The four types of business structures in the United States are sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. They differ on three things that matter to every owner: how much of your personal money is exposed if the business is sued or goes under, how the IRS taxes what you earn, and how much paperwork you have to keep up with year after year. If you start earning money on your own and never file anything, you are already a sole proprietor by default, so understanding where that puts you is useful even before you decide to change it.
Sole Proprietorship
A sole proprietorship is the simplest structure and the one you fall into automatically. No formation documents, no annual reports, no separate bank account required by law.1Legal Information Institute (LII) / Cornell Law School. Sole Proprietorship Freelancers, independent contractors, and side-business owners operating under their own name are usually sole proprietors whether they think of themselves that way or not.
The cost of that simplicity is total personal exposure. There is no legal wall between you and the business, so creditors can reach your personal savings, your home, and your car to collect on business debts. A lawsuit against the business is effectively a lawsuit against you. That unlimited liability is the main reason owners move to a different structure once revenue or risk grows.
How Sole Proprietors Are Taxed
All business income flows onto your personal return. You report profits and losses on Schedule C, which attaches to your Form 1040.2Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship) Net earnings are then hit with self-employment tax at 15.3% — 12.4% for Social Security and 2.9% for Medicare. The Social Security portion applies only to the first $184,500 of net earnings in 2026; above that, you still owe the 2.9% Medicare tax on every dollar.3Social Security Administration. Contribution and Benefit Base You can deduct half of the self-employment tax on your personal return.4Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040)
Operating Under a Business Name
If you use your own legal name, most jurisdictions require no registration. The moment you adopt a different name, such as “Bright Pixel Design” instead of “Jane Smith,” you typically have to register a “doing business as” (DBA) name, sometimes called a fictitious name or trade name. Some states handle this at the state level; others push it down to the county or city.5U.S. Small Business Administration. Register Your Business A DBA does not create liability protection or change your taxes. It just lets you operate and open bank accounts under the business name.
Partnership
When two or more people go into business together for profit, the law generally treats the arrangement as a partnership. No formal paperwork is required to create one. Most states follow some version of the Uniform Partnership Act or its revised edition, which sets default rules for sharing profits, resolving disputes, and winding down.6Legal Information Institute (LII) / Cornell Law School. Revised Uniform Partnership Act of 1997 (RUPA) Partnerships come in three main forms.
General Partnership
Every partner can make decisions, sign contracts, and take on debt for the business. That shared authority is also the biggest risk: if your partner signs a bad lease or gets the business sued, you are personally on the hook for the full amount, not just your share. Like sole proprietors, general partners face unlimited personal liability. A written partnership agreement is not legally required in most states, but operating without one invites trouble when disagreements arise.
Limited Partnership
A limited partnership has two tiers of owners. At least one general partner runs the business and carries unlimited liability. One or more limited partners contribute capital but stay out of daily management, and they can only lose what they put in — as long as they do not cross into active management. This structure is common in real estate ventures and investment funds where some participants want profit exposure without operational responsibility.
Limited Liability Partnership
In a limited liability partnership (LLP), every partner can participate in management, but no partner is personally responsible for another partner’s malpractice or negligence. You remain liable for your own mistakes and shielded from your colleagues’ professional errors. That is why LLPs are popular among law firms, accounting practices, and medical groups. Not every state allows LLPs for every industry, and the exact scope of protection varies.
How Partnerships Are Taxed
Partnerships themselves do not pay federal income tax. The business files an informational return on Form 1065, and each partner gets a Schedule K-1 showing their share of profits and losses.7Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income Partners report those amounts on their personal returns. This pass-through treatment avoids the double taxation a C corporation faces, but partners owe tax on their share of profits whether or not the money was actually distributed.
Limited Liability Company
An LLC combines the liability shield of a corporation with the tax simplicity of a partnership, and it does so with much less paperwork than a corporation requires. Members, which is the LLC term for owners, are generally not personally responsible for the company’s debts or legal judgments. If the business is sued or cannot pay its bills, creditors typically cannot reach a member’s personal bank accounts, home, or other assets. That protection is why LLCs have become the default choice for small businesses over the past two decades.
Formation requires filing articles of organization (sometimes called a certificate of organization) with the state and paying a fee that ranges from about $35 to $500 depending on where you file. Beyond that, LLCs have fewer ongoing formalities than corporations. No mandatory annual meetings, no board of directors, no formal minutes.
Member-Managed or Manager-Managed
In a member-managed LLC, every owner participates in running the business and can make binding decisions. That is the default in most states. In a manager-managed LLC, members designate one or more managers (who may or may not be members) to handle operations while the other members act as passive investors. The choice should be spelled out in the operating agreement, which is the internal document governing voting rights, profit splits, and how members enter or leave the business.
Tax Flexibility
What makes LLCs unusual is how much control members have over tax treatment. Under the federal “check-the-box” regulations, an LLC can choose how the IRS classifies it.8eCFR. 26 CFR 301.7701-3 – Classification of Certain Business Entities A single-member LLC is treated as a disregarded entity by default: all income flows onto the owner’s personal return, essentially the same tax picture as a sole proprietorship but with liability protection. A multi-member LLC defaults to partnership taxation. Either type can elect to be taxed as a C corporation or an S corporation by filing the right form with the IRS. That flexibility lets members pick the tax treatment that best fits their income without changing the underlying legal structure.
