Types of Business Entities: What Should You Choose for Your Business?

Deciding on a specific type of business entity is one of the most important decisions entrepreneurs face in the early stages of starting a new business venture. This decision influences how much taxes you have to pay, the ease with which you can acquire small business loans, and affects how easily you can get money from investors. If your company is ever sued, your business structure also determines which of your company’s assets they can obtain money from.

While “business entity” is a phrase often used interchangeably with “business structure,” many common business structures are in fact not a separate legal entity from the owners. There are many types of business entities, and there’s no one best choice for small business owners. You will want to think carefully and strategically about how you structure your business and establish your business entity.

There are many types of business entities, including a sole proprietorship, LLC, limited liability partnership, general partnership, corporation, and nonprofit. Each of these differs in terms of the amount of paperwork and fees required to obtain the structure, as well as the business taxes levied and the number of legal protections that they provide to owners. As a business owner, it’s important to learn all the pros and cons of each business structure before choosing the best organization for your new or expanding business.

Types of Business Entities

Below are the different types of business entities along with the pros and cons of each:

Sole Proprietorship

The most common business structure for freelancers and consultants who are the only person who owns and operates their business. In a sole proprietorship, a single individual both owns and operates the business. The main advantage of a sole proprietorship is that it is very simple to set up. You do not need to register with state and local authorities, so there is less paperwork involved in establishing your business. Filing taxes is also easy, as sole proprietors must complete the IRS Schedule C tax form, which can be found on the Internal Revenue Service (IRS) website, and include Schedule C with their personal income tax return.

The disadvantage of a sole proprietorship is that your business is not considered a separate legal entity. This means that because you are the only owner, people who sue you can take your personal assets. You may also have trouble obtaining a business loan or building business credit. To avoid these problems, sole proprietors can eventually change their business’s structure to an LLC or corporation.

General Partnership

A general partnership can be a good way for those newly launching a business to reduce the financial risks and to have people to share the ups and downs in your business’s early years. Like a sole proprietorship, a general partnership is the default business structure for those seeking to start a company that has two or more owners. Just like with a sole proprietorship, there’s no need to register a general partnership with the state. This means that, like a sole proprietorship, very little paperwork is required, and the business’s owners divide the profits and losses and can deduct them from their personal tax returns.

General partnerships have similar downsides to the sole proprietorship. For example, if the business goes into significant debt, the owners are personally responsible. Because the general partnership is not a registered business entity, it can also be more difficult to get loans and build business credit. A final consideration for general partnerships is that disputes among partners can spell ruin for your business, so make sure that you choose your business partners wisely and consider creating a partnership agreement. If any of the partners does not adhere to the terms of the partnership agreement, the other party or parties can sue.

Limited Partnership

Like a general partnership, a limited partnership is a business structure with two or more owners. However, in contrast to a general partnership, a limited partnership is registered with state or county authorities. Owners seeking to file for a limited partnership must fill out a form called a certificate of limited partnership. There are two kinds of partners: general partners, who own and make the day-to-day decisions for the business, and limited partners, who have more of an investment than ownership role. Limited partners pay fewer taxes than general partners due to their smaller role in the company and can leave at any time without affecting business operations. Businesses with many owners that can raise money from investors are ideal for the limited partnership structure as investors can avoid legal responsibility.

The downside of a limited partnership is that the general partners are held personally responsible for the business debts and legal responsibility. The general partner is required to pay self-employment taxes on the business’s income, while limited partners do not pay self-employment taxes. Also, establishing a limited partnership requires a state registration, which can be expensive.

A Limited Liability Partnership (LLP) is a type of limited partnership in which no owners have personal liability in their ownership of the business. However, most states only allow law and accounting firms, doctor’s offices, and other professional service organizations to register as LLPs. LLPs help partners of the company avoid liability for other owners’ actions; for example, if a doctor in an LLP is involved in malpractice, the LLP structure enables the other owners to avoid liability for the doctor’s actions.

Limited Liability Company (LLC)

A limited liability company establishes an independent legal structure for the business which is separate from the business owners’ personal finances. This can help reduce owners’ personal liability and separate their personal debts from their business debts. LLCs are taxed similarly to a sole proprietorship or partnership, and there is no limit to how many owners that an LLC can have. LLCs are governed by operating agreements, which establish how the business will function.

The advantages of establishing an LLC are the fact that owners of an LLC do not have personal liability for the business’s liabilities or debts. Owners also have some flexibility in filing taxes, as they can opt for the IRS to treat the LLC as a corporation or a partnership. The main drawback is the cost of establishing an LLC because it requires registration with the state. However, LLCs are popular with small business owners and particularly freelancers (e.g., single-member LLCs) because they lend the legal protections of a corporation with the ease of operations of a sole proprietorship or partnership.

C Corporation (C Corp)

The most common form of corporation is the C Corporation. A C Corp is a legal business entity separate from the business owners. This separation between business and personal finances comes with a high level of paperwork and regulations. The methods for incorporation and associated fees vary by state, so check with your local and state authorities for more information on registering as a C Corporation.

The owners of this company are the shareholders, although they do not oversee the day-to-day operations of the company. The shareholders, along with a board of directors and officers, control the company and make all of the decisions. The company must hold board and shareholder meetings, keep a detailed record of these meetings, and establish a set of bylaws.

To become a C Corp, a company must file articles of incorporation with state or county government, and maintain compliance with corporate regulations. Despite the high level of paperwork and oversight required to file for a C Corp, establishing a C Corp has some advantages. The main benefit of a C Corp is that it offers owners financial and legal protections to owners (the company’s shareholders). C Corps also have the most tax deductions with the IRS and owners pay lower self-employment taxes. C Corps can offer stock options which can help the company raise money in the future. Beware that if you plan to offer dividends, they may be subject to double taxation, so owners who invest the dividend profits back into the business rather than taking dividends may benefit the most from this form of corporate structure.

