You are here: Information Center >> Small Business >> Selecting a Legal Structure for Your Business >> Small Business: Forms of Business Chart

Small Business: Forms of Business Chart

Form of business	Legal filings	Taxation	Structure	Advantages	Disadvantages
Sole proprietorship	Required licenses and registrations	Personal rates, filed using Schedule C on Form 1040	Business ceases when proprietor leaves the business	Easy to set up	Does not protect against personal liability
Partnership	Assumed name filing, required licenses and registrations	Profit shared by partners at personal tax rates	Dissolves when a partner leaves	Fairly easy to set up; partnership agreement recommended	Does not protect against personal liability Only partial deduction for health expenses
C corporation	Annual reports Board of directors meetings	Separate tax return, taxed as separate entity Corporate tax rates Dividends taxed to shareholders	Perpetual existence More than one class of ownership are possible (e.g., common and preferred)	Can protect against personal liability of individual shareholders regarding claims against the business	Corporate tax rate is higher than individual Double taxation of dividends Additional administrative costs
S corporation	Similar to C corporation	Taxed at individual rate, Form 1040, Schedule C, E, and SE Form 1120S, Income Tax Return for S Corporation and Form 1120S K-1 Must close books at end of year	Similar to a C corporation except must meet certain requirements to be treated as an S corporation	Eliminates double taxation of dividends	Cannot deduct benefits such as health insurance for shareholders owning 2% or more of the company Cannot own subsidiaries Cannot retain earnings Typically fiscal year must be a calendar No more than 35 shareholders
LLCs	Exempt from corporate filings in most states Operating agreement required	Taxed at individual rate, Form 1040, Schedule C (need approval of IRS) Usually more accounting flexibility than C or S corporations	Somewhat of a hybrid between an S corporation and a C corporation	Taxed at personal rate Limited liability as a corporation