Business Entity Types Explained

A sole proprietorship is the default business structure in the United States. If you earn money from self-employment and have not filed formation documents with your state, you are already operating as a sole proprietor. There is no state registration required, no separate tax return to file, and no formation cost.

You report all business income and expenses on Schedule C attached to your personal Form 1040. You also pay 15.3% self-employment tax on net earnings (12.4% Social Security up to the wage base plus 2.9% Medicare). Quarterly estimated tax payments are required if you expect to owe $1,000 or more.

The biggest downside is liability. You and the business are legally the same entity. If the business is sued or defaults on a debt, your personal home, car, and savings are all at risk. There is no legal separation between you and the business.

• Best if you are testing a business idea, freelancing under $30K/year, or running a casual side hustle.
• Upgrade when your income exceeds $30K to $50K annually, you sign contracts with clients, or you have personal assets worth protecting.
• When you are ready, forming an LLC is the natural next step. See our sole proprietorship vs LLC comparison for a detailed breakdown.

A general partnership forms automatically when two or more people go into business together. Like a sole proprietorship, you do not need to file formation documents in most states. However, partnerships must file an annual Form 1065 (informational return) with the IRS and issue Schedule K-1s to each partner.

Each partner reports their share of income on their personal return and pays self-employment tax. Partners are also jointly and personally liable for all partnership debts and obligations. If your partner signs a bad deal, your personal assets are on the line too.

A limited partnership (LP) is a different structure that requires filing a Certificate of Limited Partnership with your state. Filing fees run from $70 in California to $200 in New York. LPs have at least one general partner (unlimited liability, manages the business) and one or more limited partners (liability capped at their investment, no management role). LPs are popular for real estate syndications, family investment funds, and venture capital.

• General partnerships are best for two co-equal founders with no outside investors and low risk tolerance (or limited assets).
• Limited partnerships work well for raising passive capital while keeping management control with a single general partner.
• If you want liability protection for all owners, an LLC is almost always the better choice. See our entity type overview for a full comparison.

The limited liability company (LLC) is the most popular filed entity type for new U.S. businesses, and for good reason. It combines the liability protection of a corporation with the tax simplicity of a partnership. You form an LLC by filing Articles of Organization (sometimes called a Certificate of Formation) with your state's Secretary of State.

Formation costs range from $35 in Montana to $500 in Massachusetts, with the national average at about $132 as of 2026. Annual report fees average $91 per year. California is a notable outlier: the filing fee is just $70, but you owe an $800 annual franchise tax starting in your first year, even if your LLC earns zero revenue. Four states (Arizona, Missouri, New Mexico, Ohio) charge no annual LLC fees at all.

For federal tax purposes, the IRS treats a single-member LLC as a disregarded entity (taxed like a sole proprietorship on Schedule C). A multi-member LLC defaults to partnership taxation (Form 1065). You can also elect to be taxed as an S Corp (Form 2553) or a C Corp (Form 8832). This tax flexibility is the LLC's superpower.

If your net self-employment income exceeds $80,000 per year, electing S Corp taxation lets you split income between salary (subject to 15.3% self-employment tax) and distributions (not). For someone earning $100K, that split can save $5,000 to $15,000 annually.

• No ownership restrictions: individuals, other LLCs, corporations, trusts, and foreign nationals can all be members.
• Management flexibility: member-managed (all owners run the business) or manager-managed (hired or designated managers).
• Check our best LLC formation services to compare DIY vs. professional filing. Or explore the Series LLC if you need multiple asset-protected compartments under one umbrella.

An S Corporation is not a separate entity type. It is a federal tax election that an existing LLC or corporation makes by filing IRS Form 2553. S Corp status lets your business income pass through to your personal return (like an LLC) while also allowing you to reduce self-employment taxes by paying yourself a reasonable salary and taking additional profit as distributions.

The self-employment tax savings can be significant. If your business earns $120,000 and you pay yourself a $60,000 salary, you only owe the 15.3% payroll tax on that $60,000. The remaining $60,000 in distributions avoids Social Security and Medicare taxes entirely. That is roughly $9,180 in annual savings compared to paying SE tax on the full amount.

To qualify, your business must meet strict IRS requirements:

• No more than 100 shareholders (family members can count as one).
• Shareholders must be U.S. citizens or resident aliens, certain trusts, or estates.
• Only one class of stock is permitted (voting vs. non-voting differences are allowed).
• Cannot be a bank, insurance company, or domestic international sales corporation.

The Form 2553 deadline is 2 months and 15 days after the start of the tax year (March 15 for calendar-year businesses). For new entities, the deadline is 2 months and 15 days from the formation date. Miss the deadline and you wait until the following tax year, unless you qualify for late election relief under Rev. Proc. 2013-30.

S Corp status adds compliance requirements: mandatory payroll, quarterly payroll tax deposits, Form 1120-S filing, and Schedule K-1 distribution to shareholders. Read our full guide on how to start an S Corp or compare it directly with a C Corp in our C Corp vs S Corp breakdown.

A C Corporation is the standard corporate structure and the default tax classification when you incorporate in any state. C Corps are separate legal entities from their owners, providing full personal liability protection. They file Form 1120 and pay a flat 21% federal corporate income tax rate on all net profits (unchanged since the 2017 Tax Cuts and Jobs Act and confirmed by the OBBBA signed July 4, 2026).

