The Scenario
Jessie runs a party-planning side business that made $28,000 last year. A friend told her she needed an LLC “for the tax benefits,” while her brother said LLCs are a waste of money. When she looked it up, she found three different structures, two confusing elections, and a dozen services all claiming to be the cheapest. She froze - and did nothing.
The truth is simpler than the internet makes it. Here is the plain-English version.
Who This Guide Is For
This is for new owners choosing their first structure, and for sole proprietors wondering whether to form an LLC or elect S-corp status. If your business involves significant risk, employees, or investors, talk to a professional - this guide covers the common path, not every edge case.
The Three Structures, Plainly
Sole proprietorship
You and the business are the same legal person. You report business income on your personal tax return (Schedule C), pay self-employment tax, and carry all liability personally. There is no filing fee and no paperwork - you are one as soon as you earn income.
Best for: very early businesses, low-risk services, and anyone testing an idea. The cost of being wrong is limited while the business is small.
LLC (single-member or multi-member)
An LLC is a state-registered business entity that legally separates you from the business. You still report profits on your personal return, but the business’s debts and most lawsuits stop at the entity. Costs: a state filing fee, an annual report in most states, and possibly a registered agent fee.
Best for: businesses with real risk - physical work, products, contracts, employees - or owners who want the professional separation from day one.
S-corp election
An S-corp is a tax status that an LLC (or corporation) can elect. The owner-employee takes a reasonable salary subject to payroll tax, and remaining profits pass through as distributions without self-employment tax. The savings come with real costs: payroll setup, quarterly filings, and stricter record-keeping.
Best for: established businesses with consistent profits high enough that the tax savings exceed the compliance costs.
How to Choose (The Decision Tree)
- Are you testing an idea? Start as a sole proprietor. Formality is not the point yet.
- Does the business carry risk? Physical work, products, contracts with customers, or a team means the LLC’s liability separation is worth its small annual cost.
- Do clients or banks expect a formal entity? Some contracts and accounts require an LLC or corporation. If they ask, form one.
- Is profit consistently high? Once you clear the range where S-corp savings beat the overhead, talk to a tax pro about the election.
The Formation Services
You can file an LLC yourself through your state’s website - it is a form and a fee. The reason owners use a service is convenience and compliance help:
- ZenBusiness offers the lowest-cost entry for first-time founders, with compliance reminders that catch annual report deadlines.
- LegalZoom bundles formation with legal guidance and ongoing help, which suits owners who want one provider for the long term.
- Northwest Registered Agent charges a flat rate and is the no-upsell choice for owners who know exactly what they need.
What Not to Overpay For
- “Premium” LLC packages. Expedited filing, EIN setup, and banking resolution templates are worth a few dollars - not hundreds.
- An S-corp before the math works. The election only helps at real profit levels. Do not let a formation service sell you the upgrade early.
- Registered agent fees that renew at triple the intro price. Check renewal rates before you buy.
- Doing nothing out of confusion. The cheapest structure is the sole proprietorship you can start today - formality should follow, not precede, a customer.
What to Buy
If your business is low-risk and new, keep it simple: sole proprietor, proper bookkeeping, and a business bank account once money flows. When risk or professionalism demands an LLC, form it through ZenBusiness for the budget route, Northwest for flat-rate simplicity, or LegalZoom if you want ongoing legal help alongside formation. And before you elect S-corp status, get a tax professional’s numbers - that is the one decision on this page you should not make alone.