Corporation
A corporation is a separate legal person. It can own property, enter contracts, sue, and be sued independently of its owners. That separation is its defining advantage: shareholders generally cannot lose more than what they invested. Keeping that protection, though, takes real discipline. Corporations must adopt bylaws, hold annual shareholder and director meetings, keep written minutes, and observe other formalities that LLCs and partnerships can skip.
Management runs in three layers. Shareholders own the company. A board of directors, elected by shareholders, sets strategy and appoints officers. Officers (CEO, CFO, and similar roles) run day-to-day operations. This hierarchy is not optional if you want courts to respect the separation between the corporation and its owners. When owners mix personal and business funds, skip meetings, or underfund the company at formation, courts can “pierce the corporate veil” and hold shareholders personally liable.9Legal Information Institute (LII) / Cornell Law School. Piercing the Corporate Veil The same concept can apply to LLCs, though the threshold varies by state.
C Corporation Taxation
A standard corporation (called a C corporation after the relevant section of the tax code) pays a flat 21% federal income tax on its profits.10Office of the Law Revision Counsel. 26 U.S. Code 11 – Tax Imposed When the company distributes after-tax profits to shareholders as dividends, the shareholders owe personal income tax on the same money. This double taxation is the most frequently cited drawback of the C corporation. The upside is that C corporations can raise capital by selling stock, which makes them the standard vehicle for companies seeking venture capital or planning an eventual public offering.11U.S. Small Business Administration. Choose a Business Structure
S Corporation Election
Smaller businesses can avoid double taxation by electing S corporation status, which passes income and losses through to shareholders’ personal returns. The company files Form 1120-S as an informational return, but the corporation itself pays no federal income tax.12Internal Revenue Service. S Corporations To qualify, the business must be a domestic corporation with no more than 100 shareholders, only one class of stock, and only eligible shareholders (individuals, certain trusts, and estates — not other corporations, partnerships, or nonresident aliens).13Office of the Law Revision Counsel. 26 USC 1361 – S Corporation Defined Insurance companies, certain financial institutions, and domestic international sales corporations are also ineligible.
If you own an S corporation and work in the business, the IRS requires you to pay yourself a reasonable salary before taking additional money as distributions. Officer-shareholders who provide more than minor services must receive wages subject to employment taxes.14Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers The payroll-tax savings come from distributions above that reasonable salary. Set the salary too low and you are looking at back taxes, penalties, and interest.
How the Four Structures Compare
The right structure depends on how much personal risk you can carry, how you want to be taxed, and how much paperwork you are willing to keep up with. Here is how the four stack up on the questions that matter most.
- Personal liability: Sole proprietors and general partners are personally responsible for every business debt and lawsuit. LLC members, limited partners, and corporate shareholders generally are not, as long as they respect the legal separation between themselves and the business.
- Tax treatment: Sole proprietorships and partnerships are pass-through by default, so income is taxed once on the owner’s personal return. LLCs can choose to be taxed as any of the other structures. C corporations face double taxation. S corporations avoid it but come with eligibility limits.
- Formality and cost: Sole proprietorships and general partnerships cost almost nothing to start and need minimal ongoing paperwork. LLCs require a state filing and modest fees. Corporations demand the most: formation documents, bylaws, annual meetings, and careful recordkeeping.
- Raising outside money: Venture capital firms and institutional investors almost always require a C corporation because it allows multiple classes of stock and has no cap on shareholders. If outside investment is in the plan, starting as an LLC and converting later is possible but adds legal cost and tax complexity.
Many solo owners start as sole proprietors and form a single-member LLC once revenue justifies the filing fee and the liability protection becomes worth having. Businesses with multiple owners often pick an LLC or limited partnership for the mix of pass-through taxation and liability protection. Corporations fit best when the business needs to issue stock, attract institutional investors, or operate in an industry where the corporate form carries regulatory advantages.
What You Still Have To Do After Formation
Picking a structure is the first step. Every structure beyond a basic sole proprietorship brings continuing obligations, and even sole proprietors have a few.
Employer Identification Number
Partnerships, LLCs, and corporations all need an Employer Identification Number (EIN) from the IRS. It functions like a Social Security number for the business.15Internal Revenue Service. Employer Identification Number Sole proprietors can use their personal Social Security number unless they hire employees or need to file certain tax returns. Applying is free and takes minutes online.
State Filings and Fees
Most states require LLCs and corporations to file an annual or biennial report and pay a fee to stay in good standing. Fees vary widely. Some states charge nothing for the report; others charge several hundred dollars. A handful also impose a separate franchise tax regardless of whether the company earned a profit. Miss these filings and you can face penalties, loss of good standing, or administrative dissolution, which strips away your liability protection.
Registered Agent
LLCs and corporations must maintain a registered agent in every state where they are formally registered. The registered agent is a person or company designated to receive legal documents, including lawsuits, on the business’s behalf. You can usually serve as your own, as long as you have a physical address rather than a P.O. box, or you can hire a commercial service for roughly $50 to $300 a year. Let your registered agent lapse and you can miss a lawsuit filing and end up with a default judgment against the business.