One of the first decisions to make when starting a business is choosing the type of legal structure for the company. The entity type selected can affect ownership, management, taxes, personal liability, recordkeeping, financing, and ongoing compliance requirements.
Business entities are generally formed under the laws of the state where the business is organized. Each state has its own filing requirements, naming rules, formation documents, fees, and ongoing compliance obligations.
Common business structures include:
- Sole Proprietorship
An unincorporated business owned by one individual. A sole proprietorship is generally simple to start, but the owner is typically personally responsible for the debts and liabilities of the business. - General Partnership
An unincorporated business owned by two or more people or entities. Partners generally share management, profits, losses, and liability, unless otherwise provided by agreement or applicable law. - Limited Partnership (LP)
A partnership that generally includes at least one general partner and at least one limited partner. The general partner typically manages the business, while limited partners usually act as investors with limited liability protection, subject to applicable law. - Limited Liability Partnership (LLP or RLLP)
A partnership structure that may provide certain liability protections to partners. LLPs are often used by professional service firms, although availability and requirements vary by state. - C-Corporation / S-Corporation
A separate legal entity owned by shareholders. Corporations are commonly identified by designators such as Inc., Corp., Corporation, or Ltd. Corporations may be taxed as C corporations by default or may elect S corporation tax treatment if eligible. - Professional Corporation (PC or PA)
A corporation formed by licensed professionals to provide professional services. Professional corporation requirements vary by state and profession. - Limited Liability Company (LLC)
A flexible business entity owned by members. LLCs generally provide limited liability protection and flexible management and tax options. - Professional Limited Liability Company (PLLC)
An LLC formed by licensed professionals to provide professional services. PLLC availability, ownership rules, naming requirements, and licensing approvals vary by state and profession. - Nonprofit Corporation / Not-for-Profit Corporation
A corporation formed for nonprofit purposes rather than for distributing profits to owners or shareholders. Nonprofit formation under state law is separate from applying for federal or state tax-exempt status. - Benefit Corporation / Public Benefit Corporation
A for-profit corporation formed to pursue both business purposes and a stated public benefit. Requirements and terminology vary by state.
State law controls the formation and governance of business entities, while federal tax law controls how the entity is taxed. For example, an S corporation is not a separate state-law entity type. It is a federal tax election available to certain eligible corporations and LLCs that meet IRS requirements.
No single entity type is best for every business. The appropriate structure depends on the owners, business activities, tax considerations, liability concerns, management needs, financing plans, and long-term goals of the company.
This information is provided for general informational purposes only and should not be relied upon as legal or tax advice. Business owners should consult with an attorney, accountant, or tax advisor before selecting a business structure.
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