Choosing a business structure in the US: sole proprietorship, LLC, S corp, C corp or partnership

This guide is general information about federal tax and bookkeeping, not legal or tax advice. Liability protection, state fees and the right choice for you depend on your state and your circumstances; speak to a business attorney and a CPA before you decide.

Two separate questions

Choosing a business structure is really two decisions that are easy to mix up:

1. The legal form under state law. Are you a sole proprietorship, a general partnership, a limited liability company (LLC) or a corporation? This decides who is liable for the business's debts, what you file with the secretary of state, and what the state charges each year.
2. The federal tax classification. How does the IRS tax the profit? As your own income on Schedule C, as a partnership, as an S corporation, or as a C corporation?

The two do not always match. An LLC is a state-law form, and the IRS taxes it as a sole proprietorship, a partnership or a corporation depending on how many members it has and what it elects. Keep the two questions apart and the options make much more sense.

The five common structures

Sole proprietorship

The default if you start working for yourself and do nothing else. There is no separate entity: you and the business are the same person in law. Profit goes on Schedule C of your Form 1040, and you pay self-employment tax (15.3%: 12.4% Social Security on earnings up to $184,500 for 2026, plus 2.9% Medicare) on most of the net profit, in addition to income tax. It is the simplest and cheapest to run, but you are personally liable for the business's debts and claims.

General partnership

Two or more people in business together without forming an entity are a general partnership by default. The partnership files Form 1065, an information return, and gives each partner a Schedule K-1 with their share of profit, which they report on their own return. Each general partner can be personally liable for the partnership's debts, including those another partner runs up. A written partnership agreement is essential.

Limited liability company (LLC)

Formed by filing articles of organization with your state. Run properly, an LLC can keep business debts and lawsuits away from the owners' personal assets. For federal tax the IRS treats an LLC by default as:

• a disregarded entity if it has one member, taxed like a sole proprietorship on Schedule C, or
• a partnership if it has two or more members, filing Form 1065.

An LLC can instead elect to be taxed as a corporation with Form 8832, or as an S corporation with Form 2553. That flexibility is why the LLC is so popular for small businesses.

S corporation

Not a legal form but a tax election, made by a corporation or an LLC on Form 2553. The business files Form 1120-S, and profit passes through to the owners on K-1s, so there is no corporate income tax at the federal level. To qualify it must be a domestic entity with no more than 100 shareholders, only allowable shareholders (individuals, certain trusts and estates, not partnerships, corporations or non-resident aliens) and one class of stock.

The attraction is self-employment tax. An owner who works in the business is an employee and must be paid a reasonable salary through payroll, with Social Security and Medicare withheld and matched. Profit above that salary can be taken as distributions, which are not subject to self-employment tax. The cost is running payroll for yourself, an extra return, and stricter bookkeeping. To take effect for a tax year, Form 2553 is generally due no more than 2 months and 15 days after that year begins.

C corporation

A corporation that has not elected S status. It files Form 1120 and pays federal corporate income tax at a flat 21%. Dividends paid to shareholders are taxed again on their own returns, which is the "double taxation" people mention. C corporations can have any number and kind of shareholders and more than one class of stock, which is why companies planning to raise outside investment often choose them. For most owner-operated small businesses, the extra tax layer and formality outweigh the benefits.

Side by side

"Generally limited" is doing a lot of work in that table. Liability protection depends on state law, on keeping business and personal money separate, and on not personally guaranteeing loans. It does not protect you from your own professional negligence.

What changes in your books

The bookkeeping for sales, bills and the bank looks the same under every structure. What changes is the equity section of the balance sheet and how the owners get paid.

• Sole proprietorship and single-member LLC: one owner's equity account for money you put in and one owner's draw account for money you take out. Draws are not an expense and do not reduce profit. See owner draws vs contributions.
• Partnership and multi-member LLC: a capital account and a draw account for each partner, so you can show what each one put in, took out and earned. Guaranteed payments to partners are recorded separately from draws, because they are reported differently on the K-1s.
• S corporation: common stock (or members' capital for an LLC), retained earnings, and a distributions account. Your salary goes through payroll like any employee's. Keep loans between you and the company in their own account, with paperwork.
• C corporation: common stock, additional paid-in capital, retained earnings and dividends. The corporation's income tax becomes an expense and a liability in its own books.

Whatever you choose, open a separate bank account in the business's name and run everything through it. Mixing personal and business money is the fastest way to lose the liability protection you formed the LLC or corporation to get.

How to decide, step by step

1. Estimate your first two years. Expected profit is the biggest factor. A business making a modest profit gains little from an S election; one making a steady six-figure profit may gain a lot.
2. Weigh the risk. Do you sign leases, hold inventory, have employees, work in people's homes or give professional advice? More risk usually means more reason for an entity and for good insurance. Insurance matters more than structure for many claims.
3. Count the owners. One owner keeps every option open. Two or more owners need a written agreement whatever the structure.
4. Check your state. Filing fees, annual reports and minimum taxes vary a lot between states. Some charge an annual LLC or franchise tax even in a loss year.
5. Think about the future. Investors, selling the business or bringing in partners may point to a corporation; a lifestyle business seldom needs one.
6. Price the paperwork. An S corporation needs payroll, quarterly payroll returns, W-2s and a separate business return. Get a quote from your CPA for the year-end work.
7. Get advice, then file. Take your numbers to a CPA and an attorney, then form the entity with the state, get the EIN and make any tax election on time.

Paperwork after you choose

• State formation: articles of organization (LLC) or incorporation (corporation) with the secretary of state, plus an operating agreement or bylaws. A sole proprietor using a trade name usually files a DBA ("doing business as") with the county or state.
• EIN: required for partnerships, corporations and anyone with employees. See how to get an EIN.
• Tax elections: Form 2553 for S corporation status, Form 8832 for an LLC that wants to be taxed as a C corporation.
• Licences and registrations: local business licences, state sales tax registration, and payroll accounts if you hire.
• Beneficial ownership: US-formed companies no longer file BOI reports with FinCEN. The final rule took effect on August 14, 2026.
• Annual upkeep: state annual reports, registered agent, meeting minutes for corporations, and the federal returns in the table above. The tax deadlines and record keeping guide lists the dates.

Checklist

• Estimate profit for the next two years
• List the main risks and get insurance quotes
• Decide how many owners there will be and write an agreement if there is more than one
• Check your state's formation fees, annual report and any minimum tax
• Ask a CPA whether an S corporation election would save you money
• Ask an attorney about liability, contracts and the operating agreement or bylaws
• File the formation documents with the state
• Get an EIN in the entity's name
• File Form 2553 or Form 8832 on time if you are making an election
• Open a business bank account and set up the equity accounts for your structure

In AcboBooks

AcboBooks does not ask for your business structure; the books work the same way for each one. Every new company starts with Owner's Equity, Owner's Draw and Retained Earnings accounts. A partnership adds a capital and draw account for each partner; a corporation renames Owner's Equity to Common Stock and adds a distributions or dividends account. If you elect S corporation status, run your salary through payroll like any employee's. The Academy lesson on the chart of accounts shows how to add and rename accounts.

Sources and official links

• SBA: Choose a business structure
• IRS: Business structures
• IRS: Limited liability company (LLC)
• IRS: S corporations
• IRS: Instructions for Form 2553
• IRS: Self-employment tax
• FinCEN: Beneficial ownership information reporting

Last reviewed October 26, 2026. Government pages change; if a figure here differs from the official page, the official page wins.

Frequently asked questions