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You are here: Information Center >> Small Business >> Selecting a Legal Structure for Your Business >> Small Business: Forms of Business Chart

Small Business: Forms of Business Chart

Form of business Legal filings Taxation Structure Advantages Disadvantages
Sole proprietorship Required licenses and registrations Personal rates, filed using Schedule C on Form 1040 Business ceases when proprietor leaves the business Easy to set up Does not protect against personal liability
Partnership Assumed name filing, required licenses and registrations Profit shared by partners at personal tax rates Dissolves when a partner leaves Fairly easy to set up; partnership agreement recommended Does not protect against personal liability
Only partial deduction for health expenses
C corporation Annual reports
Board of directors meetings
Separate tax return, taxed as separate entity
Corporate tax rates
Dividends taxed to shareholders
Perpetual existence
More than one class of ownership are possible (e.g., common and preferred)
Can protect against personal liability of individual shareholders regarding claims against the business Corporate tax rate is higher than individual
Double taxation of dividends
Additional administrative costs
S corporation Similar to C corporation Taxed at individual rate, Form 1040, Schedule C, E, and SE
Form 1120S, Income Tax Return for S Corporation and Form 1120S K-1
Must close books at end of year
Similar to a C corporation except must meet certain requirements to be treated as an S corporation Eliminates double taxation of dividends Cannot deduct benefits such as health insurance for shareholders owning 2% or more of the company
Cannot own subsidiaries
Cannot retain earnings
Typically fiscal year must be a calendar
No more than 35 shareholders
LLCs Exempt from corporate filings in most states
Operating agreement required
Taxed at individual rate, Form 1040, Schedule C (need approval of IRS)
Usually more accounting flexibility than C or S corporations
Somewhat of a hybrid between an S corporation and a C corporation Taxed at personal rate
Limited liability as a corporation