Our work is reader-supported, meaning that we may earn a commission from the products and services mentioned.

StartUp 101 Logo
Search
Close this search box.

Comparison of Business Entities

Comparison of Business Entities

Advertising Disclosure

Advertising
Disclosure

Comparison of Business Entities

A business entity (sometimes referred to as the business structure or legal structure) is the basic foundation of starting a business.  The business entity is basically how a business is legally organized to do business.

There are four primary business entities to choose from, which include the sole proprietorship, partnership, corporation, and LLC.  Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.

It’s important to understand the differences between each and make your entity selection early, as many of the later steps of starting a business will depend on which one you choose.

Featured LLC Formation Services

ZenBusiness logo

Best for beginners
Pricing: $0 + State Fees

Incfile Logo

Most additional services
Pricing: $0 + State Fees

nw registered agent logo

Best privacy protection
Pricing: $39 + State Fees

A brief description of each entity is below.

Sole Proprietorship is an individual or married couple that decides to go into business for themselves. This is the easiest to start, least expensive to form, and most popular of the four entities to set up, with an estimated 73% of businesses in the U.S. being sole proprietors.  With this business structure, the individual and business are legally the same, so the owner is personally responsible for all debts and actions of the company.  This is what’s referred to as unlimited liability and is the biggest downside to the sole proprietorship. This means if the business is sued, the owner’s personal assets are potentially at risk.  The owner will also pay self-employment tax on all business profits and may pay more in taxes than other entities.

Learn more about the sole proprietorship

General Partnerships consist of two or more people conducting a business together. Like the sole proprietorship, there is no formal filing in most states.  Also, like the sole proprietorship, the partnership has unlimited liability.  If the partnership were to be sued, each of the partner’s personal assets are potentially at risk.  The partnership itself does not pay tax from business income.  Instead, profits and losses are passed through to the owner’s personal tax return.  This income is subject to self-employment tax.

Learn more about the partnership

Corporation is a legal entity that is separate from the individual.  While corporations are more expensive and complicated than sole proprietorships and partnerships to form and administer, the major advantage is that the corporation shields the owner’s personal assets should the corporation be sued. In order to keep liability protection for the owners, a corporation must have a board of directors meeting, a shareholders meeting and take minutes at these meetings. This all may sound absurd for a single-owner corporation but are critical to protecting the owner’s personal assets.

With no self-employment tax, income to the owner(s) will come from either a salary or dividends, which may result in tax savings.

Learn more about the corporation

The Limited Liability Company (LLC) is a popular business entity choice. It provides the liability protection of a corporation with ease of operation like a sole proprietorship.  The LLC does not have the many burdens a corporation, such as holding a board of directors meeting, shareholders meeting, taking minutes, etc., but still provides the ability to protect the owner’s personal assets from lawsuits against the business.

The LLC has additional benefits, such as having the greatest tax flexibility of the four entities.  Income can be taxed as a pass-through entity like the sole proprietor or partnership or as a corporation to save on self-employment taxes. Not only are there more options for how the business is taxed, but the way the business is taxed can also be changed later as the business grows.

Learn more about the Limited Liability Company

Related Articles:

To help show the differences between the sole proprietorship, partnership, corporation, and LLC, feel free to download our entity comparison PDF.

 

What is the Difference Between a Sole Proprietorship, Partnership, Corporation, LLC

Entity Comparison Guide

 

 

Author

  • Greg Bouhl

    With over two decades as an entrepreneur, educator, and business advisor, Greg Bouhl has worked with over 2,000 entrepreneurs to help them start and grow their businesses. Fed up with clients finding and acting on inaccurate and outdated information online, Greg launched StartUp101.com to be a trusted resource for people starting a business.

Comparison of Business Entities

Comparison of Business Entities

Leave a Reply

Your email address will not be published. Required fields are marked *

Some (but not all) of the links on StartUp101.com are affiliate links. This means that a special tracking code is used and that we may make a small commission on the sale of an item if you purchase through one of these links. The price of the item is the same for you whether it is an affiliate link or not, and using affiliate links helps us to maintain this website.

StartUp101.com is also a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.

Our mission is to help businesses start and promoting inferior products and services doesn’t serve that mission. We keep the opinions fair and balanced and not let the commissions influence our opinions.