Business Entity Comparison: LLC vs S-Corp vs C-Corp vs Partnership
A Houston CPA’s plain-English guide to choosing the right structure for your Texas business.
One of the first decisions you’ll make as a new business owner — and one of the most expensive to get wrong — is choosing your entity structure. The choice between LLC, S-Corp, C-Corp, and partnership affects how much you pay in taxes, how much liability protection you have, how complicated your bookkeeping needs to be, and how you can raise money or bring on partners.
At Whetzel CPA, we help Houston and Fort Bend County business owners think through this decision every week. Here’s how the four most common structures actually compare in practice.
The Four Main Business Structures
1. Sole Proprietorship
The default if you start a business and never file paperwork. You and the business are legally the same entity — same tax return (Schedule C on your 1040), same liability exposure. Easy to start, but offers zero liability protection. Almost every Houston small business owner outgrows this structure within a year or two.
Best for: Hobbyists, very early-stage side projects, single-member operations earning under $30k/year.
2. LLC (Limited Liability Company)
The most popular structure for Texas small businesses. Provides liability protection (your personal assets are shielded from business debts and lawsuits) while remaining flexible. By default, a single-member LLC is taxed like a sole proprietorship; a multi-member LLC is taxed like a partnership. You can also elect to have your LLC taxed as an S-Corp once profits justify it.
Texas-specific note: Texas LLCs must file a Franchise Tax Report annually, even if no tax is owed. Most small Houston LLCs fall below the no-tax-due threshold but still need to file.
Best for: Most service businesses, rental property holdings, single-owner consultancies, and partnerships up to roughly $50k–$60k of annual profit.
3. S-Corporation (S-Corp)
Not an entity type — it’s a tax election. You form an LLC or corporation and then file Form 2553 to be taxed as an S-Corp. The benefit: you split your business income between a “reasonable salary” (subject to payroll tax) and distributions (not subject to payroll tax). For a profitable business, that can save $5,000–$15,000 a year in self-employment tax.
The catch: S-Corp status requires payroll, a separate 1120-S tax return, and stricter recordkeeping. It only pays off once profits are high enough — generally when net income clears $50,000–$60,000.
Best for: Profitable single-owner businesses, professional services firms, established consultancies, and anyone earning $60k+ in net business income.
4. C-Corporation (C-Corp)
The default structure for corporations. Income is taxed twice — once at the corporate level (21% federal flat rate as of 2026) and again when distributed to shareholders as dividends. For most small businesses, the double taxation makes C-Corp status a bad fit. It’s mainly chosen by businesses planning to raise venture capital, issue stock, or retain large amounts of earnings inside the business.
Best for: Startups planning to raise outside capital, businesses with many shareholders, or operations needing to keep substantial earnings in the corporation for reinvestment.
5. Partnership (General or Limited)
Used when two or more people own a business together. General partnerships offer no liability protection (all partners are personally liable for business debts). Limited partnerships protect the “limited” partners but not the general partner. Most Houston multi-owner businesses choose a multi-member LLC instead — same tax treatment, much better liability protection.
Side-by-Side Tax Comparison
| Entity | Federal Tax | SE Tax | Payroll Required | Texas Franchise |
|---|---|---|---|---|
| Sole Prop | Personal rates (10-37%) | 15.3% on all profit | No | No |
| LLC (default) | Personal rates (10-37%) | 15.3% on all profit | No | Yes (file required) |
| S-Corp | Personal rates (10-37%) | 15.3% only on salary | Yes | Yes (file required) |
| C-Corp | 21% flat (corporate) | 15.3% on salary | Yes | Yes (file required) |
The Decision Framework We Use With Clients
When a new Houston business owner asks us what structure to use, we walk through four questions:
- How much net profit will you make this year? Under $50k, stick with an LLC. Over $60k, consider an S-Corp election.
- Will you have employees? If yes, you need payroll infrastructure anyway, so the S-Corp overhead is less burdensome.
- Do you plan to raise outside capital? Investors prefer C-Corps. If you’re bootstrapping, LLC or S-Corp is fine.
- How important is administrative simplicity to you? LLC is the simplest. S-Corp adds a separate tax return and payroll filings. C-Corp adds the most complexity.
When to Switch Entity Types
The most common transition we see in our practice: a Fort Bend County business owner starts as an LLC, hits $60k–$80k in net profit, and elects S-Corp status to save on self-employment tax. The S-Corp election can be made anytime during the year but generally must be filed within 75 days of when you want it to take effect.
Switching from S-Corp to C-Corp is less common and usually only happens when a business is preparing for outside investment or going public. The reverse (C to S) is restricted by IRS rules and isn’t always available.
Common Mistakes Houston Business Owners Make
- Forming an S-Corp too early. If your net profit is under $40k, the payroll costs and tax prep fees can eat up your tax savings.
- Skipping reasonable compensation rules. S-Corp owners must pay themselves a “reasonable salary” — paying $0 in W-2 wages and taking everything as distributions is an IRS red flag.
- Ignoring Texas Franchise Tax filings. Even if no tax is owed, Texas requires every entity to file. Missing a filing can cost $50/year in penalties and may forfeit your entity’s good standing.
- Forming in Delaware or Nevada when you operate in Texas. You’ll still have to register as a foreign entity in Texas, doubling your filing fees.
Get Personalized Entity Advice
Every business is different. The right structure depends on your profit level, your industry, your growth plans, and how much administrative complexity you can tolerate. We work with Houston and Fort Bend County business owners every week to choose, change, and maintain the right entity structure.
Schedule a Free Entity Review →
This article is general information and does not constitute legal or tax advice. Your specific situation may require different recommendations. Consult a qualified CPA or attorney before making entity decisions.