Complete Guide to Business Entity Types in the US

One of the most important early decisions you’ll make while starting a business is choosing your legal business structure. This choice affects how much tax you’ll pay, whether your personal assets are at risk, how much paperwork you’ll need to handle, and how easily you can raise capital.

Should you keep it simple with a sole proprietorship? Form an LLC for liability protection? Or set up a C Corporation to attract investors?

This guide walks you through the most common US business entity types, who they’re for, how they’re taxed, and what to watch out for. 

Before diving into details, here’s a quick side-by-side view of how the most common business structures differ on liability, taxes, ownership, and more.

Note: "Pass-through" means business profits are reported on the owner’s personal tax return, avoiding double taxation.

Now, let’s discuss all the business entity types in detail:-

1. Sole Proprietorship

If you're just starting out as a freelancer, consultant, or side hustler, a sole proprietorship might seem like the simplest path. But that simplicity comes with trade-offs.

A sole proprietorship is the default business structure for a single owner. There's no legal separation between you and your business, which means:

• You don’t need to file formation documents with the state.
  
• You report business income and expenses directly on your personal tax return (Form 1040, Schedule C).
• You're personally responsible for all debts, lawsuits, and obligations.

Pros

• Minimal paperwork and no formal registration required.
• Inexpensive to start and operate.
• Full control over decisions and profits.
• Simple tax filing. Just one set of forms.

Cons

• No liability protection. Personal assets are at risk if your business gets sued or goes into debt.
• Harder to raise funding or open a business bank account.
• Can look less credible to vendors, clients, or partners.

Best For

A sole proprietorship is best suited for individuals running very small, low-risk businesses like freelance writers, designers, solo consultants, or independent contractors. It's also a good option if you're testing out an idea and want to start quickly without formal legal steps. But if you plan to grow, hire, or seek funding, you may want to consider forming an LLC or corporation down the line.

2. Partnership

A partnership is a business owned by two or more individuals. It’s a common structure for co-founders or professional service firms that want to collaborate and share responsibility without setting up a corporation.

There are two main types of partnerships:

• General Partnership (GP): All partners share equal responsibility for managing the business and are personally liable for debts and legal obligations.
  
  
• Limited Partnership (LP): Includes at least one general partner (with full liability and control) and one or more limited partners (who invest but have limited liability and no managerial control).
  
  

Profits and losses pass through to each partner’s personal tax return. The business itself doesn’t pay income tax, but partners must report their share of income using IRS Form 1065 and Schedule K-1.

Pros

• Easy to form and operate, often with just a partnership agreement.
• Shared responsibilities and decision-making.
• Pass-through taxation (no corporate tax).

Cons

• General partners are personally liable for business debts.
• Disagreements between partners can derail operations.
• Limited lifespan, often ends if a partner leaves or dies.

Best For

Partnerships are ideal for two or more individuals who want to launch a business together and share profits, responsibilities, and risks. This structure works well for law firms, accounting practices, creative agencies, or family-run ventures, especially if trust and complementary skill sets are in place.

3. Limited Liability Company (LLC)

An LLC is one of the most popular business structures in the US. It offers liability protection without the complexity of a corporation, making it a flexible choice for both solo founders and multi-member startups.

An LLC is a legal entity separate from its owners (called “members”). It shields personal assets from business liabilities and allows for flexible tax treatment, by default, profits and losses pass through to the members' personal tax returns, but LLCs can also choose to be taxed as an S Corporation or C Corporation.

Each state has its own rules for forming and maintaining an LLC, including filing fees, annual reports, and registered agent requirements.

Pros

• Personal liability protection for all members.
• Flexible ownership structure; can have one or many members.
• Pass-through taxation by default (no corporate tax unless elected).
• Less administrative burden than a corporation.
  
  

Cons

• Formation and annual fees vary by state and can be costly.
• Some investors prefer corporations for fundraising.
• Inconsistent treatment across states can create complexity for multi-state operations.

