way too much time researching different entities, jumping between contradictory advice. My accountant recommended one thing, a fellow entrepreneur something completely different, and back then, yes, I even read books.
What I didn't understand then—but know deeply now after building multiple seven-figure businesses—is that there's no universally “best” structure. There's only the right structure for your specific vision, risk tolerance, and growth trajectory.
Most aspiring entrepreneurs make the mistake of copying what worked for someone else or choosing based on what sounds impressive. They form Delaware C-Corps because that's what tech startups do, or they stay sole proprietors far too long because it seems simpler.
Your business structure should reflect what your business is today and what you want it to become.
In this guide, I'll break down each major business structure without the legal jargon. You'll understand the real-world implications for your taxes, personal liability, ability to raise funding, and day-to-day operations.
Note: Before we get started, I want to note that you should always consult a trusted legal and tax advisor before making your final decision. The information here is for reference only and should not be considered tax or legal advice — it’s based on my own experience running a solopreneur business.
The different types of business ownership
| Feature | Sole Proprietorship | General Partnership | LLC | S Corporation | C Corporation | Cooperative |
|---|---|---|---|---|---|---|
| Formation Complexity | Very Low | Low | Moderate | High | High | High |
| Formation Costs | Very Low ($0–100) | Low ($0–200) | Moderate ($100–800) | High ($500–1500) | High ($500–1500) | High ($1000+) |
| Personal Liability Protection | None | None | Strong | Strong | Strongest | Limited |
| Tax Treatment | Pass-through | Pass-through | Flexible | Pass-through | Corporate tax | Pass-through |
| Ongoing Compliance | Minimal | Minimal | Moderate | Significant | Significant | Significant |
| Ability to Raise Capital | Limited | Limited | Moderate | Limited | Excellent | Challenging |
| Ownership Flexibility | Single owner | Multiple owners | Flexible | Restrictions apply | Highly flexible | Member-based |
| Suitable for Solopreneurs | Only for early-stage | Not suitable | Excellent fit | Good for profitable solopreneurs | Rarely suitable | Not suitable |
| Self-Employment Tax | On all profits | On all profits | On all profits (unless S-Corp election) | Only on salary | N/A | Varies |
| Double Taxation | No | No | No | No | Yes | No |
1. Sole Proprietorship
A sole proprietorship is the simplest form of business structure for solopreneurs. There's no legal distinction between you and your business—you are the business.
You automatically operate as a sole proprietorship when you start selling products or services without forming any legal entity.
The main advantages of this structure are its simplicity and low cost. There's no registration required beyond any local business licenses or permits specific to your industry. You file taxes using Schedule C (in the United States) with your personal tax return and maintain complete control over all business decisions.
This simplicity comes with significant drawbacks. Most importantly, you have unlimited personal liability for all business debts and legal issues. If your business gets sued or can't pay its bills, your personal assets (house, car, savings) are at risk.
Is a sole proprietorship right for solopreneurs?
A sole proprietorship can make sense for solopreneurs in the earliest stages of business, particularly if you're testing a concept or have minimal liability exposure.
Many folks spend months agonizing over whether to form an LLC or an S-Corp when they haven't even landed a first client. Just get started. You can always restructure.
When your business generates meaningful revenue or creates potential liability, you should transition to a more protective structure. Think of the sole proprietorship as a temporary starting point, not a long-term solution for most serious solopreneurs but also don’t overengineer your entity structure early on in the process.
2. Partnership
A partnership forms when two or more people run a business together. Like sole proprietorships, partnerships don't require formal registration with the state (though you should always have a written partnership agreement).
Partnerships offer shared resources, complementary skills, and distributed workload. They're relatively easy to form and operate.
However, partnerships come with significant risks around liability and potential disputes. There are several types of partnerships, each with different liability implications and management structures.
General Partnership (GP)
In a general partnership, all partners share equally in the business's management, profits, and liabilities. Each partner can act on behalf of the business, binding all other partners to contracts and agreements.
The most critical drawback is that each partner has unlimited personal liability for the actions of all other partners. If one partner makes a costly mistake or incurs business debt, all partners' personal assets are at risk.
Is a General Partnership Right for Solopreneurs?
By definition, a true solopreneur operates alone, making general partnerships incompatible with the solopreneur model.
If you're contemplating bringing on a partner, you're shifting away from solopreneurship toward co-ownership. I strongly recommend using a more protective entity structure like an LLC rather than a general partnership in these cases, as the personal liability risks are too great.
Limited Partnership (LP)
Limited partnerships include general partners (who manage the business and assume full liability) and limited partners (who invest but don't participate in management and have liability limited to their investment).
This structure is common in investment scenarios where some partners want to be passive investors while others run the business.
Is a limited partnership right for solopreneurs?
Limited partnerships are rarely appropriate for solopreneurs. They're designed specifically for businesses with active managers and passive investors, making them more complex than most single-owner companies need.
The LP structure could be helpful if a solopreneur wanted to raise capital from investors while maintaining operational control. However, an LLC or corporation usually provides better options for similar scenarios with less complexity.
Limited Liability Partnership (LLP)
LLPs provide liability protection for all partners. Each partner is protected from personal liability for the actions of other partners, though they remain liable for their actions.
