The entity menu
Sole proprietorship, partnership, LLC, C corporation, S election, LP and LLP, PBC, 501(c)(3): what each is under state law and for federal tax.
Every business entity is two things at once. Under state law it is a legal form — a corporation, an LLC, a partnership, or no entity at all — and that decides who is liable for its debts, who owns it and how it raises money. Under federal tax law it has a classification — a corporation, a partnership, or a disregarded entity — and that decides who pays the tax and on which return.
The two layers don't line up one-to-one. A corporation formed under a state's corporation law is a corporation for tax, full stop. An LLC isn't: it takes a default classification by its number of members, and can choose another with a check-the-box election on Form 8832. A corporation that qualifies can elect to be an S corporation on Form 2553.
The difference shows up in the books first in equity. Northwind, a corporation, records its founders' $60,000 as common stock and keeps retained earnings. An LLC or partnership keeps a capital account per owner. A sole proprietor has one capital account and records money taken out as a draw.
Pick the legal form for liability and fundraising, then the tax classification for who pays — they are separate choices that happen to share a name.
In this lesson: a page for each entity — what it is, how it's taxed, what it files, what it's good and bad at, and who it suits.
Pages in this lesson
8 pages go deeper, about 28 minutes in all. Read them in order, or open the one you need.
- Sole proprietorshipWhat is a sole proprietorship and how is it taxed?
- General partnershipWhat is a general partnership and how is it taxed?
- Limited liability company (LLC)What is an LLC, and how is an LLC taxed?
- C corporationWhat is a C corporation, and what is double taxation?
- S corporationWhat is an S corporation?
- LP and LLPWhat is the difference between an LP and an LLP?
- Public benefit corporation (PBC)What is a public benefit corporation?
- Nonprofit 501(c)(3)What is a 501(c)(3) nonprofit?
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Federal regulation
- Treas. Reg. §301.7701-3(b)(1) (opens in a new tab)Default classification of a domestic eligible entity — the check-the-box rulesFree to read
- IRS guidance
- IRS, Business structures (opens in a new tab)Business structures — sole proprietorship, partnership, corporation, S corporation, LLCFree to read
- Federal agency guidance
- SBA, Choose a business structure (opens in a new tab)Choose a business structure — the SBA's overview of the optionsFree to read
- Official form
- Form 8832 (Rev. December 2013) (opens in a new tab)Form 8832, Entity Classification Election (PDF)PDF · Free to read
- Background reading — not an authority
- Wikipedia, “Flow-through entity” (opens in a new tab)Flow-through entityFree to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Sole proprietorshipA business one individual owns without forming an entity. Its profit is reported on the owner's Schedule C with self-employment tax on Schedule SE, and the owner is personally liable for its debts
- General partnershipTwo or more people carrying on a business together for profit without forming another entity. Each partner is personally liable for the partnership's debts; it files Form 1065 and pays no income tax itself
- Limited liability companyA state-law entity whose owners (members) are shielded from its debts like shareholders. Federal tax has no LLC category: by default it is a partnership with two or more members and disregarded with one, and it is a C or S corporation only if it elects
- C corporationA corporation taxed as a taxpayer in its own right: it files Form 1120 and pays 21% of its taxable income, and its shareholders are taxed again on what it pays them as dividends. Every corporation is a C corporation unless it elects S status
- S corporationA domestic corporation, or an LLC eligible to be treated as one, that has elected on Form 2553 to pass its income, losses, deductions and credits through to its shareholders. No more than 100 shareholders, all of them individuals other than nonresident aliens, estates, or certain trusts and exempt organizations, and one class of stock. Files Form 1120-S
- Disregarded entityAn eligible entity with one owner that has not elected to be a corporation, ignored for income tax so its results go on the owner's return — Schedule C for an individual owner. It is still a separate legal entity, and still the employer for employment taxes
- Check-the-box electionThe election on Form 8832 by which an eligible entity — an LLC or a partnership, never a corporation formed under a state's corporation statute — chooses its federal tax classification. Effective no more than 75 days before or 12 months after it is filed, and after a change, no second change for 60 months
- Public benefit corporationA for-profit Delaware corporation formed to produce a public benefit named in its charter, whose board must balance the stockholders' financial interests, the interests of those its conduct materially affects, and that benefit. Reports to stockholders on it at least every two years; taxed like any other corporation
- 501(c)(3) organizationA nonprofit organized and operated exclusively for the exempt purposes section 501(c)(3) names — charitable, educational, religious, literary, scientific and the like — none of whose earnings may benefit a private shareholder or individual. It has no owners and no equity to sell
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.