Best For

LLCs are a strong fit for small and midsize businesses that want legal protection without formal corporate governance. Whether you're a solo founder launching a SaaS product or a small team building a service business, an LLC offers the balance of protection, simplicity, and control.

4. Corporation

Corporations are separate legal entities that exist independently of their owners. They offer strong liability protection and are designed to scale, especially if you plan to raise capital from outside investors or go public.

4.1. C Corporation (C Corp)

A C Corporation is a separate legal entity owned by shareholders. It’s the default corporate form in the US and is commonly used by startups that plan to raise institutional funding or eventually go public.

When you form a C Corp, the business becomes legally distinct from its owners. That means the company, not the founders, is responsible for its debts, lawsuits, and obligations. Owners (shareholders) are protected from personal liability beyond their investment in the company.

C Corps are governed by a board of directors, follow corporate bylaws, and must hold annual meetings and maintain proper documentation.

They pay taxes as a company (corporate income tax on Form 1120). If profits are distributed to shareholders as dividends, those are taxed again on individual returns, this is what’s known as double taxation.

Pros

• Strong liability protection: Shareholders are not personally liable for business debts.
• No ownership limits: Can have unlimited shareholders, including foreign individuals or entities.
• Access to capital: Can issue multiple classes of stock and raise funds from VCs, angel investors, or public markets.
• Attractive for equity compensation: Stock options, RSUs, and other equity-based incentives are easier to structure.

Cons

• Double taxation: Profits are taxed at both the corporate and shareholder level.
• Ongoing compliance: Must follow strict governance rules - board meetings, annual reports, and detailed recordkeeping.
• More expensive to maintain: Higher administrative, legal, and tax-related costs.

Best For

C Corporations are best for startups that plan to raise venture capital, offer equity to employees, and grow aggressively. Most high-growth tech startups and companies that eventually go public use this structure. If you're building for scale and want access to serious funding, this is usually the preferred route.

4.2. S Corporation (S Corp)

An S Corporation is not a type of legal entity, but rather a tax status you can elect with the IRS after forming a corporation or LLC. It allows qualifying businesses to avoid double taxation while still benefiting from corporate liability protection.

To become an S Corp, a business must first be incorporated (usually as a C Corporation or LLC), then file IRS Form 2553 to elect S Corporation status. This changes how the business is taxed, not how it’s structured.

Unlike C Corps, S Corps are pass-through entities. That means the company itself doesn’t pay federal income tax. Instead, profits and losses pass through to shareholders, who report them on their personal tax returns. The business still files an informational return (Form 1120S), but doesn’t pay tax directly.

Pros

• Avoids double taxation: Only shareholders pay taxes, not the corporation itself.
• Saves on self-employment tax: Owners who work in the business can pay themselves a reasonable salary (taxed like wages), with remaining profits distributed as dividends, which aren’t subject to self-employment tax.
• Retains liability protection: Just like C Corps, S Corps protect owners’ personal assets from business liabilities.

Cons

• Strict ownership limits: Only US citizens and residents can be shareholders. No corporations, partnerships, or foreign owners.
• Capped at 100 shareholders: Not ideal for businesses planning to scale through broad equity distribution.
• One class of stock only: Limits flexibility in structuring investor rights.
• Increased IRS scrutiny: Must follow salary rules and may be audited if distributions seem disproportionate to compensation.

Best For

S Corps are a strong choice for profitable US-based small businesses with no plans to raise venture capital. If you’re a founder who wants tax efficiency while still keeping liability protection, and you meet the IRS eligibility criteria, this setup can offer meaningful savings.

4.3. Benefit Corporation (B Corp)

A Benefit Corporation is a legal structure for businesses that want to make a profit while also committing to a positive impact on society, the environment, or both. It’s designed for founders who want to align mission with margin, building companies that do well financially and do good.

Unlike a standard corporation that’s focused solely on shareholder returns, a B Corp is legally required to consider the interests of all stakeholders - employees, customers, communities, and the environment. This accountability is written into the company’s charter.

It's important to distinguish between a Benefit Corporation (a legal structure available in many US states) and a Certified B Corp (a third-party certification granted by the nonprofit B Lab). You don’t need to be certified to operate as a legal B Corp, but many companies choose to pursue both.

