Business Structures

Updated: August 19, 2025

Depending on the nature and business or entity structure, entrepreneurs should become familiar with federal, state, and local regulations before establishing their business. It is recommended to seek legal, tax and financial advice before starting a business or entity.

Considerations when electing a business structure

• Capital Investment

• Regulations

• Permits y licenses

• Complexity

• Flexibility

• Control

• Tax Treatment

• Responsibility

1. Sole Proprietor

Doing Business

• May do business as (DBA) under a trade name.

• Application for a Trade Name - Allows the owner to take legal action in case someone else copies or misuses such trade name.

• May register a brand and open a bank account.

Control

 The owner controls the business and decision-making.

Advantages

• Simplicity of creation and dissolution

• No double taxation

• Less expensive to establish and maintain

Disadvantages

• Personal Liability: Owner is at risk and respond with personal assets

• Capital investment is personal savings and loans.

Tax Treatment

• Taxed at the individual level on Form 1040

• Self-Employment Tax

• Estimated Tax

• Employment tax if the business has employees

• Excise Tax (if applicable)

2. LLC (Limited Liability Company)

Publication 3402, Tax Issues on Limited Liability Companies. Similar to a Corporation in that owners (members) have limited liability for debts and actions of the company. May be managed by members or management may delegate one or more administrators.

Advantages:

• Has the advantages of Partnerships where profits and losses are passed-through to their owners.

• General rule, require less formalities than corporations.

• Freedom to manage the company.

Disadvantages:

• Self-Employment Taxes on members profits unless taxed as an S Corp.

• Some states charge an annual franchise tax or LLC fees even though business is not profitable.

• May not issue stocks

Requirements:

a. Choose a Business Name: The company name must include the following words: "Limited Liability Company" or "LLC"

b. Assign a Resident Agent: May be a person or an entity authorized to do business in the State. Must have a physical address in the state.

c. File Articles of Organization/Certificate of Organization with the Secretary of State. Must contain the name and address of the LLC, the physical and mailing address of the resident agent and must indicate if it is organized to provide professional services, its members, professional employees ,and persons licensed to practice such profession, as applicable. Filing fees vary depending on the state.

d. Create an Operating Agreement. The state of Nebraska does not require an Operating Agreement, but it is recommended to establish the startup, operation, and termination of the LLC. Check the requirements of your state.

e. Publish a Notice on the county newspaper for 3 consecutive weeks (cost depends upon the newspaper) - Required by the state of Nebraska

f. File an affidavit (by mail or online) as proof of the publication with the Secretary of State. - Required by the state of Nebraska.

g. Apply for an EIN (Employer Identification Number) on the IRS Website.

h. File Annual/Biennial Reports with Secretary of State.

*Verify with your state for specific requirements.

Types of LLCs and Tax Treatment:

Single Member LLC

(1) For income tax purposes, an LCC having a single member, is automatically treated as a disregarded entity unless it files Form 8832 with the IRS to make an election to be treated as a Corporation.

• Use form 8829 to deduct expenses for Business use of Home.

• Report net gain or loss from LLC operations on Form 1040, Schedule C.

Domestic LLC with at least 2 members

(2) A domestic LLC with at least 2 members is classified by the IRS as a Partnership for tax purposes unless it files Form 8832 and elects to be treated as a Corporation.

(3) If the LLC elects to be treated as an S Corporation, the laws of S Corp will apply. The S Corp will report to each owner its share on the corporate income, credits, and deductions on Schedule K-1 from Form 1120-S. (See S Corporation)

(4) If the LLC elects to be treated as a Corporation, the regular Corporation laws will apply. (See 3. Corporation)

(5) If the LLC elects to be treated as a Partnership, the Regular Partnership laws will apply. Must file Form 1065 U.S. Return of Partnership Income. Each partner receives a Schedule K-1 that derives from Form 1065 Partner's Share of Income, Deductions, Credits, etc. Normally, members of the LLC that file a Return of Partnership must pay - Self-Employment Taxes for their participation in the partnership's gains. *For payroll tax purposes and excise taxes, a single member LLC is considered a separate entity. *There are certain classification rules as Corporations for certain businesses.

