Sole Proprietorship, Partnership, LLC, S Corp, C Corp: What's the Difference?

When you start a business, one of the first decisions is choosing a legal and tax structure. The five most common options—sole proprietorship, partnership, LLC, S corporation, and C corporation—differ in how they protect your personal assets, how business income is taxed, and how much administrative work they require. An LLC is a legal form created under state law, not a tax classification on its own; the IRS can tax an LLC several different ways depending on elections made and the number of owners. Partnerships are a distinct structure with their own variations and liability considerations. Understanding these distinctions at a general level can help you ask better questions when you work with a licensed attorney or CPA.

The five common business structures at a glance

Each structure sits at a different point on two spectrums: liability protection (how much your personal assets are shielded from business debts) and tax treatment (whether the business itself pays income tax, or whether income passes through to your personal return).

Structure	Liability protection	Default tax treatment	Complexity
Sole proprietorship	None	Pass-through (Schedule C)	Lowest
Partnership (GP)	None (general partners)	Pass-through (Form 1065)	Low–moderate
Partnership (LP / LLP)	Partial or full (varies by type)	Pass-through (Form 1065)	Moderate
LLC	Yes (state law)	Varies by election & owners	Low–moderate
S corporation	Depends on underlying legal entity	Pass-through (Form 1120-S)	Moderate
C corporation	Yes	Entity-level tax (Form 1120)	Highest

Sole proprietorship

A sole proprietorship is the default structure when one person operates a business without forming a separate legal entity. There is no state filing required to create one—you simply start doing business. Income and expenses are reported on Schedule C, attached to your personal Form 1040, and net profit is subject to both income tax and self-employment tax.

The significant drawback is unlimited personal liability: creditors can pursue your personal assets (savings, home, car) to satisfy business debts or judgments.

Partnership

A partnership exists when two or more people carry on a business together and share in its profits and losses. Like a sole proprietorship, a general partnership can come into existence without a formal state filing—though a written partnership agreement is strongly advisable. All partnerships file an informational return on Form 1065, and each partner receives a Schedule K-1 reporting their share of income, deductions, and credits to include on their personal return.

Partnerships are pass-through entities: the partnership itself does not pay federal income tax. However, general partners are typically subject to self-employment tax on their distributive share of business income.

There are several variations of the partnership form:

General partnership (GP): All partners share management responsibilities and have unlimited personal liability for the debts and obligations of the business.
Limited partnership (LP): Has at least one general partner (with unlimited liability and management authority) and one or more limited partners (whose liability is generally capped at their investment, but who typically cannot participate in day-to-day management).
Limited liability partnership (LLP): Common among professional service firms such as law and accounting practices. Partners generally retain limited liability protection from the malpractice or negligence of other partners, though the exact protections vary by state.

A multi-member LLC is taxed as a partnership by default, which is why the two structures are often compared. The key difference is that the LLC form provides liability protection to all members under state law, while a general partnership does not.

LLC (Limited Liability Company)

An LLC is a legal structure created under state law, not a federal tax classification. This is one of the most commonly misunderstood points in small-business planning. Forming an LLC gives owners (called members) limited liability protection similar to a corporation, while allowing flexibility in how the business is managed and taxed.

By default, the IRS taxes an LLC based on the number of owners:

Single-member LLC — treated as a disregarded entity; income reported on Schedule C (same as a sole proprietorship for federal tax purposes).
Multi-member LLC — treated as a partnership; income reported on Form 1065, with each member receiving a Schedule K-1.

An LLC can also elect to be taxed as an S corporation or C corporation by filing the appropriate forms with the IRS. The legal form (LLC) and the tax classification are separate decisions.

S corporation

An S corporation is a federal tax election (made on Form 2553) available to eligible corporations or LLCs. It is not a separate type of legal entity at the state level—most businesses that elect S status are formed as regular corporations or LLCs first, and the underlying legal entity determines what liability protection, if any, applies. The S election itself confers no liability protection.

