Entity Type Guide
Choosing the right business structure is one of the most important decisions you'll make. This guide breaks down every major entity type — what it is, who it's for, and when to use it. When in doubt, consult a qualified attorney or CPA.
Sole Proprietorship
Freelancers, side hustles, solo service providers just starting out
Pros
- ✓Easiest and cheapest to start
- ✓No formal registration required in most states
- ✓Full control — you make all decisions
- ✓Business income goes directly on your personal taxes
Cons
- ✗You are personally liable for all business debts
- ✗Harder to get business credit or loans
- ✗Less credibility with some clients or partners
- ✗No distinction between personal and business legally
Tax Treatment
Self-employment income reported on Schedule C of your personal tax return.
Ideal Revenue Range
Under $50K/year or just testing a business idea
Consider Upgrading When
You have clients signing contracts, employees, or significant revenue
LLC (Limited Liability Company)
Most small businesses — the most popular structure for a reason
Pros
- ✓Personal liability protection (your house, car, savings are protected)
- ✓Flexible tax options (taxed as sole prop, partnership, or S-Corp)
- ✓Credibility with clients and banks
- ✓Relatively simple to form and maintain
Cons
- ✗Filing fees vary by state ($50–$500+/year)
- ✗Requires an operating agreement and basic record-keeping
- ✗Self-employment taxes still apply by default
Tax Treatment
Pass-through taxation by default. Can elect S-Corp status for potential tax savings.
Ideal Revenue Range
$30K–$500K/year
Consider Upgrading When
You want S-Corp tax treatment (usually at $60K+ net profit)
S-Corporation
Established businesses looking to reduce self-employment taxes
Pros
- ✓Owners can split income between salary and distributions (saving on SE tax)
- ✓Strong liability protection
- ✓Credibility and structure for growth
Cons
- ✗Must pay yourself a "reasonable salary"
- ✗More complex — payroll required, stricter IRS rules
- ✗Limited to 100 shareholders, one class of stock
Tax Treatment
Pass-through — profits/losses reported on personal return. Payroll taxes only on salary portion.
Ideal Revenue Range
$60K+ in net profit
Consider Upgrading When
You want to attract investors or have more complex ownership
C-Corporation
Businesses seeking venture capital, planning to go public, or with complex ownership
Pros
- ✓Can have unlimited shareholders and multiple stock classes
- ✓Preferred by investors and VCs
- ✓Employees can receive stock options
Cons
- ✗Double taxation (corporate tax + personal tax on dividends)
- ✗Most complex and expensive to maintain
- ✗Significant compliance requirements
Tax Treatment
Corporate tax rate (21% federally) + personal taxes on dividends distributed.
Ideal Revenue Range
When fundraising or IPO is the goal
Consider Upgrading When
You need complex ownership structure or outside investment
Partnership
Two or more people starting a business together without formal structure
Pros
- ✓Easy to form
- ✓Pass-through taxation
- ✓Flexible profit sharing
Cons
- ✗Partners are personally liable (in a General Partnership)
- ✗Disputes can destroy the business — a partnership agreement is essential
- ✗Banks may require more documentation
Tax Treatment
Each partner reports their share of income/loss on personal returns.
Ideal Revenue Range
Any — but structure it properly with a partnership agreement early
Consider Upgrading When
You want liability protection — consider an LLC with multiple members instead
Nonprofit
Mission-driven organizations serving the public, community, or a cause
Pros
- ✓Tax-exempt status (federal and often state)
- ✓Eligible for grants and charitable donations
- ✓Strong community credibility
Cons
- ✗Profits cannot be distributed to founders/owners
- ✗Complex application (Form 1023 for 501(c)(3))
- ✗Ongoing compliance and reporting requirements
Tax Treatment
Generally exempt from federal income tax. Must file Form 990 annually.
Ideal Revenue Range
Revenue reinvested into the mission — not personal profit
Consider Upgrading When
When you want to formalize community or social impact work
⚠️ This guide is for informational purposes only and does not constitute legal or tax advice. Please consult a licensed attorney or CPA before making any formation decisions.
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