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Business Entities:

A business entity is formed to conduct business activities. Learn about the different types and how to choose one. 


In simplest terms, a business entity is an organization created by an individual or individuals to conduct business, engage in a trade or partake in similar activities. There are various types of business entities — sole proprietorship, partnership, LLC, corporation, etc. — and a business's entity type dictates both the structure of that organization and how that company is taxed.

When starting a business, one of the first things you want to do is choose the structure of your company — in other words, choose a business entity type.

This decision will have important legal and financial implications for your business. The amount of taxes you have to pay depends on your business entity choice, as does the ease with which you can get a small business loan or raise money from investors. Plus, if someone sues your business, your business entity structure determines your risk exposure.

State governments in the U.S. recognize more than a dozen different types of business entities, but the average small business owner chooses between these six: sole proprietorship, general partnership, limited partnership, limited liability company, C corporation and S corporation.

Which business entity is right for you? This guide is here to help you make that decision. We'll explain the types of business entities and the pros and cons of each so that you have all of the information you need to determine what's best for your company.


As we mentioned above, at a very basic level, a business entity simply means an organization that has been formed to conduct business. However, the type of entity you choose for your business determines how your company is structured and taxed. For example, by definition, a sole proprietorship must be owned and operated by a single owner. If your business entity type is a partnership, on the other hand, this means there are two or more owners.

Similarly, if you establish a business as a sole proprietorship, this means for tax purposes, you're a pass-through entity (the taxes are passed onto the business owner). Conversely, if you establish your business as a corporation, this means the business exists separately from its owners, and therefore, pays separate taxes.

Generally, to actually establish your business's entity structure, you'll register in your state where your business is located. Most business owners will choose from the six most common options: sole proprietorship, general partnership, limited partnership, LLC, C corporation or S corporation. Below, we've explained each of these popular business entity types, as well as the pros and cons of choosing each particular structure for your company.


A sole proprietorship is the simplest business entity, with one person (or a married couple) as the sole owner and operator of the business. If you launch a new business and are the only owner, you are automatically a sole proprietorship under the law. There’s no need to register a sole proprietorship with the state, though you might need local business licenses or permits depending on your industry.

Freelancers, consultants and other service professionals commonly work as sole proprietors, but it’s also a viable option for more established businesses, such as retail stores, with one person at the helm.

General Partnership:

Partnerships share many similarities with sole proprietorships — the key difference is that the business has two or more owners. There are two kinds of partnerships: general partnerships, or GPs, and limited partnerships, or LPs. In a general partnership, all partners actively manage the business and share in the profits and losses.

Like a sole proprietorship, a general partnership is the default mode of ownership for multiple-owner businesses — there’s no need to register a general partnership with the state.

Limited Partnership:

Unlike a general partnership, a limited partnership, or LP, is a registered business entity. To form a limited partnership, therefore, you must file paperwork with the state. In an LP, there are two kinds of partners: those who own, operate and assume liability for the business (general partners), and those who act only as investors (limited partners, sometimes called “silent partners”).

Limited partners don’t have control over business operations and have fewer liabilities. They typically act as investors in the business and also pay fewer taxes because they have a more tangential role in the company.


A C corporation is an independent legal entity that exists separately from the company’s owners. Shareholders (the owners), a board of directors, and officers have control over the corporation, although one person in a C-corp can fulfill all of these roles, so it is possible to create a corporation where you're in charge of everything.

With this type of business entity, there are many more regulations and tax laws that the company must comply with. Methods for incorporating, fees, and required forms vary by state.


An S-Corporation preserves the limited liability that comes with a C-Corporation but is a pass-through entity for tax purposes. This means that, similar to a sole prop or partnership, an S-Corp’s profits and losses pass through to the owners’ personal tax returns. There’s no corporate-level taxation for an S-Corp.


A limited liability company takes positive features from each of the other business entity types. Like corporations, LLCs offer limited liability protections. But, LLCs also have less paperwork and ongoing requirements, and in that sense, they are more like sole proprietorships and partnerships.

Another big benefit is that you can choose how you want the IRS to tax your LLC. You can elect to have the IRS treat it as a corporation or as a pass-through entity on your taxes.

Pros of LLC

  • Owners don’t have personal liability for the business’s debts or liabilities.

  • You can choose whether you want your LLC to be taxed as a partnership or as a corporation.

  • Not as many corporate formalities compared to an S-Corp or C-Corp.

Cons of LLC​

  • It’s more expensive to create an LLC than a sole proprietorship or partnership (requires registration with the state).

Pros of C-corporation

  • Owners (shareholders) don’t have personal liability for the business’s debts and liabilities.

  • C-corporations are eligible for more tax deductions than any other type of business.

  • C-corporation owners pay lower self-employment taxes.