Key features:

Pass-through taxation: Business income and losses flow through to shareholders' personal returns, avoiding a second layer of corporate income tax.
Reasonable compensation requirement: Shareholder-employees must pay themselves a reasonable salary subject to payroll taxes before taking additional distributions.
Eligibility restrictions: S corps are limited to 100 shareholders, one class of stock, and shareholders must generally be U.S. citizens or residents.

C corporation

A C corporation is the default corporation under federal tax law. It is a fully separate legal and tax entity—it files its own return (Form 1120) and pays corporate income tax on its profits. When after-tax profits are distributed to shareholders as dividends, those dividends are taxed again on the shareholder's personal return. This is commonly called double taxation.

Despite that drawback, C corporations offer advantages in certain situations:

No restrictions on the number or type of shareholders, making it the standard structure for venture-backed startups and publicly traded companies.
Ability to issue multiple classes of stock.
Certain employee benefits may be deductible at the corporate level.

How these structures are often compared

A few distinctions come up repeatedly when business owners compare these options:

Pass-through vs. double taxation: Sole proprietorships, partnerships, S corps, and (by default) single-member and multi-member LLCs are all pass-through entities. C corps are not.
Partnership vs. multi-member LLC: Both are taxed the same way by default (Form 1065 / Schedule K-1), but an LLC provides liability protection to all members under state law. A general partnership does not.
Self-employment tax planning: S corp elections are sometimes used by profitable small businesses to reduce self-employment taxes, but this strategy involves payroll requirements and added compliance costs that must be weighed carefully.
State rules vary: LLC formation fees, annual reports, franchise taxes, partnership registration requirements, and recognition of S corp elections differ by state.

Frequently asked questions

Is an LLC automatically taxed as a corporation?

No. By default, a single-member LLC is taxed as a disregarded entity (like a sole proprietorship) and a multi-member LLC is taxed as a partnership. A corporation election requires a separate IRS filing. The LLC's legal status under state law and its federal tax classification are independent of each other.

What is the difference between a partnership and a multi-member LLC?

Both are taxed the same way by default—income passes through to owners via Form 1065 and Schedule K-1. The main legal difference is liability protection. In a general partnership, all partners have unlimited personal liability for the business's debts. In an LLC, all members generally have liability protection under state law. An LLC is often preferred when two or more people want partnership-style taxation with corporate-style liability protection.

What does "pass-through taxation" mean?

Pass-through taxation means the business itself does not pay federal income tax. Instead, profits and losses are reported on the owners' personal tax returns and taxed at individual rates. Sole proprietorships, partnerships, and S corporations are all pass-through structures. C corporations are not—they pay tax at the entity level first.

Can an LLC elect S corporation status?

Yes, in most cases. An LLC can file Form 2553 with the IRS to be treated as an S corporation for federal tax purposes, provided it meets the eligibility requirements (e.g., no more than 100 members, all members are eligible shareholders). The LLC remains an LLC under state law—only the federal tax treatment changes.

Does electing S corporation status provide liability protection?

No. The S corporation election is a federal tax classification only. It does not create or change any liability protection. Liability protection comes from the underlying legal entity—a corporation or LLC formed under state law. If the underlying entity provides liability protection, that protection exists regardless of the S election; the S election itself adds nothing in this regard.

Do partners in a partnership pay self-employment tax?

Generally, yes. General partners typically owe self-employment tax on their distributive share of partnership income. The rules for limited partners and LLP partners are more nuanced and have been the subject of ongoing IRS guidance. A CPA can help determine how self-employment tax applies based on a partner's specific role and the partnership agreement.

Which structure is best for a new small business?

There is no single right answer. The best structure depends on factors like expected profitability, the number of owners, liability concerns, plans for outside investment, and state-specific costs. A licensed CPA or business attorney can model the tax and legal implications for your specific situation before you make a decision.