Quick answer: A sole proprietorship is simplest but offers no liability protection and puts all profit under self-employment tax. An LLC adds liability protection while keeping pass-through taxation, and it can elect to be taxed as an S corporation, which can reduce self-employment tax once profits are high enough to support a reasonable salary. A C corporation pays its own corporate tax and suits businesses that plan to retain earnings or bring in outside investors. In New York, an S corporation also needs a separate state election, and new LLCs face a publication requirement.

Choosing an entity is one of the first decisions a new business owner makes, and one of the most common things we are asked to revisit years later. The legal form (what you file with the state) and the tax treatment (how the IRS sees you) are two separate choices. Getting both right early saves money and cleanup.

A sole proprietorship, LLC, or corporation is a legal structure under New York law. How that structure is taxed is a separate question:

  • A single-member LLC is taxed like a sole proprietorship by default.
  • A multi-member LLC is taxed as a partnership by default.
  • Either kind of LLC can elect to be taxed as a corporation, and then as an S corporation.
  • A corporation is a C corporation by default and can elect S status if it qualifies.

So "LLC versus S corp" is not really an either-or. Many of our Central New York clients are LLCs taxed as S corporations. The IRS business structures page lays out the options.

When does a sole proprietorship make sense?

You become a sole proprietor automatically when you start doing business on your own. There is nothing to form, and you report profit on Schedule C of your personal return.

It works well for a new or low-risk business with modest profit. The downsides are real, though:

  • No separation between business and personal liability.
  • All net profit is subject to self-employment tax.
  • It can look less established to banks and larger customers.

If you are freelancing or doing gig work, our article on self-employed and gig income taxes covers what you owe in this setup.

Why do so many owners choose an LLC?

An LLC gives you a liability shield between business debts and your personal assets, as long as you respect the separation: separate bank accounts, signed agreements in the LLC's name, and no mixing of funds. For tax, it stays flexible.

New York has a few LLC-specific requirements to plan for:

  • Publication. Within 120 days of formation, a New York LLC must publish notice of its formation in two newspapers designated by the county clerk and file proof with the Department of State. Publication costs vary widely by county, and failing to comply can suspend the LLC's authority to do business until it is fixed.
  • Annual filing fee. LLCs taxed as partnerships or disregarded entities with New York source income may owe an annual filing fee to the Tax Department based on gross income.
  • Operating agreement. New York requires one. It matters most with multiple owners, so do not skip it.

When is an S corporation worth it?

The main tax advantage of an S corporation is how profit is split. Owners who work in the business must take a reasonable salary through payroll, which is subject to Social Security and Medicare tax. Remaining profit can be distributed without self-employment tax.

That savings has to outweigh the added costs: payroll processing, a separate corporate return, unemployment insurance, and more bookkeeping discipline. As a rough rule, an S election starts to make sense once profit comfortably exceeds what a reasonable salary for your role would be. The salary question is the heart of it, and we cover it in detail in our article on S corporation reasonable compensation.

Points to know:

  • The federal election is made on Form 2553, generally within two months and 15 days after the start of the tax year it is to take effect.
  • New York requires its own election on Form CT-6. Without it, your company is treated as a C corporation for New York purposes even if it is an S corporation federally.
  • S corporations are limited to 100 shareholders, generally individuals who are U.S. citizens or residents, and one class of stock.
  • New York S corporations still pay a fixed dollar minimum tax based on New York receipts.
  • S corporation owners may also benefit from New York's elective pass-through entity tax (PTET).

When does a C corporation make sense?

A C corporation pays federal corporate income tax at a flat rate, plus New York's business corporation franchise tax. When it pays dividends, shareholders pay tax again. That double tax is why most small owner-operated businesses avoid C status.

But C corporations fit some situations well:

  • Businesses that plan to reinvest most profit rather than distribute it.
  • Companies raising money from venture investors, who often require C corporation stock.
  • Founders hoping to qualify for the exclusion of gain on qualified small business stock when they sell, which has strict holding period and eligibility rules.
  • Owners who want certain fringe benefits that are more favorable in a C corporation.

Pass-through owners, by contrast, may be able to claim the qualified business income deduction, which is now a permanent part of the tax code. A C corporation does not get it.

How do I choose, and can I change later?

Questions we walk through with owners:

  1. How much profit do you expect in the next two to three years?
  2. Will you have partners or outside investors?
  3. Do you plan to keep profits in the business or take them out?
  4. How much liability exposure does the business have?
  5. Are you prepared to run payroll and keep clean books?

You can change later, but not every change is free. Converting from an LLC to an S corporation election is usually simple. Moving appreciated assets out of a corporation, or revoking an S election, can trigger tax and waiting periods. Our business and corporate tax work often starts with exactly this review.

Frequently asked questions

Is an LLC or S corporation better for a small business?

They are not mutually exclusive. An LLC is a legal structure, and an S corporation is a tax election that an LLC can make. Many small businesses form an LLC for liability protection and later elect S corporation tax treatment once profit is high enough to justify payroll.

Does an LLC protect my personal assets?

Generally yes, for business debts and claims against the business, if you keep finances separate and follow formalities. It does not protect you from your own personal negligence or from debts you personally guarantee, such as many bank loans and leases.

Do I need to file anything with New York for an S corporation?

Yes. New York requires a separate S election on Form CT-6. Without it, the company is taxed as a C corporation for New York purposes, which can be an expensive surprise.

This article is general information for 2026, not tax or legal advice for your situation. Tax rules and figures change; confirm current amounts with the IRS, New York State, or your accountant before acting.

Related service: Business & Corporate Tax