3. Corporation

Introduction:

Business legal entity that limit personal liability of shareholders for business debt. It is managed by the Board of Directors who delegate the daily affairs to the Officers of the Corporation. Shareholders must observe certain formalities, including stock issuance, held meetings, record minutes of meetings, elect directors and conduct business by resolution. It is recognized as a separate taxable entity that is responsible for payment of taxes on corporate income. C Corporations may not own stocks in S Corps.

Advantages:

• Protection against personal liability for shareholders

• Business Continuity and Security

• Easy access to capital (financing)

Disadvantages:

• Require formality and protocols: Annual meetings, formal records (minutes of meetings, resolutions, etc.) and annual filings with state and franchise taxes.

• Costly and Complex

• Double Taxation - Income is taxed at corporate level, then distributions to shareholders in the form of dividends or compensation are taxed at the individual level.

Types of Corporations

a. C Corporation - Regular Corporation

Legal entity that is separate from its owners (shareholders).

Formation

• Filing articiles of incorporation with the state

Liability

• Shareholders liability are limited to the investment in the corporation.

Advantages

• Access to capital from investors

• May issue multiple classes of stocks

• May become public company and have more access to capital

Management

• May have unlimited shareholders

Taxation

• Income is taxed at corporate level

• Dividends and Compensation to shareholders are taxed at personal level

b. Professional Corporation

Similar to a regular C corporation except that it is formed by professionals with a license issued by the state to offer specific services within their profession.

Tax Treatment

• May elect to be taxed as a C-Corp or as an S-Corp if they meet criteria.

• Double Taxation if elect C-Corp.

c. S Corporation

Formation

A corporation or entity that elects to be treated as an S Corp. (Small Business Corporation) must use Form 2553 to make election under Section 1362(a). An entity eligible to be treated as a Corporation that comply with certain requirements will be treated as a Corporation as of the date of effectiveness of the S Corp election and does not need to file Form 8832, Entity Classification Election.

Eligibility Requirements

Who is eligible for an S Corp?

(1) A domestic corporation or a domestic entity eligible to elect to be treated as a corporation, files Form 2553 on a timely basis and complies with all other requirements mentioned hereon. (see late elections).

(2) It does not have more than 100 shareholders. An individual or their spouse (and their estate) may be treated as a shareholder for this test. May also treat all members of a family and your equity as a shareholder for this test. For details, see Section 1.131-1(e)(3)(ii). All others are treated as separate shareholders.

(3) Its only shareholders are individuals, the estate, exempt organizations described in the Section 401(a) or 501(c)(3), or certain trusts described in section 1361(c)(2)(A).

(4) Has no nonresident alien shareholders (other than potential current beneficiaries of an ESBT). All shareholders of the S Corporation must be citizens.

(5) May have only one class of stock. (not taking into account differences in voting rights) Generally, a corporation is treated as having a single class of stock if all of the outstanding shares of the corporation's stock confer identical rights to distribution and liquidation products.

Advantages

• Pass-Through entity, avoiding double taxation. Business Losses may be used to offset other income of shareholder on personal returns, subject to limitations. Profits distributed to shareholders are taxed at individual level only.

• Savings on Self-Employment Tax if shareholders are employe/owners who receive a reasonable compensation subject to payroll taxes.

• Profits distributed are not subject to self-employment tax. Dividend income and remaining gains may flow through to owners but are not subject to Social Security and Medicare on such funds.

• Limited Liability Protection

Disadvantages

• Ownership restructed to 100 maximum shareholders

• Only U.S. citizens or residents can be shareholders.

• Owners must receive a reasonable compensation or otherwhise be penalized by the IRS.

• Must adhere to struct rules by the IRS.

• This form of entity is not recognized in all states.

Tax Treatment

In general, an S Corporation income is tax to the shareholders instead to the corporation.

• Income can be divided between the business and the shareholders, allowing it to be taxed at different tax rates.

• Any income assigned to the owners will be subject to Self-Employment Tax. Dividends from the business will be taxed at its own level. (not subject to Self-Employment Tax) S Corp owners must be paid a Salary for which they must pay Social Security and Medicare.

