A business enterprise is an organized entity—owned by one or more people—that produces goods or delivers services on an ongoing basis with the goal of earning a profit. In the United States, that enterprise almost always takes one of five legal forms: sole proprietorship, general partnership, limited liability company, S corporation, or C corporation. The form you pick decides who is personally on the hook for the business’s debts, how its income is taxed, and what paperwork it has to keep filing year after year.
What separates an enterprise from a one-off sale or a hobby is coordination and continuity. The activity is set up to repeat, the owner intends to keep it running, and it has the resources and structure to do so. Courts, lenders, and tax authorities look for exactly that pattern when they decide whether something counts as a business.
The Five Common Legal Forms
Sole Proprietorship
A sole proprietorship is the simplest form. The business and the owner are the same legal person. There is no separation between personal and business assets, so if the business cannot pay its debts, creditors can go after the owner’s house, car, or savings. Sole proprietors report business income on Schedule C of their individual tax return and pay self-employment tax on net earnings.1Internal Revenue Service. Self-Employed Individuals Tax Center
General Partnership
A general partnership exists whenever two or more people agree to run a business together and share profits and losses. The partnership files Form 1065 as an information return, and each partner reports their share of income on their personal return.2Internal Revenue Service. Partnerships Under the Uniform Partnership Act, which most states have adopted in some version, each partner can be held personally responsible for the full amount of the partnership’s debts, not just a proportional share. Active partners also owe self-employment tax on their distributive share.
Limited Liability Company
An LLC separates the business from its owners (called members) for liability purposes. If the business is sued or cannot pay a creditor, the members’ personal assets are generally protected. Forming an LLC requires filing articles of organization with the state and paying a filing fee that varies by state.
By default, the IRS treats a single-member LLC as a sole proprietorship and a multi-member LLC as a partnership for tax purposes. An LLC can also elect to be taxed as a corporation. Internal rules go in an operating agreement, which covers ownership percentages, profit splits, voting rights, and what happens when a member leaves or dies. It isn’t always legally required, but without one the business runs entirely on state default rules that may not match what the owners actually want.
S Corporation
An S corporation is not its own kind of entity. It’s a tax election available to qualifying corporations and LLCs. To make the election, the business files Form 2553 with the IRS and must meet specific requirements: it has to be a domestic corporation, have no more than 100 shareholders, issue only one class of stock, and have no shareholders that are partnerships, other corporations, or nonresident aliens.3Office of the Law Revision Counsel. 26 USC 1361 S Corporation Defined Like a partnership, an S corporation passes income through to its shareholders and generally avoids tax at the entity level.4Internal Revenue Service. S Corporations
C Corporation
A C corporation is a fully independent legal entity owned by shareholders and run by a board of directors. It can raise capital by issuing stock, sign contracts in its own name, and keep operating through changes in ownership. The trade-off is double taxation: the corporation pays a flat 21 percent federal income tax on its profits, and shareholders pay tax again on any dividends they receive.5Office of the Law Revision Counsel. 26 USC 11 Tax Imposed State laws require corporations to adopt bylaws, hold regular board and shareholder meetings, and keep formal records of major decisions.
How Each Form Is Taxed
Entity choice determines how many layers of tax hit your profits and what forms you file.
Pass-Through Entities
Sole proprietorships, partnerships, S corporations, and most LLCs are pass-through entities. The business itself pays no federal income tax. Income flows through to the owners’ individual returns and is taxed at their personal rates, meaning only one layer of tax applies.4Internal Revenue Service. S Corporations
Sole proprietors and active partners also owe self-employment tax on net business earnings. The self-employment tax rate is 15.3 percent: 12.4 percent for Social Security (up to the annual wage base cap) and 2.9 percent for Medicare with no cap.6Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) S corporation owners who also work in the business can reduce self-employment tax by splitting their pay between a reasonable salary (subject to payroll tax) and distributions (which are not).
C Corporation Taxation
A C corporation pays the flat 21 percent federal tax at the entity level.5Office of the Law Revision Counsel. 26 USC 11 Tax Imposed After-tax profits distributed as dividends are then taxed again on the shareholders’ returns. The double hit is the main drawback, though it can be softened by retaining earnings inside the company or using deductible expenses such as salaries and benefits to reduce taxable income at the entity level.
The Section 199A Deduction Has Expired
From 2018 through 2025, owners of pass-through businesses could deduct up to 20 percent of their qualified business income under Section 199A, which cut their effective tax rate significantly. That deduction expired on December 31, 2025, and as of early 2026 has not been renewed.7Internal Revenue Service. Qualified Business Income Deduction The expiration raises the effective tax burden on pass-through income and may change the math for owners weighing a C corporation election or a different compensation structure.
When Limited Liability Can Be Lost
Forming an LLC or corporation does not lock in liability protection forever. Courts can pierce the corporate veil and hold owners personally liable when the separation between the business and its owners is more fiction than reality. That generally requires two findings: the entity wasn’t truly operated as something separate, and letting the separation stand would reward fraud or serious injustice.
Behaviors that increase the risk include:
- Commingling funds. Using a business account to pay personal expenses, or dropping business revenue into a personal account, undercuts the claim that the entity is actually separate.
- Undercapitalization. Launching a business without enough money to cover foreseeable obligations suggests the entity was set up as a shell to dodge liability.
- Ignoring formalities. Skipping required meetings, failing to keep records, or operating without an operating agreement or bylaws weakens the argument that the entity has its own life.
- Fraud or dishonesty. Signing deals knowing the business can’t pay, or altering financial records, sharply raises the odds a court sets the entity’s protection aside.
Smaller entities—single-member LLCs, family-owned companies, closely held corporations—face the most scrutiny, because fewer people are involved and the line between personal and business activity blurs more easily.
Federal and State Compliance After Formation
Employer Identification Number
Most enterprises need an Employer Identification Number from the IRS. You generally have to get one if you hire employees, operate as a partnership or corporation, or pay certain excise taxes. LLCs, partnerships, and corporations should form the entity at the state level before applying for the EIN.8Internal Revenue Service. Get an Employer Identification Number
State Annual Reports and Fees
Most states require LLCs and corporations to file an annual or biennial report and pay a recurring fee to stay in good standing. Fees vary widely. Some states charge nothing for the report itself; others impose several hundred dollars a year. Missing the filing can lead to administrative dissolution or revocation, which strips the entity of its legal status along with the liability protection that comes with it.
Beneficial Ownership Reporting
The Corporate Transparency Act originally required most small businesses to report their beneficial owners to the Financial Crimes Enforcement Network. As of March 2025, FinCEN exempted all entities created in the United States from that requirement, concluding that domestic reporting would not serve the public interest.9FinCEN.gov. Beneficial Ownership Information Reporting Only entities formed under foreign law and registered to do business in a U.S. state still have to file beneficial ownership reports. The exemption came through an interim rule and could be revised, so owners should keep an eye on it.