Choosing the right legal structure for your business is one of the most important decisions you'll make as an entrepreneur. The structure you choose affects everything from your personal liability and tax obligations to your ability to raise capital. This guide explains the most common business entity types to help you make an informed decision.
## Sole Proprietorship
A sole proprietorship is the simplest and most common business structure. It's an unincorporated business owned and run by one individual with no distinction between the business and the owner. You are entitled to all profits and are responsible for all your business's debts, losses, and liabilities.
* **Liability:** Unlimited personal liability.
* **Taxation:** Pass-through taxation. You report business income and losses on your personal tax return.
* **Formation:** No formal action is required to form a sole proprietorship.
## Partnership
A partnership is a single business where two or more people share ownership. Each partner contributes to all aspects of the business, including money, property, labor, or skill. In return, each partner shares in the profits and losses of the business.
* **Liability:** General partners have unlimited personal liability. Limited partners have limited liability.
* **Taxation:** Pass-through taxation. Profits and losses are passed through to the partners' personal tax returns.
* **Formation:** Requires a partnership agreement.
## Limited Liability Company (LLC)
An LLC is a hybrid business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. This is a popular choice for small businesses.
* **Liability:** Limited liability. Owners are not personally responsible for business debts.
* **Taxation:** Can be taxed as a pass-through entity (like a sole proprietorship or partnership) or as a corporation.
* **Formation:** Requires filing articles of organization with the state.
## Corporation (C Corp)
A C corporation is a legal entity that is separate and distinct from its owners. Corporations can be taxed, sued, and can enter into contractual agreements. The corporation has a life of its own and does not dissolve when ownership changes.
* **Liability:** Limited liability.
* **Taxation:** Taxed separately from its owners (corporate tax). This can lead to double taxation if dividends are distributed to shareholders.
* **Formation:** Requires filing articles of incorporation with the state.
## S Corporation (S Corp)
An S corporation is a special type of corporation that's created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation.
* **Liability:** Limited liability.
* **Taxation:** Pass-through taxation. Profits and losses are passed through to the owners' personal tax returns.
* **Formation:** Requires first forming a C corporation and then making a special election with the IRS.
## References
[1] SBA.gov - Choose a business structure (https://www.sba.gov/business-guide/launch-your-business/choose-business-structure)