Pros

• Mission alignment: Legally formalizes your commitment to social or environmental goals.
• Public accountability: Builds trust with customers, employees, and investors who care about impact.
• Attracts purpose-driven talent: Strong values help with hiring and retention.
• Competitive edge: Certified B Corps can use the B Lab seal in branding and marketing.

Cons

• Added compliance: Must publish an annual benefit report to show progress on social/environmental goals.
• Limited investor appeal: Some institutional investors may prefer traditional C Corps with no alternative mandates.
• Not recognized in all states: You'll need to check if your state offers B Corp registration.

Best For

Benefit Corporations are ideal for founders building purpose-driven companies, especially in sectors like sustainability, education, ethical fashion, or social impact tech. If you want to embed impact into your governance and brand identity, this structure offers both legal backing and public credibility.

4.4. Close Corporation

A Close Corporation is a special type of corporation designed for businesses with a small number of shareholders who want to run the company without many of the formalities required of traditional corporations.

A Close Corporation (sometimes called a “closely held” corporation) allows a small group of shareholders, often family members or founding teams, to maintain full control over the business without needing to form a board of directors or hold annual meetings.

In many states, close corporations are limited to 30–50 shareholders, and they can place restrictions on share transfers to prevent unwanted ownership changes. The company still offers liability protection, and it can elect to be taxed as a C Corp or S Corp depending on the business’s goals.

Pros

• Simplified governance: No need for a formal board, bylaws, or annual meetings.
• More control: Keeps ownership and decision-making in the hands of a few trusted individuals.
• Flexible structure: Can customize internal rules through shareholder agreements.

Cons

• Limited growth: Restrictions on share transfers and number of shareholders make it harder to raise outside capital.
• Not available in all states: Must check state law to see if the close corporation option is offered.
• Fewer investor options: VCs and institutional investors typically avoid close corporations.

Best For

Close Corporations are best for small businesses that want to stay tightly held, often by family, founders, or a small ownership group. If you’re building a business where outside capital isn’t a priority and you want to minimize red tape, this structure offers more flexibility and privacy.

5. Non-Profit Corporation

A Non-Profit Corporation is formed to serve a mission rather than generate profits for owners or shareholders. These organizations exist to advance charitable, educational, religious, scientific, or cultural purposes, and can qualify for tax-exempt status under federal and state law.

A Non-Profit Corporation is a legal entity separate from its founders and directors. It can open bank accounts, own property, and enter contracts in its own name, just like a for-profit corporation.

To receive federal tax exemption, most nonprofits apply for 501(c)(3) status with the IRS. If approved, the organization doesn’t pay income taxes, and donations to the nonprofit may be tax-deductible for donors.

Non-profits are governed by a board of directors and must follow strict operational and reporting rules, including filing annual returns (Form 990) and maintaining financial transparency.

Pros

• Tax-exempt status: No federal income tax on funds used for mission-related activities.
• Eligible for grants and donations: Can receive public and private funding that for-profit companies can’t access.
• Limited liability: Protects directors and officers from personal liability.
• Public trust: Tax exemption and transparency requirements can build credibility with the public.

Cons

• No profit distribution: Surplus income must be reinvested into the mission. No dividends or profit sharing.
• Strict compliance: Must adhere to IRS and state rules for governance, reporting, and charitable use of funds.
• Limited control: Major decisions require board approval and public accountability.

Best For

Non-Profit Corporations are best for organizations focused on public benefit rather than personal gain, such as charities, advocacy groups, educational institutions, and religious organizations. If your goal is to solve a social problem and access public funding or grants, a non-profit structure offers the right legal and financial foundation.

6. Cooperative (Co-op)

A Cooperative, or Co-op, is a business owned and operated by the same people who use its products or services. Unlike traditional businesses that serve shareholders, co-ops exist to serve their members, and profits are shared among those members based on participation, not capital investment.

