1. Sole Proprietorship
Taxes

  • Profits are reported on your personal tax return (Schedule C on Form 1040).

  • No separate business tax — the business is you.

  • Self-employment tax (for Social Security & Medicare) applies to all net earnings.

Legal Implications

  • No liability shield. If the business is sued or owes money, your personal assets (house, savings, car) are at risk.

  • Simple to form and dissolve, but legally risky for anything beyond a side gig.

2. Partnership
Taxes

  • The partnership itself files an informational return (Form 1065).

  • Profits/losses “pass through” to partners, who report them on personal tax returns.

  • Each partner pays self-employment tax on their share of earnings.

Legal Implications

  • In a general partnership, each partner is personally liable for business debts (even if caused by the other partner).

  • You can limit this with a Limited Partnership (LP) or Limited Liability Partnership (LLP), depending on state law, but rules vary.

  • Partnerships require strong agreements to avoid conflicts.

3. Corporation (C-Corp)
Taxes

  • A corporation is a separate taxpayer.

  • Pays corporate income tax on profits.

  • If profits are distributed to shareholders as dividends, those are taxed again on personal returns = double taxation.

  • But corporations can deduct many expenses (salaries, benefits, insurance).

Legal Implications

  • Strong liability protection: shareholders’ personal assets are shielded.

  • More complex compliance (bylaws, annual meetings, board of directors, state filings).

  • Attractive to investors and venture capital.

4. Corporation (S-Corp, special election)
Taxes

  • Like a pass-through entity: profits go directly to shareholders’ personal returns.

  • Can save on self-employment tax by splitting income into salary (taxed normally) + distributions (not subject to self-employment tax).

  • Limited to 100 U.S. shareholders and only one class of stock.

Legal Implications

  • Same liability protection as a C-Corp.

  • Must follow corporate formalities, but usually less complex than C-Corps.

5. LLC (Limited Liability Company) – Focus
Taxes

  • By default: taxed like a sole proprietorship (if 1 member) or a partnership (if multiple members). Profits “pass through” to owners.

  • Members pay income tax on their share of profits and self-employment tax (Social Security & Medicare) on earnings.

  • Flexibility: An LLC can choose to be taxed as an S-Corp or a C-Corp if that saves money.

    • Example: A profitable single-owner LLC might elect S-Corp taxation to pay themselves a salary (subject to payroll taxes) and take the rest as distributions (not subject to self-employment tax).

Legal Implications

  • Limited liability: Members’ personal assets are generally protected from lawsuits or debts of the business.

  • Fewer formalities than a corporation (no mandatory board or annual meetings, though annual reports and state fees are required).

  • Ownership can be flexible — individuals, corporations, or even other LLCs can be members.

  • However, courts can “pierce the veil” if you mix business and personal money or commit fraud, putting personal assets at risk.

Why LLCs are so popular

  • Combine the simplicity of a sole proprietorship with the liability protection of a corporation.

  • Flexible tax options let you optimize for your situation.

  • Easy to set up and run compared to corporations.

  • Best suited for small to medium businesses, freelancers, real estate investors, and online businesses.