1. Sole Proprietorship

• What it is: A one-person business that isn’t legally separate from the owner.

• Setup: Easiest and cheapest to start—just register your business name and get licenses if needed.

• Taxes: Business income is reported on your personal tax return.

• Liability: You’re personally responsible for all debts and legal issues.

• Best for: Freelancers, independent contractors, or very small, low-risk businesses.

2. Partnership

• What it is: A business owned by two or more people.

• Setup: Usually requires a partnership agreement but is simple to form.

• Taxes: Each partner reports their share of profits or losses on personal tax returns.

• Liability: Partners share responsibility for debts and liabilities.

• Best for: Small businesses with multiple owners who want to share control and profits.

3. Limited Liability Company (LLC)

• What it is: A flexible structure that protects your personal assets like a corporation but is taxed like a sole proprietorship or partnership.

• Setup: File formation documents with your state and create an operating agreement.

• Taxes: Profits “pass through” to owners’ personal tax returns (unless you choose to be taxed as a corporation).

• Liability: Owners are generally not personally liable for business debts.

• Best for: Most small businesses—simple, flexible, and protective.

4. Corporation

There are two main types for small businesses: C Corporation and S Corporation.

C Corporation (C Corp)

• What it is: A separate legal entity from its owners (shareholders).

• Taxes: The corporation pays its own taxes on profits; shareholders also pay tax on dividends (double taxation).

• Liability: Owners are protected from personal liability.

• Advantages:

  • Easier to raise money by selling stock.

  • Can attract investors and venture capital.

  • Good for companies planning to grow large or go public.

• Best for: Businesses that plan to scale, seek outside investment, or reinvest profits into growth.

S Corporation (S Corp)

• What it is: A special tax status available to certain corporations or LLCs.

• Taxes: Profits and losses “pass through” to the owners’ personal tax returns—no corporate income tax.

• Liability: Same protection as a C Corp.

• Advantages:

  • Avoids double taxation.

  • Owners can pay themselves a reasonable salary and take remaining profits as dividends (which can reduce self-employment tax).

• Limitations:

  • Limited to 100 shareholders.

  • All shareholders must be U.S. citizens or residents.

• Best for: Small-to-medium businesses that want liability protection, tax savings, and don’t plan to go public or have foreign investors.

Summary Table