How to Choose a Business Structure: Sole Proprietorship, Partnership, LLC or Corporation

In the US, the IRS's Business Structures page (last reviewed or updated October 3, 2026) says: "The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation." It adds: "A limited liability company (LLC) is a business structure allowed by state statute." The choice matters because, as the SBA puts it (US, page checked October 31, 2026), "Your business structure affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability."

This page sets out what the SBA and the IRS say about each structure, with each source's date, so you can compare them before a meeting with an adviser. It doesn't recommend a structure for you. The SBA says on the same page: "Consulting with business counselors, attorneys, and accountants can prove helpful."

For the basics of each form, see what is a business entity, what is a sole proprietorship and what is an LLC. For the steps after you decide, see how to register a business.

Four questions to settle first

Write down your answers to these before you compare structures. They're the points the SBA lists, turned into questions for your own situation:

1. Liability: if the business owed money or was sued, what personal assets would you want kept out of reach?
2. Taxes: will the business keep profits in the company, or pay them out to you as they come in?
3. Raising money: will you ever want investors, or sell part of the company?
4. Paperwork: how much filing and record-keeping can you keep up with each year?

Take the answers to an accountant or a lawyer. The sections below give the official wording to check their advice against.

Sole proprietorship

You don't have to file anything to become one. The SBA says (US, page checked October 31, 2026): "You’re automatically considered to be a sole proprietorship if you do business activities but don’t register as any other kind of business." It also says: "You can be held personally liable for the debts and obligations of the business."

The IRS's Sole Proprietorships page (US, last reviewed or updated June 28, 2026) says: "A sole proprietor is someone who owns an unincorporated business by themselves." Among the forms it lists for a sole proprietor is "Schedule C (Form 1040 or 1040-SR), Profit or Loss from Business".

Partnership

The IRS's Partnerships page (US, last reviewed or updated June 8, 2026) says: "A partnership is the relationship between two or more people to do trade or business." On tax, it says: "A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax." And: "Each partner reports their share of the partnership's income or loss on their personal tax return."

The SBA (US, page checked October 31, 2026) describes two kinds of limited partnership and says: "Limited liability partnerships are similar to limited partnerships, but give limited liability to every owner." For running a business with partners day to day, see how to manage business partnerships.

Limited liability company (LLC)

The IRS's LLC page (US, last reviewed or updated October 10, 2026) says: "Each state may use different regulations, you should check with your state if you are interested in starting a Limited Liability Company."

For federal tax, an LLC doesn't have one fixed treatment. The same IRS page says: "Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”)."

Corporation (C corporation)

The IRS's page on forming a corporation (US, last reviewed or updated June 17, 2026) says: "The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends." The SBA (US, page checked October 31, 2026) adds that "Corporations also require more extensive record-keeping, operational processes, and reporting."

S corporation

The SBA (US, page checked October 31, 2026) says "S corps must file with the IRS to get S corp status, a different process from registering with their state". The IRS's S Corporations page (US, last reviewed or updated June 11, 2026) says: "S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes." To make the election, it says, "the corporation must submit Form 2553, Election by a Small Business Corporation signed by all the shareholders." The same page lists who can and can't be a shareholder, so check it with your accountant before you file.

Worked example: splitting partnership profit

Sample figures, to show the arithmetic only: two partners write into their partnership agreement that profit is shared 60% and 40%. The partnership earns $84,000 of profit for the year.

• Partner A's share: $84,000 × 60% = $50,400
• Partner B's share: $84,000 × 40% = $33,600
• The two shares add back up: $50,400 + $33,600 = $84,000

The IRS's Partnerships page quoted above (US, last reviewed or updated June 8, 2026) says the partnership files an information return but "does not pay income tax"; the $50,400 and $33,600 go on the partners' personal returns. How much tax each partner then owes depends on their whole situation, so that part is for their accountant.

Where Billed fits

Whichever structure you choose, keep the business's money records apart from your own. Billed's expense tracking page says: "An expense in Billed records who you paid, when, how much and which category it belongs to, with the receipt attached to the same entry." If you own two or more businesses, the same page says: "If you run more than one business from one Billed account, each business has its own expenses, invoices, clients and financial reports, and you can switch between businesses as you work."

When this guide isn't for you

This page quotes federal sources and doesn't cover the rules of any one state, professional licensing or ownership agreements. It isn't legal or tax advice. Ask a lawyer or an accountant before you form or change a business entity.

Related Articles

• What Is a Business Entity?
• What Is a Sole Proprietorship?
• What Is an LLC?
• How to Register a Business
• How to Get an Employer Identification Number (EIN)

Frequently Asked Questions

Is my first business structure permanent?

The SBA says (US, page checked October 31, 2026): "While you may convert to a different business structure in the future, there may be restrictions based on your location." Ask a lawyer or an accountant before you plan on a later change.

Am I a sole proprietor if I never registered my business?

The SBA says (US, page checked October 31, 2026): "You’re automatically considered to be a sole proprietorship if you do business activities but don’t register as any other kind of business."

How does the IRS tax an LLC?

It depends on the LLC. The IRS says (US, last reviewed or updated October 10, 2026): "Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”)."

How does a corporation become an S corporation?

The IRS says (US, last reviewed or updated June 11, 2026): "In order to become an S corporation, the corporation must submit Form 2553, Election by a Small Business Corporation signed by all the shareholders." An accountant can check whether your business qualifies.