4. Professional Limited Liability Company (PLLC)

Similar to a professional corporation, but with the benefits of an LLC and a more flexible management structure. Limits liability for business debts but not for negligence claims or malpractice.

5. Partnership

Formation

Consists of two or more people doing business as co-owners of a business. It is recommended to make a Partnership Agreement where the rights and responsibilities of the partners before starting the business. If not established, the laws of the state govern aspects of the business. Follow IRS guidelines for dividing profits and losses disproportionately to interests of the owners in the business. Publication 541, Partnerships.

Types

a. General Partnership - Does not require formal documents to create.

b. Limited Partnership (LP) - Requires submitting a Limited Partnership Certificate. Provides of limited liability for some of the partners. All partners, limited and general, share the profits of the business. Interest is not freely transferable.

• General partners have unlimited liabilities for the business obligations. Has a right to manage the business and is an agent of the limited partnership. Withdrawal of a general partner may dissolve a limited partnership, absent a contrary agreement of the partners.

• Limited partners have liability limited to their capital contribution to the business. Has no right to manage the business or to act as its agent. Have the right to vote on matters such as admitting new partners.

  
  

c. Limited Liability Partnership (LLP) - a type of general partnership with 2 or more partners, where every partner has a limited personal liability for the debts of the partnership. Partners will not be liable for the tortious damages of other partners but potentially for the contractual debts (See state laws)

Tax Treatment

The partnership does not pay taxes on income, instead, each partner includes in his individuals' tax returns, their share of the profits or losses of the society. Form 1065 Partnership Income Tax Return - To report the participation to partners, but does not pay taxes. It is an information return. From the 1065, there is a Schedules K-1 for each partner.

6. Non-Profit Corporation

Formation

Legal entity created and operated to serve the public or a charitable purpose. May qualify for tax-exempt status under IRS Code Section 501(c)(3) or other sections. Need to apply and be approved by the IRS.

Formality: Obtain EIN, create bylaws, register with state, board of directors, hold regular meetings and maintain records such as minutes of board meetings, etc.

Donations

Donations may be tax-deductible for donors if the entity was granted the exempt status under IRS Code Section 501(c)(3).

Summary

Summary of Business Structures, ownership, liability, taxes and required forms:

Business Structure	Ownership	Liability	Taxes	Structure Forms	​Owners Forms
Sole Proprietorship	One person	​Unlimited personal liability	At personal level, subject to Self-Employment tax	1040, Schedule C, Schedule SE, 1040-ES, 941 or 943, 944, W-2s, W-3, 940, excise tax (as applicable)
Limited Liability Company (LLC)	One or more person	Owners are not personally liable	​If treated as a disregarded entity, subject to personal tax and Self-Employment tax. If treated as a corporation, subject to corporate tax	1040 (if single member) or 1065 and Schedule K-1 (1065) if two or more members	​If a Single Member 1040, 1040-ES, Schedule C
​Partnership	Two or more person	Unlimited personal liability unless structured as a Limited Partnership	​At personal level for partners -Subject to Self-Employment taxes (except limited partners)	1065, Schedule K-1 (Form 1065), Employment taxes (941,943, 940), excise taxes if applicable.	​Partners: 1040, Schedule E Part II
C Corporation	One or more person	Owners (Shareholders) not personally liable	​Corporate tax and Shareholders are taxed on Dividends and Interests. (Double Taxation)	​1120, Employment Taxes (941 or 943, 940), Excise Tax, as applicable.	​Shareholders:1040
S Corporation	One or more person, up to 100. All must be U.S. citizens.	Owners (Shareholders) not personally liable	Personal tax level	​1120-S, K-1, K-2, K-3, Employment Taxes (941, 943, 940), Excise Taxes if applicable.	​1040, Schedule E part II
Non Profit Corporation	One or more person	Owners (Shareholders) not personally liable	Need to apply for Tax-Exempt status, but corporate profits cannot be distributed.		​990-N (Gross receipts≤$50,000), 990-EZ or 990 (Gross receipts <$200,000 and Total Assets<$500,000), 990 (Gross receipts ≥$200,00 or Total assets≥$500,000), 990-PF for private foundations.

If you have any further questions regarding your particular situation, please contact us for a consultation.