Choosing the Proper Business Entity

Whether you are an entrepreneur taking the first step on your journey or an experienced business-owner, make sure the type of business entity you are using is well-suited to your needs. Much of the information on this page is also available in PDF format from our Document Library, including our brochure on Choosing the Proper Business Entity.

Sole Proprietorship

A sole proprietorship is a business that is owned and operated by one person. The owner is entitled to all profits of the business, but is also personally liable for all obligations. A sole proprietorship is considered the simplest form of business entity because few formalities are required.

For more information, see our publication on Sole Proprietorships.

General Partnership

A general partnership is formed when two or more people co-own a business for a profit. A written partnership agreement is not required, but it is a good idea. The partnership agreement governs the amount of control each partner will have and also how the partners will share profits or losses. Typically each partner is jointly and severally liable for all obligations of the partnership. Each partner is responsible for the income taxes on his share of partnership profits.

For more information, see our publication on General Partnerships.

Limited Partnership

A limited partnership is a partnership formed by two or more people with at least one general partner and at least one limited partner. The general partner controls the management of the business and is usually liable for all obligations of the partnership. The limited partner is usually only an investor and has limited liability. For tax purposes, limited partnerships act like general partnerships, where each partner pays personal income taxes on his or her share of the partnership profits. A limited partnership must be registered with the State Corporation Commission, but has no additional record keeping requirements.

For more information, see our publications on Limited Partnerships and Limited Liability Partnerships.

Corporation

A corporation is a legal entity that is separate from its owners, the shareholders. A corporation typically consists of directors, officers, and at least one shareholder, each with different levels of  responsibility, legal duty, and control. Corporations are formed by filing articles of incorporation with the State Corporation Commission and have strict record keeping requirements. A corporation must comply with federal laws and the laws of each state in which it conducts business. The manner in which business profits are taxed depends entirely on the structure of the corporation.

For more information, see our publication on Corporations. See also our publication on 501(c)(3) Charities.

Limited Liability Company

A Limited Liability Company (LLC) is a separate legal entity that has one or more owners, called members. The liability of the owners is generally limited to their investment. LLCs have few record keeping requirements, but should have an operating agreement and must file articles of organization with the State Corporation Commission. LLCs offer tremendous organizational flexibility and can be taxed like corporations or partnerships.

For more information, see our publication on Limited Liability Companies.

	Management/Profits	Liability	Taxes	Administration
Sole Proprietorship	Sole proprietor has total control of business operations and receives all profits.	No separation of liability—all of the proprietor’s personal and business assets are at risk.	All profits are taxed as income of sole proprietor.	Must obtain business license and register trade name.  No administrative requirements.
General Partnership	Control and profits are shared between partners according to the partnership agreement.	Partners are liable for all obligations of the partnership and liabilities of other partners.	Acts as pass-through entity.  Each partner pays tax on his share of profits.  May also require self-employment taxes.	No formal administrative requirements other than obtaining local licenses and permits.
Limited Partnership	General and limited partners share in the control and profits of the partnership according to the partnership agreement.	Limited partners: no liability for obligations of limited partnership. General partners: same liability as partners in a general partnership.	Acts as pass-through entity.  Both general and limited partners pay tax on their share of profits.	Articles of association must be filed, but generally no record keeping or tax filing requirements.
Corporation	Shareholders: ownership rights, including election of directors. Directors: govern general affairs and appointment of officers. Officers: manage day-to-day operations of the business.	In general, neither directors, officers, nor shareholders are personally liable for any of the obligations of the Corporation.	S-Corp (acts as pass-through entity): All profits are taxed as income of each shareholder. C-Corp: Business income is taxed at corporate level and dividends are taxed as income of each shareholder.	Requires bylaws and filing of articles of incorporation; typically have comprehensive record keeping and tax filing requirements.
Limited Liability Company	Member profits and management procedures are directed by the operating agreement.	Usually limited to the member’s investment in the company.	Can be taxed like corporation or partnership.	Only articles of organization must be filed, but should have operating agreement.