While a C Corp is typically not the best option for a small business, they can be a good option for people seeking to expand and redefine a more established business and obtain more legal protections to separate personal and professional finances.

S Corporation (S Corp)

S Corporations, also called Small Business Corporations or S Corps, are easy to establish and run and no state filing is required. An S Corp organizational structure is a good idea for a company seeking a corporate business arrangement without the complicated corporate tax regulations that are associated with C Corps.

Like a C Corp, an S Corp requires corporate features such as bylaws and holding shareholder and board meetings. Additionally, S Corps do offer reduced personal liability for business owners. However, an S Corp is what is called a “pass-through entity,” so the government levies taxes on S Corporations much like it does a sole proprietorship. Shareholders are the owners of an S Corp and are therefore the recipient of corporate income, losses, deductions, and credits. As such, there is no corporate taxation or double taxation for S Corps.

To form an S Corp, you will need to file IRS form 2553. Like a C Corp, S Corps are more expensive to form than sole proprietorships and even LLCs, but the legal and financial protections may make it worth it for more established business ventures.

B Corporation (B Corp)

A benefit corporation, also called a B Corporation or a B Corp, is a for-profit business entity that is recognized in most states in the U.S. Driven by both mission and profit, shareholders hold B Corps accountable to deliver benefit to the public at large. In some states, B Corps must submit annual reports which show that they are helping the community. B Corps are taxed like C Corps, although they have different goals and have greater corporate transparency.

Close Corporation

A close corporation is similar to a B Corp but possesses a different company structure without many of the corporate formalities. For this reason, many smaller companies opt to register as Close Corporations. Close corporations are not allowed to be traded publicly and are typically run by a small group of shareholders and a board of directors.

Nonprofit Corporation

The overarching goal of a nonprofit corporation is to conduct charity, educational, religious, literary, or scientific work. As such, nonprofits are tax-exempt and do not pay state or federal taxes on their profits. Nonprofits must register with the IRS to obtain tax exemption, which is a separate process from registering with the state. While nonprofits are exempt from federal taxes, they must also follow special rules – for example, they cannot contribute to political campaigns or disperse profits to members of their company. Operated to benefit the greater good, nonprofits are also called 501(c)(3) corporations – a term referring to the section of the IRS tax code which deals with them.


A cooperative is a business that is both owned and operated by those benefiting from its services. Profits and earnings are distributed among members of the cooperative. An elected board of directors oversees the cooperative, and regular members, who are also called user-owners, are empowered to control the cooperative by voting.

Business Entity Structures Compared: LLC vs C Corp vs S Corp & More

Not sure which structure you should choose for your new business? Review a helpful list of the similarities and differences between the different business structures below:

Business StructureOwnershipLiabilityTaxes
Sole ProprietorshipA single personYou, the only owner, are responsible for all business debts and liabilitiesStraightforward – just fill out Schedule C and send in with your tax returns
General PartnershipTwo or more peopleEach owner is personally responsible for business debts and other liabilitiesOwners can deduct business losses on their personal tax returns
Limited PartnershipTwo or more people, including both general partners and limited partnersFewer liabilities for ownersEach general partner is taxed upon their share of the income
LLCOne or many; there’s no limit on the number of business ownersIndependent legal structure separates business and personal assetsSimilar to sole proprietorship or general partnership
C CorpShareholders are ownersIndependent legal corporate structure with bylaws, board meetings, etc.Corporate tax rate; dividends could be subject to double taxation
S CorpOne to 100 owners; all must be U.S. citizensIndependent legal corporate structure with bylaws, board meetings, etc.Personal tax rate
B CorpOne or more ownersOwners do not have personal liabilityCorporate tax rate
Close CorporationOne or more ownersLimited liabilityTaxed as a C Corp unless shareholders seek S Corp status
Nonprofit CorporationOne or more ownersOwners do not have personal liabilityTax-exempt
CooperativeOne or more ownersLimited liabilityTaxed like all businesses except for C Corps

Obtaining A “Doing-Business-As” Name or DBA Name

Some business structures, such as C Corps, S Corps, LLCs, nonprofits, and various other business entities, require a DBA filing which enables them to use a different name than the name that appears on their formal incorporation documents. Entrepreneurs should consult their state or county clerk’s office for more information on how to file for a DBA. Sole proprietors who may wish to use a fictitious DBA name must operate their business under their own name. Sole proprietors, therefore, need to consult the relevant state authorities before obtaining a DBA.

Bottom Line

There are many things to consider when starting a new business, such as choosing the right business name, ensuring a great social media presence, and importantly, the business structure you choose to register your business as. There are many different business entities and vary in complexity from sole proprietorships, which require no formal state or county filing and have one owner and employee, to more complex structures with many different partners with different roles.

In choosing a business structure, you will need to consider the liabilities for which you and your co-owners are held responsible, as well as how the business structure will affect your taxes, and how many owners your company will have. Some business structures have a limit on how many owners there can be, while other structures can have an unlimited amount of owners.

Freelancers who do not want to deal with complicated forms and paperwork may opt for the simple sole proprietorship, for example, while a law firm or doctors’ office may seek the legal protections offered by a limited liability practice or LLP. Furthermore, some business entity formations require that all of the owners are people, or U.S. Citizens, while other entity structures allow for a business entity to be owned by another business.

Learning about different business structures can help you make the right choice in selecting the best business entity type for your purposes. It can also help you help your business grow, as you may begin a new venture as a sole proprietorship and then register as an LLC or corporation when your business has become more established.

About the Author
The Gro Team