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Word art spelling corporation, LLC, C-Corporation and other business entity types

Understanding the Different Types of Business Entities

Word art spelling corporation, LLC, C-Corporation and other business entity types

When starting or expanding a business, one of the most important choices to make is which business entity type (legal structure) to select for the company. The business entity type will depend on the individual circumstances of each business owner. It’s important to choose a business entity type that gives the owner(s) the right balance of legal protections and financial benefits. This decision will have an impact on how much the business and owners pay in taxes, affect the amount of paperwork the business is required to do, the personal liability of the owners, and the ability to raise and access money for the company.

Consult a lawyer or accountant to determine the best organizational structure for your business.

To help you better understand the options here is a summary of each business entity type to consider for your business. Remember, you can update and change your business entity type at any time to suit your business needs.

Sole Proprietorship

A sole-proprietorship (also referred to as sole-prop) is one of the simplest business entity types, usually run by one person for his or her own business benefit. Sometimes referred to as consultants, freelancers, or independent contractors, the owner has full control of all business decisions and spending habits. With minimal fees and paperwork to file, there is no annual report or separate tax filing required as all taxes are reported as part of the owners individual tax return, which simplifies the accounting for the business.

The owner of a sole proprietorship assumes all responsibility (and liability) for the business. This means that the owner is placing their own personal assets at risk, which can be used to satisfy a business debt or legal claim filed against the business.


The next simplest type of business entity is a partnership, which begins with a written partnership agreement but does not require a state filing. A partnership can have multiple owners. There are two types of partnerships that provide different controls and liabilities.

General Partnership

With a general partnership, each partner can act on behalf of the business, such as taking out loans and making decisions that will affect the business and be binding in all the partnerships (if the general partnership permits.) Typically, each partner would have a functioning role to contribute to the business, either in the form of labor, skill or financial resources.

Each partner absorbs all profits and liabilities of the business. Partnerships tend to be more expensive to establish than a sole proprietorship due to the legal and accounting services required.

Limited Partnership

In contrast to a general partnership, limited partners serve as financial investors only. They limit their risk and liability of the business based on the percentage of their financial investment. This is a very attractive business opportunity for those with investable money that don’t want to be involved in the day to day running of a business. These limited partners can also exit the business with no need to dissolve the partnership itself, providing the business the flexibility to attract new investors as needed.


A corporation is a legal entity that operates under state law and is governed by its charter, the articles of incorporation, which details how the corporation will operate, including the responsibilities of directors, officers, and shareholders, among other things. One of the key benefits of a corporation is that owners significantly limit their personal liability. The shareholders are also safeguarded from liability.

A big disadvantage of a corporation is the high cost to form it and the extensive record-keeping required.

There are two forms of a corporation that offer separate tax-benefits.


A c-corporation status offers the opportunity for unlimited shareholders (investors) and is the most common form of a corporation. The biggest disadvantage is double taxation, where the corporation pays income tax at the corporate rate before the profits transfer to the shareholders, who must then pay taxes on an individual level.


An s-corporation is solely for smaller companies to gain tax advantages. Operating in the same manner as a c-corporation, an s-corporation has limited protections and faces the same amount of taxation as a partnership where net income is calculated as income for the shareholders and profit/loss is passed through to the individual tax returns.

Contact your secretary of state or the state office that is responsible for registering corporations to start the process of incorporation. Request instructions, forms, and fee schedules on business incorporations. Always consult an accountant and/or attorney before conducting any legal changes to your business.

Limited Liability Company (LLC)

A limited liability company (LLC) enjoys the best of both worlds in that it gets the liability protection that a corporation enjoys without the double taxation. Earnings and losses pass through to the owners and are included in their personal tax returns.

An LLC acts as an independent entity (much like a corporation) and is taxed similarly to a sole proprietorship (if one owner) or a partnership (if multiple owners), with no limit of number of owners. The profits and losses are divided between the owners.

Limited Liability Partnership (LLP)

Operating with the same benefits as an LLC, a limited liability partnership (LLP) is usually associated with such businesses as accounting, law, or medicine as the partners would not be held liable for any malpractice from the other partners.


Nonprofit corporations are typically established for charitable organizations or for organizations providing resources at no cost to the community. Nonprofits do not pay income taxes on any money they receive for charity causes, and financial donors can deduct donations (limits apply based on individual income levels) from their personal income taxes. Typically, nonprofits are exempt from state and federal income taxes.

Resources You May Need

Most businesses will need to get a tax ID number (except sole proprietors) and obtain the appropriate licenses and permits. Always consult with an attorney and/or accountant when making any business decisions to review the legal and financial impacts to both you and your business.