The FAQ on Business Entity Types

Updated: Nov 28, 2022

You have that excellent new service or idea that will change the world! You have the logistics worked out. You know your costs. You even know your perfect business name. Have you thought about the different types of entities your business could be - sole proprietor, partnership, corporation, S-corporation, or LLC?

Knowing which business entity type to register as can save you big when it comes to taxes, benefits, personal liability, and recordkeeping requirements. Each type of business entity formation is unique, with pros and cons. Below, you'll find the four business entities to see which type fits your needs best.

Sole Proprietor, Single-Member LLC, & Spouse-Owned Businesses

Partnership

C Corporation

S Corporation

Wait! What About LLCs?

Business Formalities

A common problem with a closely-held business is failure to adhere to business formalities. Trouble can occur when business and personal funds are intermingled, the business is not adequately capitalized, or reasonable compensation for services is not paid.

For example, separation of funds can be a key in preserving the liability protection of the “corporate veil.” Courts can pierce the corporate veil if they find the corporation is

an “alter ego” of the shareholder, which is likely to occur if shareholders pay personal expenses from the corporation checkbook or vice versa.

Transactions such as capital contributions or loans between the business and the owners can also be recharacterized by the IRS, creating unexpected negative tax consequences.

If you still have questions, we're always here to help you work through the options so you can start your new business on the best tax foot. Seeking the advice of legal counsel can also be wise, depending on the type of business you will operate.*

*Legal Disclaimer: This post contains general information for taxpayers and should not be relied upon as the only source of authority. Taxpayers should seek professional tax advice for more information. This information was current at time of posting; we are not responsible for updating this or any blog post/article for subsequent changes in the law or its interpretation.