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Vendor setup · Business type

Business types, side by side

Sole proprietorship, partnership, LLC, S corporation, C corporation and nonprofit: what each one is. None of them is the right answer for everybody.

The short version

This page describes each type and leaves the choice to you and your accountant.

  • The IRS names the sole proprietorship, partnership, corporation and S corporation as the most common forms of business; an LLC is a structure created by state statute. IRS, as of
  • The form of business determines which income tax return the business files. IRS, as of

Sole proprietorship

  • A sole proprietor is someone who owns an unincorporated business by themselves. IRS, as of
  • You are automatically a sole proprietor if you do business activities and do not register as another kind of business. SBA, as of
  • A sole proprietor reports business income on Form 1040 with Schedule C. IRS, as of
  • A sole proprietor figures self-employment tax on Schedule SE. IRS, as of
  • A sole proprietorship is not a separate legal entity, so the owner can be held personally liable for the business's debts. SBA, as of

Partnership

  • A partnership is the relationship between two or more people to do trade or business. IRS, as of
  • A partnership files an information return but pays no income tax itself; profits and losses pass through to the partners. IRS, as of
  • A partnership files Form 1065, U.S. Return of Partnership Income. IRS, as of
  • Partners are not employees and should not be issued a Form W-2; the partnership furnishes each partner a Schedule K-1. IRS, as of

LLC

  • An LLC is a business structure allowed by state statute, and rules differ by state. IRS, as of
  • LLC owners are called members, and most states allow single-member LLCs. IRS, as of
  • A domestic LLC with two or more members is taxed as a partnership by default unless it elects corporate treatment on Form 8832. IRS, as of
  • A single-member LLC is disregarded as separate from its owner for income tax unless it elects corporate treatment on Form 8832. IRS, as of
  • A single-member LLC is still a separate entity for employment tax and certain excise taxes. IRS, as of
  • An LLC protects its owners from personal liability in most instances, but members pay self-employment tax on LLC profits. SBA, as of

S corporation

  • An S corporation elects to pass income, losses, deductions and credits through to shareholders for federal tax purposes. IRS, as of
  • To be an S corporation the company must be domestic, have no more than 100 shareholders, have only one class of stock and only allowable shareholders. IRS, as of
  • A corporation becomes an S corporation by filing Form 2553, signed by all shareholders. IRS, as of

C corporation

  • For federal income tax purposes a C corporation is a separate taxpaying entity. IRS, as of
  • C corporation profit is taxed to the corporation when earned and again to shareholders when paid out as dividends. IRS, as of

Nonprofit

  • Section 501(c)(3) covers organizations organized and operated exclusively for religious, charitable, scientific, educational and similar purposes. IRS, as of
  • A nonprofit must apply to the IRS for tax exemption; that is separate from registering with the state. SBA, as of

Next steps

Once you know your type, register it with your state, then get your EIN.

Registration by stateGet an EIN

Sources

  1. Business structures Internal Revenue Service. As of .
  2. Sole proprietorships Internal Revenue Service. As of .
  3. Choose a business structure U.S. Small Business Administration. As of .
  4. Partnerships Internal Revenue Service. As of .
  5. Limited liability company (LLC) Internal Revenue Service. As of .
  6. S corporations Internal Revenue Service. As of .
  7. Forming a corporation Internal Revenue Service. As of .
  8. Exempt organization types Internal Revenue Service. As of .

Official pages change. Each line shows the day we last read it.