Understanding Business Entity Types
Choose the right structure for your business. Learn about the benefits, use cases, and considerations for each entity type.
Limited Liability Company (LLC)
Most common business structure offering liability protection
Key Benefits
- •Limited personal liability protection for members
- •Pass-through taxation (profits taxed once at member level)
- •Flexible management structure (member-managed or manager-managed)
- •Fewer compliance requirements than corporations
Best For
- •Small to medium-sized businesses with multiple owners
- •Professional service providers (consultants, contractors)
- •Real estate investors holding rental properties
- •Family-owned businesses seeking liability protection
Important Considerations
- •Self-employment taxes may apply to active members
- •State-specific formation requirements and annual fees
- •May need operating agreement for multi-member LLCs
- •Some states have publication requirements
Sole Proprietor
Individual business owner operating alone
Key Benefits
- •Simplest and least expensive business structure to set up
- •Complete control over all business decisions
- •Minimal paperwork and regulatory requirements
- •Direct access to all business profits
Best For
- •Freelancers, consultants, and independent contractors
- •Home-based businesses and online sellers
- •Side businesses and part-time ventures
- •Testing a business idea before forming a formal entity
Important Considerations
- •Unlimited personal liability for business debts
- •Harder to raise capital from investors
- •Business dissolves if owner dies or retires
- •All income taxed as personal income with self-employment tax
Partnerships
Business owned by two or more people
Key Benefits
- •Simple formation process with minimal paperwork
- •Pass-through taxation (profits taxed at partner level)
- •Shared management responsibilities and decision-making
- •Combined resources, skills, and expertise
Best For
- •Professional practices (law firms, accounting firms, medical practices)
- •Joint ventures between two or more individuals
- •Family businesses with multiple active owners
- •Small collaborative businesses sharing resources
Important Considerations
- •Personal liability for partners in general partnerships
- •Partners are liable for each other's business actions
- •Partnership agreement strongly recommended to avoid disputes
- •Potential conflicts between partners on business decisions
Corporations
Separate legal entity from its owners
Key Benefits
- •Strong liability protection for shareholders and officers
- •Easier to raise capital through stock sales
- •Perpetual existence independent of owners
- •Enhanced credibility with customers, vendors, and investors
Best For
- •Businesses seeking outside investment or venture capital
- •Companies planning to go public (IPO)
- •High-growth startups with multiple investors
- •Businesses with significant liability concerns or risks
Important Considerations
- •Double taxation (C-Corp profits taxed, then dividends taxed)
- •More complex compliance and reporting requirements
- •Higher formation and maintenance costs
- •Formal meeting and record-keeping requirements
S-Corporations
Corporation with pass-through taxation
Key Benefits
- •Pass-through taxation like LLC (avoids double taxation)
- •Limited liability protection for shareholders
- •Potential self-employment tax savings on distributions
- •Enhanced credibility of corporate structure
Best For
- •Small to medium businesses with under 100 shareholders
- •Service-based businesses with significant net income
- •Businesses with U.S. citizen/resident shareholders only
- •Companies wanting corporate benefits with simpler taxes
Important Considerations
- •Strict IRS requirements and restrictions on shareholders
- •Limited to 100 shareholders (all must be U.S. citizens/residents)
- •Only one class of stock allowed
- •Must file for S-Corp election (Form 2553) with IRS
Trusts
Fiduciary arrangement for asset management
Key Benefits
- •Asset protection and estate planning advantages
- •Avoid probate process for beneficiaries
- •Privacy for beneficiaries (unlike wills which are public)
- •Tax planning opportunities for wealth transfer
Best For
- •Estate planning and wealth transfer to heirs
- •Real estate holdings and investment properties
- •Investment management and asset protection
- •Charitable giving and philanthropic activities
Important Considerations
- •Complex setup and administration requiring legal expertise
- •Trustee has significant responsibilities and fiduciary duties
- •May require legal and tax professional guidance
- •Irrevocable trusts cannot be easily changed or dissolved
Estate
Assets of a deceased person
Key Benefits
- •Manages and protects deceased person's assets
- •Settles debts and distributes property to heirs
- •Provides legal authority to act on behalf of estate
- •Temporary structure for orderly asset management
Best For
- •Managing assets after someone's death
- •Settling final debts, taxes, and obligations
- •Distributing inheritance to beneficiaries
- •Selling or transferring estate property and assets
Important Considerations
- •Temporary entity that dissolves after estate settlement
- •Executor has significant legal responsibilities and liability
- •May require probate court oversight and approval
- •Tax filing requirements while estate remains open
Personal Service Corporation
Corporation providing professional services
Key Benefits
- •Corporate liability protection for professional service providers
- •Potential tax benefits for certain service businesses
- •Professional credibility and formal business structure
- •Easier to add partners or shareholders over time
Best For
- •Licensed professionals (doctors, lawyers, accountants, architects)
- •Health care providers and medical practices
- •Engineering and consulting firms
- •Other professional service businesses requiring licensing
Important Considerations
- •Subject to flat 21% corporate tax rate (no graduated rates)
- •Must meet IRS definition of 'personal service' activity
- •At least 95% of activities must be personal services
- •Employee-owners must perform substantial services for corporation
Nonprofit Organization
Organization serving public or mutual benefit
Key Benefits
- •Tax-exempt status if qualified under 501(c)(3)
- •Eligible for grants, donations, and fundraising
- •Limited liability protection for directors and officers
- •Public trust and credibility for mission-driven work
Best For
- •Charitable organizations and foundations
- •Educational institutions and schools
- •Religious organizations (separate from churches)
- •Social advocacy groups and community organizations
Important Considerations
- •Strict compliance with IRS regulations and state laws
- •Must apply separately for 501(c)(3) tax-exempt status
- •Profits must support mission, not benefit individuals
- •Extensive record-keeping and annual reporting requirements
Church Organization
Religious organization or place of worship
Key Benefits
- •Automatic tax-exempt status (no 501(c)(3) application needed)
- •Exempt from filing annual Form 990 information return
- •Clergy housing allowance tax benefits
- •Donations are tax-deductible for donors
Best For
- •Religious congregations and places of worship
- •Religious educational institutions and seminaries
- •Church-affiliated ministries and missions
- •Faith-based community organizations and outreach programs
Important Considerations
- •Must meet IRS definition of 'church' (regular worship, congregation, etc.)
- •Activities must be primarily religious in nature
- •Should maintain detailed records despite reduced reporting
- •Political activity restrictions apply to maintain tax-exempt status
Frequently Asked Questions
Can I change my entity type after getting an EIN?
Yes, but you'll need to notify the IRS of the change. In some cases, you may need to apply for a new EIN depending on the type of change (e.g., changing from sole proprietorship to LLC typically requires a new EIN).
How long does it take to get an EIN?
Processing times vary based on the service level you choose. We offer multiple speed options to fit your timeline, from same-day processing to standard processing within a few business days.
Do I need a lawyer to choose my entity type?
While we provide comprehensive information, we recommend consulting with a tax professional or attorney for personalized advice based on your specific situation, especially for complex business structures or tax situations.
What if I'm not sure which entity type to choose?
Review the benefits, use cases, and considerations for each type above. Consider your liability concerns, tax situation, growth plans, and ownership structure. We also recommend consulting with a business advisor or accountant who can provide guidance based on your specific goals and circumstances.