How to Choose A Business Structure That’s Right for You

While you can switch entities later, how you structure your small business is a decision you'll feel for some time. The business structure you select impacts your taxes and adds responsibilities on top of running your core business.

Aspiring entrepreneurs deciding how to legally structure a new business, and existing owners considering a change, should use this article to learn what a business structure is, compare the six types side by side, understand what changed with beneficial ownership reporting, and the questions to ask before finalizing your selection.

What is a business structure?

An entity is a legally recognized organizational structure used to conduct business activities, manage taxes, and define ownership liability. Choose from the following structures when forming your business:

• C corporation

• LLC

• Non-profit

• Partnership

• S corporation

• Sole proprietorship

Why the Right Business Structure Matters

Each business structure has strengths and weaknesses, so choose the one that best fits your operations. Whichever you go with, it will impact:

• Liability. Specific business structures protect your assets from lawsuits.

• Recordkeeping. Each business legal structure has a different tax form.

• Taxation. Some tax structures categorize their business income as personal income, while others tax business and personal income separately.

• Company hierarchy. Corporations must have a board of directors, while sole proprietorships and other structures have fewer formal obligations.

• Registration. Your legal structure is required to register your business in your state.

• Fundraising. Your structure can block you from raising funds.

Business structure comparison table

Types of Business Structures

Each business structure has its own strengths and weaknesses to consider before moving forward with the formation process.

LLC

You can form as a single-member or multi-member LLC. LLCs are flexible, and owners can elect to be taxed as a sole proprietorship, partnership, C corporation, or S corporation.

LLC Advantages:

• Pass-through taxation. The business passes profits and losses through to owners.

• Flexibility. Owners have options and can elect different tax treatments.

LLC Disadvantages:

• All LLC members must pay their individual taxes on the company’s earnings.

• Starting an LLC can cost more than other business entities.

S Corporation

An S corp is a tax election, not a separate business entity. Your business must first be formed as an LLC or C corporation before making this election. The five requirements to form and maintain this election:

• Must be a domestic entity

• 100 or fewer shareholders

• Only one class of stock

• Eligible shareholders only (individuals, certain trusts, and estates)

• Shareholders must be U. S. citizens or residents

S Corp Advantages:

• S corps allow shareholders to avoid double taxation.

• They provide liability protection for business owners and shareholders by keeping business assets separate from personal assets.

S Corp Disadvantages:

• You can only elect this status after forming a C corp or an LLC; shareholders do this through a shareholder election.

• Maintaining an S corp requires ongoing compliance, including drafting articles of incorporation and keeping corporate minutes up to date.

• Tax burden. Shareholders must pay taxes on S corp revenue even if they didn’t receive a portion of their income.

• Salary requirements. Active officers and owners of an S corp must take a "reasonable salary," which means setting up a payroll system, adding costs and obligations.

C Corporation

Corporate members are shareholders separate from the corporation. Corporations have four requirements, making formation more complex than other entities.

C Corporation Advantages:

• You'll have limited liability protection if you form a C corp as an owner or a shareholder. This gives shareholders peace of mind knowing their personal assets are protected, especially as corporate risk increases.

• You may pay taxes at a lower tax rate if your business income falls into a lower tax bracket.

• Tax deductions. Corporations can receive tax deductions, including bad debt, charitable donations, and depreciation.

C Corporation Disadvantages:

• C corps are more challenging to form and maintain compared to other business structures.

• C corps are subject to double taxation. Double taxation occurs when the corporation pays federal tax (a flat 21% rate), and shareholders then pay individual tax on the corporation’s profits.

Partnership

Partnerships are an excellent option for those considering starting a business with at least one other person. There are three different partnership types that you can form, with general partnerships being the most common.

• General partnership (all partners share personal liability)

• Limited partnership (general partners manage and carry liability; limited partners are liable only up to their investment)

• Limited liability partnership (partners are generally shielded from liability for other partners’ actions, common among professional practices)

Partnership Advantages:

• All partners can manage the business and share profits.

• You are more likely to get a business loan with more than one business owner, which is particularly helpful if you have a low credit score.

Partnership Disadvantage:

• Partnership liability. Creditors can seek personal assets from all members in a general partnership.

Sole Proprietorship

Sole proprietorships are the simplest and most common business structure to form, allowing you to create and operate a business as an owner with few formalities. Because no employer withholds taxes for sole proprietors and other self-employed individuals, most owners need to make quarterly estimated tax payments throughout the year if they expect to owe $1,000 or more in taxes.

Sole Proprietorship Advantages:

• Sole proprietorships require you to use your individual income tax return, IRS Form 1040, U. S. Individual Income Tax Return, and information about your business’s loss or profits on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship).

• Maintaining a separate bank account to conduct your business is optional.

• You can dissolve your business at any time without formal paperwork.

Sole Proprietorship Disadvantages:

• Sole proprietors are personally liable for company debts and lack liability protection.

• You’ll be responsible for taxes that other businesses avoid at the entity level, including income, sales, and self-employment taxes.