In a co-op, members are both customers and owners. Each member typically gets one vote, regardless of how much money they’ve invested, ensuring democratic decision-making. Co-ops can take many forms - consumer co-ops (like grocery stores), worker co-ops (owned by employees), or producer co-ops (common in farming).

They are legal business entities, and while most are incorporated at the state level, they may also follow specific cooperative statutes.

Pros

• Member ownership: Members have a direct say in how the business is run.
• Profit sharing: Surplus earnings are distributed among members, often as patronage dividends.
• Community alignment: Co-ops often prioritize local or social impact over maximizing profit.
• Tax flexibility: In some cases, co-ops are taxed only on profits retained, not those distributed to members.

Cons

• Slower decision-making: Consensus and democratic processes can limit speed and agility.
• Limited funding options: Raising outside capital is difficult, as equity is usually not available to non-members.
• Complex compliance: Must follow specific legal and tax rules, which vary by state and industry.

Best For

Co-ops are ideal for businesses where shared ownership creates more value than individual control, like agricultural supply chains, community credit unions, independent retailers, or employee-owned service businesses. If your model depends on fairness, transparency, and shared rewards, a co-op offers an alternative to traditional profit-first structures.

How to Choose the Right Business Structure?

There’s no one-size-fits-all entity. The right choice depends on your goals, risk tolerance, growth plans, and how you want to handle taxes, ownership, and compliance.

Here’s how to think through your decision:

Ask These Questions Before You Decide

Use these filters to narrow down your options:

i) Do you need liability protection?

If yes, rule out sole proprietorships and general partnerships. LLCs and corporations offer personal asset protection.

ii) How many people will own the business?

Single founder? LLC or sole proprietorship might work. Multiple founders or investors? Consider an LLC, partnership, or corporation.

iii) Are you planning to raise capital?

C Corporations are usually preferred by VCs and angel investors. LLCs and S Corps face more limitations.

iv) Do you want to keep things simple?

Sole proprietorships and partnerships have minimal paperwork but expose you to personal liability.

v) What’s your preferred tax treatment?

If you want pass-through taxation, look at LLCs, partnerships, or S Corps. If you're okay with double taxation in exchange for scale, a C Corp might be better.

vi) Will you reinvest profits or distribute them?

Non-profits can’t distribute profits. Co-ops distribute based on participation. Corporations distribute dividends at the board’s discretion.

When Should You Reconsider Your Business Entity?

Your initial structure isn’t permanent. It’s common to start with a simple structure (like an LLC) and upgrade later. You might revisit your entity choice if:

• You’re raising your first round of outside funding.
• You’re offering equity compensation to employees.
• You’re expanding into multiple states.
• Your tax situation changes dramatically (e.g., sustained profits, foreign operations).

If you’re a founder figuring out whether to go with an LLC, C Corp, or something else entirely, don’t rely on guesswork or generic advice.

At Inkle, we’ve helped hundreds of US startups and cross-border set up the right foundation for growth. Talk to us, and we’ll help you pick the structure that fits your vision.

Frequently Asked Questions

What’s the most flexible structure for small businesses?

LLCs are the most flexible. They offer liability protection, pass-through taxation, and minimal compliance, making them popular with early-stage startups.

Can I switch from an LLC to a C Corporation later?

Yes. Many startups start as LLCs and convert to C Corporations when raising venture capital. The process involves legal paperwork, new filings, and potential tax implications.

What’s the main difference between a C Corp and an S Corp?

C Corps pay taxes at the corporate level and again on dividends. S Corps avoid double taxation by passing income directly to shareholders but have restrictions on ownership and stock structure.

Do non-profits pay any taxes at all?

If approved for 501(c)(3) status, non-profits are exempt from federal income tax. However, they may still pay certain state and employment taxes depending on location and structure.

Can foreign founders set up an S Corporation?

No. S Corps are limited to US citizens or residents only. If you’re a foreign founder, consider forming a C Corp instead.

Are co-ops only for agriculture?

No. While co-ops are common in agriculture, they’re also used in retail, housing, energy, and worker-owned businesses, anywhere shared ownership creates value.