Legal types of business entities

What types of business structures can you form?

When starting your business, you must decide what form of business entity to establish. Your business entity determines which income tax return form you have to file, the amount of paperwork your business is required to do, the personal liability you face and your ability to raise money. The most common forms of business are the corporation, LLC, partnership and sole proprietorship. Make sure you check the federal, state and local legal and tax considerations for your business entity. And don’t get confused with the lingo business structure, business entity, business type - all refer to the same thing.

  • Corporation: A form of organization that provides its owners and shareholders with certain rights and privileges, including protection from personal liability.

  • Limited Liability Company (LLC): A business structure allowed by state statute. Each state may use different regulations, you should check with your state if you are interested in starting a Limited Liability Company.

  • Partnership: A relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business. Two common types are general partnership and limited partnership.

  • Sole Proprietorship: Someone who owns an unincorporated business by himself or herself.

How do you choose the right type of entity for your business?

Choosing the right type of entity for your business will impact everything from day-to-day operations, to taxes, to how much of your personal assets are at risk, to the ease with which you can get a small business loan or raise money from investors. And if someone sues your business, your business entity structure determines your risk exposure. You should choose a business structure that gives you the right balance of legal protections and benefits.

You'll need to choose a business structure before you register your business with the state. Most businesses will also need to get a tax ID number, or EID, and file for the appropriate licenses and permits.

Keep the following in mind when deciding among the different types of business entities:

  • As a starting point, though, there are three general factors to consider when choosing among business entity types: legal protection, tax treatment, and paperwork (government) requirements.

  • Sole props and general partnerships are good “starter” entities.

  • As your business grows and generates more income, consider registering as an LLC or corp.

  • Consult a business lawyer and accountant to get specific help for your business.

Pro Tip

The business entity you establish will determine which income tax return form you have to file, read more through the IRS of the Small Business Administration .