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A business entity type is the legal form of a company. The form decides who is liable for debts, which tax return gets filed and what paperwork the state expects. The SBA sets out the main choices on its business structure page. The IRS makes the same point on its business structures page: your form of business determines which income tax return form you have to file.
The six common structures
Sole proprietorship. The SBA says it is easy to form and gives you complete control. You can be held personally liable for the debts and obligations of the business. Taxes involve self-employment tax and personal tax. Compare it with an LLC in our sole proprietorship guide.
Partnership. The SBA calls partnerships the simplest structure for two or more people to own a business together. Liability is unlimited personal liability unless structured as a limited partnership. The IRS partnership page says a partnership does not pay income tax. It passes profits or losses to its partners, who report their share on personal returns. A written partnership agreement sets out the terms.
Limited liability company. The SBA says an LLC lets you take advantage of the benefits of both the corporation and partnership structures, and protects you from personal liability in most instances. Tax can be personal or corporate. Read what is an LLC.
C corporation. The SBA describes a legal entity separate from its owners that offers the strongest protection from personal liability. Corporations pay income tax on their profits, which can mean profits are taxed twice. Corporations use bylaws. See LLC vs corporation.
S corporation. The SBA calls it a special type of corporation designed to avoid double taxation. Profits pass through to owners' personal income without corporate tax. An LLC or corporation can elect this status, as explained on the Form 2553 page and in our LLC vs S corp comparison.
Cooperative. The SBA describes a cooperative as owned by and operated for the benefit of those using its services. Profits and earnings are distributed among the members.
How to choose
Ask four questions.
- How much personal risk are you carrying? Sole proprietors and general partners carry the most.
- Who are the owners? Some structures limit who can own shares. The IRS lists S corporation limits, such as no more than 100 shareholders, on its S corporations page.
- How do you want profit taxed? Pass-through or at the company level.
- What paperwork can you keep up? Corporations and LLCs usually have annual state duties, which our annual report deadlines page covers.
State rules still apply
The SBA and IRS describe federal and general rules. The state sets formation fees, name rules and annual reports, and those differ. An entity formed in one state that works in another may need to register there, covered under foreign vs domestic entity.
This page is general information, not legal or tax advice. An attorney or accountant can confirm which type fits you.
If an LLC suits you, start at /start-an-llc/.