Non-profit

Non-profit corporations are the most specific business entity. They may operate for purposes including charity, education, and religion. Federal tax-exempt status requires filing Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, with the IRS. Most non-profits must also file an annual IRS Form 990, Return of Organization Exempt from Income Tax, to maintain that status.

Non-profit Advantage:

• The business structure of non-profit corporations allows them to be exempt from state and federal taxes.

Non-profit Disadvantage:

• Non-profits can use their earnings only for narrow purposes and for the industries or groups they serve.

What Changed: Beneficial Ownership Reporting

Under the Corporate Transparency Act, many small businesses were previously required to file BOI reports with FinCEN after formation. As of 2026, FinCEN has permanently dismantled this reporting requirement for U. S. companies and U. S. persons, removing a compliance step that once weighed on entity formation decisions.

While a future administration can revive this reporting standard, it is currently eliminated.

Formation and Ongoing Costs by Structure

Your final costs will vary by state and by structure. Sole proprietorships and general partnerships typically have no state filing fees, while LLCs and corporations usually do. Fees typically range from as little as $50 to as much as a few hundred dollars. There are ongoing costs after formation to know about.

In some states, you must file an annual report and pay a fee or pay a franchise tax. For example, California has an $800 minimum annual franchise tax for LLCs and corporations, due whether or not your business is profitable. C corporations and S corporations also carry added compliance costs, such as maintaining corporate minutes and running payroll for an owner's reasonable salary.

The Qualified Business Income Deduction and Entity Choice

Sole proprietorships, partnerships, LLCs, and S corporations may qualify for the Section 199A qualified business income deduction, worth up to 20% of qualified business income. This provision, originally set to sunset at the end of 2025, was made a permanent part of the tax code under 2025 federal legislation.

C corporations do not qualify for this deduction because it benefits pass-through entities.

Factors to Consider When Choosing a Business Structure

No single business entity is best for every small business. There are many factors to consider when selecting a business structure for your latest venture. But a couple of questions can help guide your choice.

• How much personal liability are you willing to take on, if any?

• How much flexibility do you need to perform the core duties of your business?

• What sort of tax scenario works best for you?

• How many owners or co-founders will your business have?

• Do you plan to raise outside investment or eventually sell the business?

• How much ongoing paperwork and cost can you realistically manage while growing your operations?

The answers to these questions will help determine the proper structure for your business.

FAQs About Choosing a Business Structure

What’s the difference between an LLC and an S corporation?

An LLC is a type of legal entity formed at the state level to shield personal assets from business liabilities. An S corporation is not a distinct entity type, but rather a special tax status that an eligible LLC or C corporation elects with the IRS. While a standard LLC pays self-employment tax on all net profits, an S corp structure lets owners split income into a reasonable salary and shareholder distributions to reduce the SE tax burden.

Can I change my business structure later?

Yes, you can change your structure as your business grows and your financial needs evolve. A sole proprietorship can easily upgrade to an LLC, and an existing LLC can elect S corporation tax status by filing Form 2553, Election by a Small Business Corporation, with the IRS. You can also convert a corporation back to a simpler structure or switch entity types completely, though it requires navigating state filings and potential tax consequences.

Which business structure best protects my personal assets?

Corporations and LLCs offer the strongest protection for your personal assets by creating a separate legal entity. This separation creates a "corporate veil" that shields personal holdings like your home, savings, and vehicles from company debts and lawsuits. In contrast, a sole proprietorship or general partnership offers zero asset protection, leaving the owner personally liable for all business failures.

What’s the least expensive business structure to start?

A sole proprietorship is the least expensive business structure because it requires no formal state entity registration fees. You only need to cover basic local costs like local business licenses or a "Doing Business As" name registration. Formal structures like LLCs and corporations require ongoing expenses, including initial state filing fees and annual report charges.

Do I still need to file a Beneficial Ownership Information report?

No, if your business is a domestic U. S. company, you no longer need to file a BOI report. Following an administrative final rule, FinCEN permanently eliminated the BOI reporting requirement for all U. S. companies and U. S. citizens. The filing mandate remains active only for foreign entities registered to conduct business inside the United States.

How does my business structure affect my ability to raise funding?

A C corporation is the best structure for raising venture capital because it allows for unlimited growth and multiple classes of stock. Investors typically avoid LLCs because profit and loss allocations must pass through to personal tax returns, which complicates investor tax filings. S corporations are also restrictive for fundraising because the IRS limits them to one class of stock and 100 total shareholders, all of whom must be U. S. citizens or residents.

What business structure is best for a single owner?

A single-member LLC is widely considered the best structure for a solo business owner. It provides vital personal asset protection while avoiding the rigid corporate formalities like keeping board minutes or holding annual shareholder meetings. It also offers tax flexibility, letting you start with simple pass-through taxation and easily transition to S corp status later if profits surge.

Work with Professionals Who Specialize in Entity Formation

Now that you have a better understanding of the six business structures, important legislative updates, and the questions to ask, you can make your selection with confidence. While you can handle the process and paperwork yourself, expert support makes formation easy.

If you're ready to form your business the right way the first time, learn more about 1-800Accountant's entity formation solution to get started.