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Types of Business Entities

Date: December 12, 2023

A sole proprietorship is the most common U.S. legal business structure, with minimal startup costs and various tax perks.

US Chamber of Commerce

What is a business entity?

A business entity refers to an organization established to conduct commercial, industrial, or professional activities. Selecting the right business entity is an important decision that should be made with careful consideration of the specific goals and circumstances of the business. It’s often advisable to seek the guidance of legal and financial professionals when making such decisions.

Types of Business Entities

There are several types of business entities, each with its own advantages, disadvantages, and legal implications. The choice of business structure depends on factors such as the size of the business, the nature of its activities, and the preferences of the owners. Here are some common types of business entities:

Sole Proprietorship
  • Owned and operated by a single individual.
  • Simplest form of business structure.
  • The owner has full control and is personally responsible for the business’s debts and liabilities.
  • The business income is reported on the owner’s personal tax return (Form 1040) using Schedule C.
Partnership
  • Formed by two or more individuals or entities who agree to share profits and losses.
  • Partnerships can be general (equal sharing of profits and responsibilities) or limited (with both general and limited partners).
  • The partnership itself does not pay income taxes; instead, profits and losses are passed through to the partners, who report them on their individual tax returns.
Limited Liability Company (LLC)
  • Provides limited liability protection to its members (owners).
  • Combines features of a partnership and a corporation.
  • Offers flexibility in management and taxation.
  • By default, a single-member LLC (aka disregarded entity) is treated as a sole proprietorship for tax purposes, while a multi-member LLC is treated as a partnership. However, LLCs can also elect to be taxed as a corporation.
Corporation
  • A legal entity that is separate from its owners (shareholders).
  • Shareholders have limited liability for the company’s debts.
  • Categorized as either C corporations or S corporations, each with different tax implications.
    • C Corp – the corporation itself pays income taxes on its profits at the corporate tax rate. Shareholders then pay personal income tax on any dividends received.
    • S Corp – similar to a C Corp, but with a special tax status that allows it to avoid double taxation.
      Profits and losses are passed through to the shareholders, who report them on their individual tax returns.
Cooperative
  • Owned and operated by its members for mutual benefit.
  • Members contribute to and democratically control the capital of the cooperative.
  • Cooperatives can be taxed similarly to corporations, but they may also have special tax considerations.
Nonprofit Organization
  • Formed for purposes other than making a profit, such as to serve a charitable, educational, religious, scientific, or social purpose.
  • Exempt from certain taxes, and contributions may be tax-deductible for donors.

The business structure you choose influences everything from day-to-day operations, to taxes and how much of your personal assets are at risk. You should choose a business structure that gives you the right balance of legal protections and benefits. – SBA

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