LLPs are common in professional service industries like law, accounting, architecture, and medicine.
Is a Limited Liability Partnership right for solopreneurs?
LLPs typically require at least two partners, making them incompatible with the solopreneur model. Also, many US states restrict LLPs to specific professional service providers.
For solopreneurs in professional services, a professional LLC (PLLC) or professional corporation (PC) often provides similar benefits with more straightforward administration.
3. Limited Liability Company (LLC)
The LLC has become the most popular entity choice for small businesses and solopreneurs, combining the liability protection of a corporation with the tax simplicity of a sole proprietorship or partnership.
An LLC creates a legal separation between your personal assets and your business. If your company faces litigation or debt, your assets generally remain protected (with exceptions for personal guarantees or negligence).
LLCs also offer tax flexibility. Usually, one-person LLCs are taxed as sole proprietorships and multi-member LLCs are taxed as partnerships. However, LLCs can be taxed as S or C Corporations if it benefits you.
Is an LLC right for solopreneurs?
LLCs are usually the right call for solo or small teams. You get liability protection without corporate headaches. Plus, you keep pass-through taxation, which keeps things simple.
A single-member LLC allows you to maintain complete control while shielding personal assets. For solopreneurs generating substantial profit, an LLC with an S Corporation tax election can provide additional tax advantages by potentially reducing self-employment taxes.
4. Corporation
Corporations are independent legal entities owned by shareholders. They offer the strongest liability protection and are designed for businesses planning significant growth, outside investment, or eventual public offerings.
There are two primary types of corporations that small business owners consider: C Corporations and S Corporations.
C Corporation
The C Corporation is the standard corporate structure used by large companies and startups seeking venture capital. It's a separate legal entity that pays its own taxes at corporate rates.
C Corporations can have unlimited shareholders and multiple classes of stock, making them ideal for raising capital. They also allow for a wide range of employee benefits that can be deducted as business expenses.
The main disadvantage is “double taxation”—profits are taxed at the corporate level, then taxed again as dividends when distributed to shareholders. However, this can sometimes be mitigated through tactics like reinvestment of profits.
Is a C corporation right for solopreneurs?
If you plan to raise VC money, you'll almost certainly need to be a Delaware C-Corp. But if you're bootstrapping, that complexity can become a burden.
C Corporations rarely make sense for solopreneurs unless you're building a high-growth startup that will eventually require venture capital. The administrative requirements, corporate formalities, and potential tax disadvantages typically outweigh the benefits for most one-person businesses.
However, if your long-term strategy involves significant outside investment or an eventual acquisition, starting with a C Corporation (particularly in Delaware) might benefit you.
S Corporation
An S Corporation isn't a distinct entity type but a tax election available to qualifying corporations and LLCs. It combines the liability protection of a corporation with pass-through taxation like a partnership or sole proprietorship.
S Corporations avoid the double taxation issue of C Corporations. Instead, profits and losses pass through to shareholders' personal tax returns.
The most significant potential advantage for profitable businesses is the ability to reduce self-employment taxes. S Corporation owners can pay themselves a reasonable salary (subject to employment taxes) and take additional profits as distributions (not subject to self-employment taxes).
However, S Corporations have restrictions: they're limited to 100 shareholders, can only issue one class of stock, and must meet other IRS requirements.
Is an S Corporation right for solopreneurs?
For profitable solopreneurs, an S Corporation election (either for a corporation or LLC) can offer significant tax advantages once your business consistently generates enough profit to justify the additional administrative requirements.
The sweet spot for considering an S Corporation is typically when your business profit exceeds what would be considered a reasonable salary for your role by at least $30,000-$50,000 annually.
Remember that you can start as an LLC and elect S Corporation taxation later when your profitability justifies the change—you don't need to form a corporation to gain S Corporation tax treatment.
5. Cooperative
A cooperative is a business owned and democratically controlled by its members, who are also its customers, workers, or producers. Profits and earnings are distributed among members based on participation rather than investment.
Cooperatives follow the principle of one member, one vote, regardless of investment size. They're common in agricultural, retail, housing, and utility sectors.
The primary advantages are shared ownership and democratic control. Profits are distributed based on patronage (use of the cooperative's services) rather than capital investment. However, you have to rely on other people within the company to make decisions.
Is a Cooperative right for solopreneurs?
Cooperatives are fundamentally incompatible with the solopreneur model, as they're designed for group ownership and democratic governance.
However, a solopreneur might eventually transition to a worker cooperative if they want to share ownership with employees rather than maintain sole control.
Choose the right business structure for your solopreneurship journey
The biggest mistake is picking a structure because someone else said it worked for them. Your ownership model should reflect how you want the business to live in your life.
As you evaluate these options, consider where your business is today and where you want it to go. Your business structure should align with your growth trajectory, financial goals, and personal risk tolerance.
For most solopreneurs, the journey typically progresses from a sole proprietorship in the earliest stages to an LLC as the business generates revenue and creates potential liability. Those who get substantial profits might choose to form an S corporation later on.
That said, always consult a trusted legal and tax advisor before making your final decision. The information here is for reference only and should not be considered tax or legal advice. Your specific situation may have nuances affecting which structure is best for your business.
