Business structures explained simply

One person running a business without forming a company: you are the business. A dog walker who just starts taking clients is one. Good: free and instant. Watch out: no separation between business debts and your personal assets.

Two or more people in business together for profit, with no company formed. Two friends opening a pottery studio together without filing anything are a general partnership. Good: simple, and profit is split however you agree. Watch out: each partner can be personally on the hook for the business’s debts, including ones the other partner ran up. Variants called an LLP (limited liability partnership, often for professionals like accountants) and an LP (limited partnership, where silent investors are protected) add some protection and need a state filing.

A limited liability company: a simple company you register with your state that keeps the business’s debts separate from your personal assets. Good: protection plus light paperwork, and the profit is still taxed on your personal return. Watch out: state fees every year in most states, and you still pay self-employment tax on the profit.

No, it isn’t a type of company. It’s a tax choice an LLC or corporation makes by filing IRS Form 2553. You pay yourself a salary, and profit above that salary avoids the 15.3% self-employment tax. Good: can save tax once profit is high. Watch out: payroll, an extra tax return, and a salary the IRS must find reasonable.

A regular corporation, the kind big companies and venture-backed startups use. It’s owned by shareholders and pays its own federal income tax at a flat 21%. Good: easiest to raise money from investors and issue stock. Watch out: profit paid out to owners is taxed twice, and there are more formalities.

An organization formed for a mission (charity, education, religion and the like) rather than to make its owners money. It has no owners, and with IRS 501(c)(3) status it pays no federal income tax on mission income and donors can generally deduct gifts. Good: donations and grants. Watch out: you can’t keep or sell the profits. See nonprofit vs LLC.

It means the business’s debts and lawsuits stay with the business. If your LLC owes money, the creditor can generally take the business’s assets but not your house, car or personal savings. Without it, your personal assets are fair game.

A customer at your pottery studio slips at the wheel, gets hurt and sues for more than the business has. As a sole proprietor or general partner, you could personally owe the difference. As an LLC, the claim is generally limited to what the business owns and its insurance.

No. You’re still personally responsible for your own mistakes (say, you personally injure someone), for loans you personally guarantee, and for unpaid payroll taxes in many cases. Mixing personal and business money can also let a court ignore the protection, so keep a separate business bank account.

Usually yes. The LLC protects your personal assets; insurance protects the business itself from a costly claim. The pottery studio would typically carry general liability insurance, and workers’ compensation once it hires staff.

The business itself pays no federal income tax; the profit "passes through" to the owners, who report it on their personal returns. Sole proprietorships, partnerships, LLCs (by default) and S-corps all work this way.

It’s what happens with a C-corp. The company pays 21% tax on its profit, and when it pays the rest out to you as dividends, you pay tax on it again. Pass-through businesses are taxed only once.

It’s Social Security and Medicare for people who work for themselves: 15.3% on most of your profit, on top of income tax. Employees split this with their employer; when you’re the business, you pay both halves. It applies to sole proprietors, partners and default LLC owners.

When profit is high enough that the self-employment tax you save beats the cost of payroll and the extra tax return. Our 2026 model breaks even at roughly $60,000 of profit for a single owner, and the saving grows from there. A bakery making $30,000 a year usually won’t benefit; one making $120,000 often will. Run your numbers in the S-corp calculator.

Not by default. A one-owner LLC is taxed exactly like a sole proprietorship. The difference is protection, not tax, unless the LLC later elects S-corp status.

State filing fees to form an LLC range from $35 to $500, and most states charge an annual report fee or tax every year after that. Look up your state in the LLC cost calculator or compare states with which state to form in.

A person or company with an address in the state that accepts legal papers and official mail for your business. Every LLC and corporation needs one. You can be your own if you have an address in the state and are there in business hours; services typically cost about $100–$150 a year.

An Employer Identification Number: a business’s tax ID, like a Social Security number for the company. It’s free from the IRS online. You need one to hire staff, and usually to open a business bank account or run an LLC with partners.

Sole proprietor: a schedule on your personal return. Partnership: a yearly partnership return and a form for each partner. LLC: a state annual report plus your normal taxes. S-corp: payroll plus its own return. C-corp: payroll, its own return, board meetings and minutes. Nonprofit: state reports plus a yearly IRS Form 990.

Any structure can hire. You’ll need an EIN, payroll, and to pay employer payroll taxes and usually workers’ compensation insurance. If the pottery studio hires a part-time instructor, expect roughly 10–15% on top of wages. See the cost of hiring calculator.

If the business could get sued or owe real money (customers on site, a lease, employees, products people eat), an LLC is usually worth its fees. A dog walker just testing the waters might stay a sole proprietor for a while with good insurance; a bakery signing a lease usually forms an LLC.

Most small partnerships form a multi-member LLC: same pass-through tax as a partnership, but with liability protection. Either way, put a written agreement in place covering who owns what, who decides, and what happens if one of you leaves.

Mainly if you plan to raise money from venture investors or offer stock to many employees. For a business that pays its profit out to the owner, the double tax usually makes it the costlier choice.

Yes. Many people start as a sole proprietor, form an LLC when things get serious, and elect S-corp tax once profit grows. Switching to S-corp is just an IRS form; changing the entity itself, or moving it to another state, means state filings (see moving an LLC).

Not to form a simple LLC: most people file online themselves in an afternoon. A professional is worth it for partner agreements, raising investment, an S-corp election or a nonprofit application. Free help is available from Small Business Development Centers and other free resources.

Take the which-structure quiz, then read the full comparison or follow the step-by-step formation path.