The legal structure a company adopts, such as an LLC, corporation, or sole proprietorship.
What is a Business Entity?
A business entity refers to the legal structure under which a company is organized and operates. Common entity types in the U.S. include Limited Liability Companies (LLCs), Corporations (C Corporations or S Corporations), Sole Proprietorships, and Partnerships. The choice of entity affects how the business is taxed, how liability is handled, and how ownership is structured.
A Limited Liability Company (LLC) is one of the most flexible and widely used business structures, especially for small to medium-sized businesses. An LLC provides personal liability protection—meaning the owners (called members) are generally not personally responsible for business debts or lawsuits. LLCs benefit from “pass-through taxation,” where profits and losses are reported on the members’ personal tax returns, avoiding double taxation. They also allow for flexible ownership structures and are relatively easy to manage, without the formalities required of corporations.
Corporations are more structured entities, ideal for businesses that plan to scale significantly or raise capital. A C Corporation (C-Corp) is a separate legal entity from its owners (called shareholders), which means it offers strong liability protection. However, C-Corps are subject to double taxation—once at the corporate level and again when profits are distributed to shareholders as dividends. On the other hand, an S Corporation (S-Corp) allows profits and losses to pass through directly to shareholders’ personal tax returns, avoiding corporate-level tax. But S-Corps have stricter requirements, such as a limit on the number of shareholders (100) and all shareholders must be U.S. citizens or residents.
A Sole Proprietorship is the simplest and most informal business structure. It is not a separate legal entity, which means there’s no distinction between the business and the individual owner. The owner reports income and losses on their personal tax return, and they are personally liable for all business debts and obligations. This structure requires minimal paperwork, but it offers no liability protection—making it a risky option as a business grows.
A Partnership is formed when two or more people agree to operate a business together. Like sole proprietorships, partnerships are typically not separate legal entities (unless formed as a limited liability partnership). There are different types of partnerships, including general partnerships and limited partnerships. In a general partnership, all partners share responsibility and liability, while in a limited partnership, some partners have limited roles and protections. Partnerships also benefit from pass-through taxation.
Choosing the right business entity is a foundational decision. It impacts tax obligations, legal exposure, and administrative complexity. It also determines how the business interacts with federal and state agencies. In the U.S., forming a formal entity like an LLC or corporation is typically done at the state level through a filing process.
