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Choosing a Small Business Structure: A Guide to LLCs, Sole Proprietors, Corporations, & Partnerships

A guide to formation your business entity.
A guide to formation your business entity. ©️ CreateHER Stock.

This post explains choosing a small business structure, their advantages & disadvantages, and the tax implications. If your current entity doesn't fit your needs, learn how to switch from one entity type to another. We'll also walk through registering your business and how to stay compliant with state regulations by keeping good records.

Do you own or want to start a small business? If so, you may be wondering what type of company structure is best for your business. In this blog post we'll explain the different types of business entity structures available, and which one might be right for you.

Your choice will depend on the size and complexity of your company, the number of owners/members/shareholders, and the industry it operates in. There are also federal requirements that must be met before registering as an LLC or other corporate entity.

The most common business structure among small business owners is an LLC but you should also consider the others: sole proprietorships, partnerships, and corporations. They’re similar in some ways and in others very different. They affect how your business is governed, your personal liability protection, taxes, and income distribution.

Here's an overview of LLCs including personal asset protection, how it affects your taxes, and things you need to know as an LLC member.

Entity options for LLCs, corporations, & partnerships.
Entity options for LLCs, corporations, & partnerships.

LLC Overview

Limited Liability Companies or LLCs are popular because many people see them as a quick and easy way to establish a new business. An LLC is a business structure that’s separate from its owner(s). It also protects the owner’s personal assets from litigation if the business gets sued. LLC owners are called members and you can have as many members as you'd like. An LLC must be renewed annually or biannually in most states to remain compliant.

Your Default Tax Classification

If you’re the only business owner filing an LLC, you’re a single-member LLC and your default tax classification is a sole proprietorship. That means that your business profits or losses will be included on Schedule C as part of your personal tax return. The IRS does not recognize LLCs as taxable entities therefore the members of the LLC are taxed individually.

Alternate Tax Elections

A single-member LLC can also choose to be taxed as an S-corporation for added tax benefits. With S-corporation status owners don't pay self-employment taxes like you would being taxed as a single-member LLC.

Some entrepreneurs think a C-corp is reserved for large, publicly traded organizations but in some cases, depending on the goals, it could make sense for your small business.

Keep in mind that electing to be taxed as a different entity type does not mean you lose your LLC status - this is how the IRS recognizes your business since they don't recognize LLCs for tax purposes.

Sole Proprietorships, Corporations, and Partnerships

While LLCs are the most popular structure for entrepreneurs, it’s not the only option. The best thing you can do for your business is be informed. Don’t base your business decisions on what you’ve seen or heard someone else do - just because it worked for them doesn’t mean it’ll work for you. Here’s a quick summary of other business structures, the type of owner liability protection they provide, and tax impacts.

Sole Proprietor

The sole proprietorship is the most basic federal tax treatment and doesn’t require additional filings. Profits and losses from the business are included on Schedule C as part the business owner's personal tax return. Sole proprietors are also required to make quarterly estimated payments on income and pay self-employment taxes.


Owners of a corporation are called shareholders or shareowners. There's formal paperwork required to form a corporation - lots of paperwork which can get expensive and this is a reason why people tend to shy away from this structure.

The other big reason why a C-corporation structure is often not selected by small businesses is because of “double taxation” on profits. A corporation’s profits are taxed on the business tax return and again on the shareholders’ tax returns when profits are paid to owners.

A corporation is a legal entity totally separate from its owners. For that reason, a corporation can continue even if you sell your ownership stake or pass away.


If you’re going into business with partners or co-founders, a partnership is an option. There’s no formal paperwork required to form a partnership. You share profits and losses, and each owner is responsible for the debts and decisions made on behalf of the business. If someone sues a general partnership, your personal assets are also at risk.

If you choose a Limited Partnership, that brings personal liability protection. Profits and losses from partnerships are included on each owner’s personal income tax return.

Other Things to Consider When Choosing a Small Business Structure

Things to consider as you form your small business.
Things to consider as you form your small business. ©️ CreateHER Stock.

Registered Agent

To form an LLC, you must select a registered agent. Your registered agent is a person or service provider who agrees to be your point of contact with the state. This person or business will receive government notices on behalf of your business. For example, if your business is sued, your registered agent will receive the subpoena or court papers at the designated address.

Some business owners choose to be their own registered agent. While that might save you a few dollars, there’s drawbacks to being your own registered agent like:

  • Your street address becomes public as part of your business registration

  • You may receive more marketing or junk mail from companies who purchase public mailing lists from the secretary of state

  • If you’re business is sued, family, friends, and neighbors may witness this which can be embarrassing

  • Anytime you move, you’ll have to update your mailing address with the secretary of state

As part of your formation package with us, you receive registered agent services free for one year.

Employer Identification Number (EIN)

Multi-member LLCs and partnerships are required to have an EIN number. An Employer Identification Number or EIN is like the social security number for your business. When you open a bank account or apply for business credit, lenders will likely ask for your EIN.

If you'll have employees, your EIN is required to track your small business’ hiring activity. It’s also used to file your business tax returns.

We highly recommend that all LLC members establish and maintain a business account separate from any personal transactions. Mixing business and personal transactions could result in loss of your personal asset protection per standard LLC governing rules. We can obtain an EIN number for your business as part of your formation package.

We’ll create your LLC or other business structure and handle your annual renewals. We’ll also get you an Employer Identification Number so you can stop using your social and file your state and local tax registrations.

All of our entity formations include ongoing compliance monitoring to make sure your LLC filing is always current.

If you already have an LLC and want S-Corporation status, we can do that for you too.

Get started today with our Entity Formation & Compliance services.

Note: While this post offers valuable insights, this information should not be considered a substitute for professional tax advice. Tax laws and regulations can be complex and vary by jurisdiction. Consider a consultation with Winston CPA Group for personalized tax guidance tailored to your specific situation.

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