The primary downside is double taxation. The corporation pays 21% on its profits, and then shareholders pay personal income tax (up to 23.8% including the net investment income tax) when those profits are distributed as dividends. The combined effective rate can reach 36% to 40% on distributed earnings.

So why would you choose a C Corp? Three scenarios stand out:

• Raising venture capital. VCs invest through preferred stock, which requires multiple classes of stock. S Corps cannot do this. C Corps can.
• QSBS tax exclusion. Under Section 1202, qualifying C Corp stock held for 5+ years can exclude up to $15 million in capital gains from tax (expanded by OBBBA in July 2026).
• Going public. Public companies are structured as C Corps. If an IPO is on your roadmap, start here.

Formation costs mirror those of an S Corp (which is just a C Corp with a tax election): state incorporation fees range from $50 to $500. Delaware is the most popular incorporation state for C Corps due to its well-developed corporate law, though the $90 formation fee comes with a $300 annual franchise tax. Most small businesses are better off incorporating in their home state. For a detailed breakdown, read our C Corp vs S Corp comparison.

A nonprofit is a corporation organized for charitable, educational, religious, scientific, or literary purposes. It is formed at the state level by filing Articles of Incorporation (or a Certificate of Incorporation) with your Secretary of State. State filing fees range from $8 in Kentucky to over $200 in some states. California charges $115 for a public benefit corporation.

After incorporating, you apply for federal tax-exempt status with the IRS. The full Form 1023 costs $600 to file and takes 3 to 9 months to process. Small nonprofits that expect gross receipts under $50,000 and assets under $250,000 may qualify for the streamlined Form 1023-EZ, which costs $275 and processes faster.

Tax-exempt status under Section 501(c)(3) means the organization pays no federal income tax on mission-related activities. Donors can deduct contributions on their personal returns. However, nonprofits must file annual Form 990 returns, and unrelated business income is still taxable.

• Nonprofits have no owners. A board of directors (minimum 3 in most states) governs the organization. No one receives equity or dividends.
• Total startup costs (state filing + IRS application) typically range from $283 to $1,200 depending on your state and which IRS form you file.
• Ongoing annual costs include state corporate filings ($10 to $50/year) and potential charitable solicitation registration in each state where you fundraise.
• For the full step-by-step process, see our how to start a nonprofit guide.

The right entity type depends on four variables: your revenue, your risk exposure, your number of owners, and your growth plans. Here is a scenario-based framework.

• If you are a solo freelancer earning under $50K/year with no employees, start as a sole proprietor. You can always form an LLC later. But if you have personal assets to protect (a home, savings above $25K), form an LLC now. The $50 to $200 filing fee is cheap insurance.
• If you are launching a service business or consulting firm with moderate risk, form an LLC in your home state. It gives you liability protection and pass-through taxation. Use our best LLC services guide to compare filing options.
• If your net profit exceeds $80K/year and you are the sole or primary owner, form an LLC and elect S Corp taxation by filing Form 2553. The payroll tax savings typically exceed the added compliance costs once you pass the $80K mark. Read our S Corp formation guide.
• If you plan to raise venture capital or issue stock options to employees, form a Delaware C Corporation. VCs require preferred stock, which S Corps cannot issue. The QSBS exclusion (up to $15M in tax-free gains) is only available to C Corp shareholders.
• If you are investing in real estate with passive investors, consider an LLC (or a Series LLC for multi-property portfolios). A limited partnership works too, but the general partner has unlimited personal liability unless you use an LLC as the general partner entity.
• If you are co-founding a business with an equal partner, form a multi-member LLC. Avoid a general partnership because both partners face unlimited personal liability. The LLC operating agreement replaces the partnership agreement and adds asset protection.
• If your mission is charitable, educational, or religious, incorporate as a nonprofit and file for 501(c)(3) status. Budget $500 to $1,200 for combined state and IRS fees, plus 3 to 9 months for IRS processing.

Regardless of which entity you choose, you will also need to register your business name, open a business bank account, and appoint a registered agent (for LLCs and corporations). If you operate under a trade name different from your legal entity name, file a DBA.

Your business structure is not permanent. As your revenue grows, your ownership changes, or your goals shift, you can (and should) convert to a more appropriate entity. Here are the most common transitions.

• Sole proprietorship to LLC. The most common conversion. File Articles of Organization with your state ($35 to $500), get a new EIN from the IRS (free, online, same day), and open a separate business bank account. The process takes 1 to 3 weeks in most states. See our sole proprietorship vs LLC comparison.
• LLC to S Corp (tax election). You keep your LLC legal structure and file Form 2553 with the IRS. There is no IRS filing fee. The deadline is March 15 for calendar-year businesses. You must set up payroll and pay yourself a reasonable salary going forward. See how to start an S Corp.
• LLC to C Corp (tax election). File Form 8832 with the IRS. This is typically done when preparing for a VC funding round or when you want to issue stock options.
• C Corp to S Corp. File Form 2553 within 2 months and 15 days of the tax year you want the election to take effect. All shareholders must consent.

If you need to shut down an entity entirely, follow the formal dissolution process to avoid ongoing fees and tax obligations. Our LLC dissolution guide walks through the steps. Changing your entity's legal name (but keeping the same structure) is a separate process covered in our LLC name change guide.

If your LLC operates in a state other than where it was formed, you will need a foreign LLC registration. And every LLC or corporation should stay current on annual report filings to maintain good standing with the state.