Choosing a Business Structure in 2025: LLC, S-Corp, or C-Corp?

When a client comes to me ready to launch a new business, one of the first decisions we work through is entity structure. It sounds technical, but it's really a strategic question: How do you want to be taxed? How much personal liability are you willing to carry? Do you see outside investors in your future? The answers drive the structure. Here's how I frame the choice for entrepreneurs in Tennessee, Florida, and Texas.

Liability Protection: The Starting Point for Everyone

Regardless of which entity you choose, every business should operate through a formal legal structure. Running as a sole proprietor or general partnership leaves your personal assets — home, savings, personal accounts — exposed to business debts and lawsuits. An LLC, S-Corp, and C-Corp all provide a liability shield between you and the business, as long as you maintain the entity correctly: separate bank accounts, proper recordkeeping, no commingling of personal and business funds. The protection is real, but it's only as strong as your compliance habits.

Tax Treatment: Pass-Through vs. Corporate-Level Tax

An LLC (taxed as a disregarded entity or partnership) and an S-Corp both offer pass-through taxation — profits and losses flow directly to the owner's personal return, with no federal tax at the entity level. A C-Corp pays a flat 21% federal corporate tax on earnings, and shareholders pay tax again on dividends — the classic "double taxation" problem. For most small businesses taking regular distributions, pass-through treatment wins on tax efficiency.

The S-Corp election adds a layer: by splitting income between a W-2 salary and distributions, owners can reduce self-employment tax significantly. I covered this in detail in a separate post, but the short version is that for businesses netting $80,000 or more annually, the savings are often meaningful.

Tennessee has no personal income tax, which benefits LLC and S-Corp owners alike. However, Tennessee's Franchise and Excise (F&E) tax — a 6.5% excise on net earnings — applies to most business entities and is an ongoing cost that factors into the structure analysis. Florida and Texas also have no personal income tax, making pass-through entities particularly attractive in all three states.

When a C-Corp Makes Sense

If outside investment — particularly venture capital — is a realistic part of your business plan, a C-Corp (typically incorporated in Delaware) is almost always the right starting structure. S-Corps are capped at 100 shareholders, allow only one class of stock, and cannot have entity shareholders like investment funds. These restrictions make them incompatible with most institutional financing structures. C-Corps offer the flexibility that outside capital requires: preferred stock, complex equity arrangements, and broad shareholder eligibility.

For bootstrapped businesses, professional practices, family businesses, and most Main Street companies, the LLC remains the most practical starting point — low administrative burden, flexible governance, and pass-through taxation, with the option to elect S-Corp treatment once the business is profitable enough for the savings to justify the added complexity.

Getting your structure right from the start is far easier than unwinding a mistake later. If you're launching a business or reconsidering your current structure, I offer free consultations. Call me at 615-829-6181 or email forest@foresthamiltonlaw.com — let's build your foundation the right way.