Business Types 101
Learn the pros and cons of the 5 different business types to find the one that’s right for you.
| Business Type | How it's Unique | Protections & Taxation | Drawbacks to Consider |
|---|---|---|---|
| LLC | Better for max flexibility in how you manage and run your business; board of directors not required | You’re not personally on the hook for business liabilities Taxed once or twice; you’re free to choose which can help minimize taxes |
Ongoing filings and fees to stay in compliance LLCs can’t go public Not recognized globally; you may be taxed as a corporation in other countries |
| S Corporation | Better for smaller corporations | You’re not personally on the hook for business liabilities Taxed once—only shareholders pay on profits received |
Ongoing filings and fees to stay in compliance Less management flexibility; must have a board of directors More admin; strict rules about holding meetings and keeping records All shareholders must be U.S. citizens or residents |
| C Corporation | Best if you plan to go public one day; can issue shares to founders, employees, and investors | You’re not personally on the hook for business liabilities Taxed twice—business pays at the corporate level, and shareholders pay on income received |
Ongoing filings and fees to stay in compliance Less management flexibility; must have a board of directors More admin; strict rules about holding meetings and keeping records |
| Nonprofit | Best if you’re supporting a good cause and want to protect your personal assets | You’re not personally on the hook for business liabilities Tax exempt—if you have 501(c)(3) status with the IRS |
Ongoing filings and fees to stay in compliance Less management flexibility; must have a board of directors More admin; strict rules about holding meetings and keeping records Pricier application and filing fees if you try for 501(c)(3) tax-exempt status |
| Sole Proprietorship | Better if you need an easy set-up | You’re personally on the hook for business liabilities Taxed once—you pay on profits in your personal tax return |
No personal liability protection |
Frequently Asked Questions
Do I need to form an LLC, corporation, or nonprofit to start my business?
- No, but you might want to. Forming an LLC, a corporation, or a nonprofit protects your personal assets and may unlock tax benefits.
What’s the main difference between a sole proprietorship and an LLC?
- Personal liability protection. An LLC protects owners from being personally on the hook for business liabilities or debts. A sole proprietorship doesn’t.
What’s the difference between an LLC and a corporation?
- Both protect owners so they’re not personally on the hook for business liabilities or debts. Key differences include how they’re owned (LLCs have one or more individual members and corporations have shareholders) and maintained (corporations generally have more formal record-keeping and reporting requirements). Even though LLCs are considered easier to start and maintain, investors tend to prefer corporations.
Can an LLC be taxed as an S corporation?
- Yes. This can be helpful for business owners who want the management flexibility of an LLC—but also want to minimize employment taxes on the profits they receive.
Do I need a doing business as (DBA) name?
- If you plan on using a business name that’s different from your personal or official company name, you’re required to get a DBA in most states or counties.
Do I need a business license or permit to get started?
- Depending on the nature of your business, and where it’s located, you might need a license or permit to operate legally within your city, county and/or state.