Business Structures in the United States

Choosing the right business structure is one of the most important decisions for any entrepreneur in the United States. Each structure has distinct implications for taxation, liability, management, and compliance. This guide covers the main business entity types and their tax treatment.

Sole Proprietorship

The simplest business structure, with no formal registration required (other than business licenses):

• Liability: Unlimited personal liability
• Taxation: Business income reported on Schedule C of owner's Form 1040
• Self-Employment Tax: 15.3% on net earnings
• Formation: No formal filing required (DBA may be needed)

Limited Liability Company (LLC)

The most popular structure for small businesses, combining liability protection with flexible taxation:

• Liability: Limited to member's investment
• Taxation: Default pass-through (single-member disregarded, multi-member as partnership)
• Can Elect: S-Corp or C-Corp taxation by filing Form 2553 or 8832
• Formation: File Articles of Organization with state (varies by state, typically $50-$500)
• Operating Agreement: Strongly recommended
• Annual Report: Required in most states ($0-$800)

C Corporation (C-Corp)

The standard corporate structure, suitable for larger businesses and those seeking venture capital:

• Liability: Limited to shareholder investment
• Taxation: Entity-level tax at 21% federal + state; double taxation on dividends
• Shareholders: No limit on number or type
• Stock Classes: Can issue multiple classes of stock
• Formation: File Articles of Incorporation with state
• Compliance: Board of directors, annual meetings, corporate minutes

S Corporation (S-Corp)

A pass-through entity with corporate characteristics, popular for small to medium businesses:

• Liability: Limited to shareholder investment
• Taxation: Pass-through (no entity-level tax except certain states)
• Limitations: 100 shareholders max, one class of stock, US citizens/residents only
• Formation: Form corporation first, then elect S-Corp status (Form 2553)
• Reasonable Salary: Shareholder-employees must take reasonable compensation

Partnership

For businesses with multiple owners, partnerships offer flexibility:

• General Partnership: All partners have unlimited liability
• Limited Partnership (LP): General partner manages (unlimited liability), limited partners are passive
• LLP (Limited Liability Partnership): All partners have limited liability (common for professional services)
• Taxation: Pass-through entity, files Form 1065, issues Schedule K-1 to partners
• Self-Employment Tax: General partners subject to SE tax

Comparison Summary