  • You have the ability to offer stock options, which can help you raise money in the future.

CoNs of C-corporation

  • More expensive to create than sole proprietorships and partnerships (the filing fees required to incorporate a business range from $100 to $500 based on which state you’re in).

  • C-corporations face double taxation: The company pays taxes on the corporate tax return, and then shareholders pay taxes on dividends on their personal tax returns.

  • Owners cannot deduct business losses on their personal tax returns.

  • There are a lot of formalities that corporations have to meet, such as holding board and shareholder meetings, keeping meeting minutes and creating bylaws.

  • Most small businesses pass over C-corps when deciding how to structure their business, but they can be a good choice as your business grows and you find yourself needing more legal protections. The biggest benefit of a C-corp is limited liability. If someone sues the business, they are limited to taking business assets to cover the judgment — they can’t come after your home, car or other personal assets.

  • Corporations are a mixed bag from a tax perspective — there are more tax deductions and fewer self-employment taxes, but there’s the possibility of double taxation if you plan to offer dividends. Owners who invest profits back into the business as opposed to taking dividends are more likely to benefit under a corporate structure. Corporation formation and maintenance can be complicated, but online legal services can help with these things.

Pros of sole-proprietorship

  • Easy to start (no need to register your business with the state).

  • No corporate formalities or paperwork requirements, such as meeting minutes, bylaws, etc.

  • You can deduct most business losses on your personal tax return.

  • Tax filing is easy — simply fill out and attach Schedule C-Profit or Loss From Business to your personal income tax return.

CONS of sole-proprietorship

  • As the only owner, you’re personally responsible for all of the business’s debts and liabilities — someone who wins a lawsuit against your business can take your personal assets (your car, personal bank accounts, even your home in some situations).​

  • There’s no real separation between you and the business, so it’s more difficult to get a business loan and raise money (lenders and investors prefer LLCs or corporations).

  • It’s harder to build business credit without a registered business entity.

  • Sole proprietorships are by far the most popular type of business structure in the U.S. because of how easy they are to set up. There’s a lot of overlap between your personal and business finances, which makes it easy to launch and file taxes. The problem is that this same lack of separation can also land you in legal trouble. If a customer, employee or another third party successfully sues your business, they can take your personal assets. Due to this risk, most sole proprietors eventually convert their business to an LLC or corporation.


Pros of S-Corporation

  • Owners (shareholders) don’t have personal liability for the business’s debts and liabilities.

  • No corporate taxation and no double taxation: An S-corp is a pass-through entity, so the government taxes it much like a sole proprietorship or partnership.

Cons of S-Corporation

  • Like C corporations, S corporations are more expensive to create than both sole proprietorships and partnerships (requires registration with the state).

  • There are more limits on issuing stock with S-Corps than C-Corps.

  • You still need to comply with corporate formalities, like creating bylaws and holding board and shareholder meetings.


Pros of limited partnership

  • An LP is a good option for raising money because investors can serve as limited partners without personal liability.

  • General partners get the money they need to operate but maintain authority over business operations.

  • Limited partners can leave anytime without dissolving the business partnership.

CONS of limited partnership

  • General partners are personally responsible for the business’s debts and liabilities.

  • More expensive to create than a general partnership and requires a state filing.

  • A limited partner may also face personal liability if they inadvertently take too active a role in the business.

  • Multi-owner businesses that want to raise money from investors often do well as LPs because investors can avoid liability.

  • You might come across yet another business entity structure called a limited liability partnership, or LLP. In an LLP, none of the partners have personal liability for the business, but most states only allow law firms, accounting firms, doctor’s offices and other professional service firms to organize as LLPs. These types of businesses can organize as an LLP to avoid each partner being liable for the other’s actions. For example, if one doctor in a medical practice commits malpractice, having an LLP lets the other doctors avoid liability.

Pros of general partnership

  • Easy to start (no need to register your business with the state).

  • No corporate formalities or paperwork requirements, such as meeting minutes, bylaws, etc.

  • You don’t need to absorb all the business losses on your own because the partners divide the profits and losses.

  • Owners can deduct most business losses on their personal tax returns.

Cons of general partnership

  • Each owner is personally liable for the business’s debts and other liabilities.

  • In some states, each partner may be personally liable for another partner’s negligent actions or behavior (this is called joint and several liability).

  • Disputes among partners can unravel the business (though drafting a solid partnership agreement can help you avoid this).

  • It’s more difficult to get a business loan, land a big client and build business credit without a registered business entity.

  • If you do go this route, it’s very important to choose the right partner or partners. Disputes can seriously limit a business’s growth, and many state laws hold each partner fully responsible for the actions of the others. For example, if one partner enters into a contract and then violates one of the terms, the third party can personally sue any or all of the partners.​​

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