When starting a business, one of the most important decisions you’ll make is choosing the right legal structure. Your choice affects everything from asset protection and tax treatment to management flexibility and compliance requirements. Below, we break down the key features of the four most common business entities: Sole Proprietorship, Partnership, LLC, and Corporation.
Business Entity Comparison Chart
| Feature | Sole Proprietorship (DBA, No Entity) | Partnership | LLC | Corporation |
|---|---|---|---|---|
| Number of Owners | Only one | Must have two or more | One or more | One or more |
| Asset Protection | None | None for GP; Good for LP | Good for single-member (protection of business assets against personal liabilities of the member is less certain); Good for multimember | Good for corporation’s assets; None for shareholders |
| Governance and Management | Easy | Easy to complex | Easy to complex (member-managed, manager-managed, board-managed) | Complex (board with officers required) |
| Recordkeeping and Compliance | Easy; minimal records required | Moderate; some records required | Moderate; some records required | Complex; records and meetings required |
| Ongoing Business Entity Maintenance Costs | State/local filing fees; initial and ongoing | State filing fees; initial and ongoing | State filing fees; initial and ongoing | State filing fees; initial and ongoing |
| Multistate or Single-State Issues | Requires registration in every state where business is done | Requires registration in every state where business is done | Requires registration in every state where business is done | Requires registration in every state where business is done |
| Tax Benefits | Income potentially eligible for 199A deduction | Income potentially eligible for 199A deduction | Income potentially eligible for 199A deduction (if LLC is treated as a partnership for tax purposes) | Income not eligible for 199A deduction (unless an S corp election is made); 21% marginal rate |
| Default Tax Status | Disregarded for most federal tax purposes | Partnership | Partnership (but single-member LLCs are disregarded for most federal tax purposes) | C Corp |
| Electable Tax Status | Cannot elect a different tax status | Can elect C corp or S corp status | Can elect C corp or S corp status | S Corp |
Key Takeaways
Sole Proprietorship
- Best for: Solo entrepreneurs seeking simplicity.
- Pros: Minimal paperwork, easy management, and low cost.
- Cons: No asset protection—your personal assets are at risk.
Partnership
- Best for: Two or more people starting a business together.
- Pros: Flexible management, pass-through taxation.
- Cons: General partners have no asset protection; limited partners do.
LLC (Limited Liability Company)
- Best for: Owners seeking flexibility and liability protection.
- Pros: Good asset protection (especially for multi-member LLCs), flexible management, and tax flexibility.
- Cons: More paperwork than a sole proprietorship or partnership, but less than a corporation.
Corporation
- Best for: Businesses seeking to raise capital, offer stock, or operate at a larger scale.
- Pros: Strong asset protection, perpetual existence, and easier to attract investors.
- Cons: Complex governance, strict compliance requirements, and double taxation unless S corp status is elected.
Final Thoughts
Choosing the right entity is a foundational step for your business. Consider your goals, the number of owners, desired level of asset protection, tax implications, and your willingness to handle compliance requirements. Consulting with legal and tax professionals can help ensure you select the structure that best fits your needs.
If you have questions about forming a business entity or want to discuss your options in more detail, contact our office for guidance tailored to your situation.
Disclaimer: This blog is for informational purposes only and does not constitute legal or tax advice. Always consult with a qualified professional regarding your specific circumstances.