Business structure basics: Corporation, partnership, sole proprietor, LLC

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Starting a business involves decisions about ownership, liability, taxes, and management.

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If you’re starting a business, one of the first decisions to make is how to structure it. Whether you’re selling crafts online, running a lawn service, or planning to manufacture widgets, the business structure you choose can affect your taxes, liability, and ability to raise capital.

If your business is simple, you could operate as a sole proprietorship with no formal paperwork. Alternatively, you could establish a separate legal entity. But what are the different types, and which should you choose?

Choosing a business structure can have important legal and tax consequences, so you may want professional advice before making a decision.

If you start selling a product or service on your own without filing any paperwork with the state, you are running a sole proprietorship. You’ll likely buy business supplies with your own money, run your business out of your home, and make all business decisions yourself. Examples of businesses that may operate as sole proprietorships include:

The supplies and products owned by the business are owned by you, and any loans you take out are owed by you—whether your business makes money or not.

All expenses and income pertaining to a sole proprietorship are reported on Schedule C, flow up to your Form 1040, and are taxed at your personal tax rate. You also owe self-employment tax on your business net income through Schedule SE. If your business does not survive, you’ll be personally liable for repaying any outstanding debts.

The basic definition of a partnership is that two or more people own a business together. Each person in a partnership provides either labor, skills, money, or property to the business.

Partnerships might be formed when similar professionals work together in a group, such as lawyers, real estate brokers, or plumbers, or when a small business owner needs someone to help pay for the costs of running their business in exchange for a return on the investment.

Although partnerships and LLCs can differ in their legal structure and liability protections, many receive similar federal tax treatment. Partnerships generally don’t pay federal income tax. Instead, they report annual information to the Internal Revenue Service on Form 1065.

Instead, each partner’s share of income and expenses is reported to them on a Form K-1. The information is entered in each partner’s personal Schedule E, which flows up to the tax Form 1040. Each partner pays tax at their individual tax rates.

Partnerships can take several forms, each with different liability protections and legal requirements.

A general partnership is formed when two or more people work together to run a business. In many states, a general partnership can be formed automatically when two or more people conduct business together as co-owners, without filing formation documents. Each general partner is liable for the work performed by the business, including any losses over and above its assets.

Limited partnerships are businesses in which one or more partners (called general partners) have all the risk in the business and the other partners (called limited partners) have limited liability. LPs are regulated by state law.

This partnership is structured such that all partners have limited liability. Only some states allow formation of LLPs. Typically, they must comprise groups of professionals requiring licensing, such as accountants, doctors, or lawyers. An LLP does not save its partners from personal liability in the case of negligence (such as malpractice). If the business goes bankrupt, though, the partners are not liable.

An LLC is a separate business structure created under state law that combines liability protection with flexible tax treatment. Owners of an LLC are called members rather than partners. LLC members generally are not personally liable for the company’s debts and obligations, although exceptions may apply.

Some states restrict the use of LLCs by licensed professionals such as physicians, attorneys, accountants, architects, and engineers, instead requiring specialized entities such as professional LLCs (PLLCs) or professional corporations (PCs). For federal tax purposes, many LLCs are taxed as partnerships, although LLCs may elect other tax classifications.

Corporations are businesses that are completely separate from their owners, who are called stockholders or shareholders. They exchange their money for shares of stock in the company. Each share represents a pro rata claim on future earnings. If a shareholder sells their interest in the business, the business continues to run without any consequence.

Shareholders have limited liability up to the value of their invested shares. Shareholders generally aren’t personally responsible for corporate debts or liabilities beyond the amount they invest in the company.

The corporation pays its own taxes, runs its business, makes a profit or loss, and can be held liable for illegal acts and negligence. There are more reporting requirements for corporations, more extensive recordkeeping is necessary, and there are more rules and regulations that cover corporations than with other business structures. A corporation can often get business loans (i.e., issue debt) more easily than a partnership, and it can raise capital by selling additional shares of stock to investors.

A corporation’s shareholders invest money in the company in hopes of a later return via increased corporate value. Shareholders may also receive dividends, which are partial profits paid to investors. A common complaint about the corporate business structure is that corporations are “doubly taxed.” A corporation’s profits are taxed at the corporate level, and the dividends it pays out to shareholders are taxed as dividend income via a personal Schedule B.

An S corp is not a business structure; it is a certain tax status election filed with the Internal Revenue Service. Although the business is structured as a corporation, the federal taxation of an S corp is treated more like a partnership. Income and expenses pass through to shareholders, who report them on their personal Form 1040 using Schedule K-1 and Schedule E.

To qualify for S corp status, a corporation must file Form 2553 and satisfy several IRS requirements:

Some states don’t recognize S corp status and tax these entities as C corps.

One benefit of owning a small business is the qualified business income deduction (also called the 199A deduction), which reduces the taxes you owe when you complete your Form 1040. Sole proprietorships, partnerships, and S corporations may qualify for a deduction of up to 20% of qualified business income, subject to income limits and other rules. The deduction doesn’t apply to C corporations. Although the deduction was originally scheduled to expire after 2025, Congress made it permanent when it passed the One Big Beautiful Bill Act in 2025.

If you’re starting your own business, you should consider all the different business structures to find the one that’s right for you and any partners. Although you’ll likely seek advice from an attorney and accountant, understanding the basics of your business structure can help you make informed decisions as your company grows.

If your plan is to start small and build your business gradually, it might make sense to begin as a sole proprietorship or general partnership and consider other structures as your business grows.

As your business grows, you may decide that additional liability protection, tax flexibility, or access to capital makes a different structure more appropriate. Consider which tax treatment would be best for your business, and be sure to register with your state government. And if you want S corp status, you’ll need to file paperwork with the IRS.

Now get to work building your dream company, and good luck.