Business Structures

US Business Structures Explained

Every business in the US has a legal structure that affects taxes, liability, and how the business is run. This guide covers the seven main structures, who they fit, and the trade-offs of each. Always talk to a qualified business attorney and CPA before forming an entity.

Educational Content Only

This is general information about business structures, not legal or tax advice. Entity selection depends on your specific situation, state, and goals. Always consult a licensed business attorney and CPA before forming an entity or making tax elections. Read full disclaimer →

Informal Structures

Simple structures with no liability protection. Easy to start, but your personal assets are on the line.

Sole Prop

Sole Proprietorship

The simplest business structure. One person owns and runs the business. There is no legal separation between you and the business, so your personal assets are on the line for business debts.

Two or more people own and run a business together. Like a sole proprietorship, there is no liability protection. Each partner is personally on the hook for business debts, including debts run up by the other partner.

Liability:None

Tax:Pass-through

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Formal Entities

State-filed entities that provide personal liability protection. The most common choice for small businesses.

LLC

Limited Liability Company (LLC)

A hybrid structure that gives you the liability protection of a corporation with the tax simplicity of a partnership. The most popular small business structure in the US for good reason.

Liability:Protected

Tax:Pass-through

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Corporations

Formal corporations with stock ownership. Required for venture capital and public companies.

S-Corp

S Corporation

Not a separate entity type, but a tax election available to LLCs and C-Corps. S-Corp status lets you split income between salary (subject to payroll tax) and distributions (not subject to payroll tax), which can save self-employment tax for profitable businesses.

A separate legal entity that pays its own corporate income tax. The default corporation type. The only structure that can easily issue multiple classes of stock and raise venture capital. Subject to 'double taxation' on dividends.

Liability:Protected

Tax:Entity-level

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Special Purpose

Specialized structures for specific purposes like nonprofits and cooperatives.

Nonprofit

Nonprofit Corporation

A corporation organized for a charitable, educational, religious, literary, or scientific purpose. Profits are not distributed to owners. Can apply for tax-exempt status under section 501(c)(3), allowing donations to be tax-deductible.

A business owned and controlled by the people who use it, called 'members.' Members pool resources, share profits based on use, and vote on major decisions democratically (one member, one vote).

Liability:Varies

Tax:Pass-through

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How to Choose a Business Structure

There is no single best structure for everyone. The right choice depends on your business type, revenue, liability risk, tax situation, and growth plans. Here are some general guidelines:

Just starting out, low risk, low revenue: Sole proprietorship is fine to start. Switch to an LLC once revenue grows or liability risk increases.
Co-founders: Form an LLC (multi-member) rather than a general partnership. The LLC gives you liability protection that a partnership does not.
Profitable business (net profit over $60K-$80K): Consider electing S-Corp taxation on your LLC to reduce self-employment tax.
Planning to raise venture capital: Form a Delaware C-Corp. VCs almost always require this structure.
Charitable, educational, or religious purpose: Form a nonprofit corporation and apply for 501(c)(3) status.
Real estate investment: LLCs are the standard for rental properties. Some investors use one LLC per property for liability isolation.

Important: Entity formation involves state-specific requirements, fees, and ongoing compliance. A qualified business attorney can help you choose the right structure and file the correct paperwork. A CPA can help you understand the tax implications.