Business Entities Glossary
The legal entity choice shapes taxation, liability, capital raising, and exit options. The right structure depends on what the business will do and who will own it.
Sole proprietorship
The default structure when an individual starts a business without filing for any other entity: there is no separate legal entity. The owner reports business income on Schedule C of their personal tax return. Setup cost is essentially zero; ongoing compliance is minimal.
The fatal weakness: no liability separation. The owner is personally liable for all business debts and lawsuits. A sole proprietor whose business causes harm — a contractor whose ladder falls, a consultant whose advice loses a client money — is personally at risk for the full amount. For any business with non-trivial liability exposure (employees, physical operations, professional advice), the cost of forming an LLC ($100-500 in most states) is dramatically lower than the cost of one bad incident.
General partnership
The partnership equivalent of a sole proprietorship: when two or more people operate a business together without forming an entity, they have a general partnership by default. Income flows through to the partners' personal returns, and each partner is jointly and severally liable for the partnership's obligations — meaning a creditor can pursue any partner for the full amount, regardless of which partner caused the issue.
General partnerships are rarely the right choice for any modern business. The combination of unlimited personal liability with the complications of multiple owners (each able to bind the partnership) is essentially all downside. LLCs and limited partnerships fix both problems with modest formation cost.
LLC (Limited Liability Company)
LLCs combine the liability protection of a corporation with the tax flexibility of a partnership. Members (owners) aren't personally liable for company debts, and the LLC by default is taxed as a partnership (pass-through) — income and losses flow through to the members' personal returns. LLCs can elect to be taxed as a C-Corp or S-Corp; the entity form and the tax election are separate decisions.
LLCs are the default modern choice for small businesses, real estate holdings, professional services, and most owner-operated businesses. They're flexible (operating agreements can structure ownership and management almost any way), administratively light (no board, no shareholder meetings required by default), and offer strong liability protection. The main weakness: institutional investors generally won't invest in LLCs because of pass-through tax complications. For venture-track startups, C-Corp is the standard structure.
C-Corporation
A C-Corp is a separate legal and tax entity. The corporation pays federal corporate income tax on its profits; shareholders pay personal tax on dividends received. This "double taxation" is a real cost for profitable, dividend-paying small businesses but is largely irrelevant for growth-stage startups (which don't pay dividends). C-Corps issue stock, can have multiple share classes (common, preferred), and can accommodate venture financings cleanly.
For any company on a venture-funded path, Delaware C-Corp is the default structure. Reasons: investors (especially institutional) overwhelmingly prefer C-Corps; preferred share classes allow standard term sheets; QSBS (Qualified Small Business Stock) tax exclusion applies to C-Corp shares held at least five years (a significant tax benefit at exit); and the established Delaware case law on corporate governance is the standard reference for board and investor disputes.
S-Corporation
An S-Corp is not a different entity type but a tax election. A C-Corp (or LLC) can elect to be taxed as an S-Corp, in which case income flows through to shareholders' personal returns — no corporate-level tax. S-Corp election has restrictions: no more than 100 shareholders, all must be US individuals (no entities, no foreign nationals), and only one class of stock allowed.
S-Corps are popular with owner-operated profitable businesses because they avoid double taxation while preserving the liability shield. Owner-employees can pay themselves a "reasonable salary" subject to payroll tax, with the rest of profits distributed as dividends not subject to self-employment tax — a real savings vs. an LLC taxed as a partnership. The single-class-of-stock restriction makes S-Corps incompatible with venture-style preferred share financings; growing S-Corps that take institutional investment usually convert to C-Corp first.
B-Corporation
"B-Corp" refers to two related but distinct things. Certified B Corporation is a third-party certification administered by the nonprofit B Lab, requiring the company to meet defined standards on social and environmental performance, accountability, and transparency. Certification costs an annual fee, requires periodic re-assessment, and applies to companies of any legal structure.
Benefit corporation (or in some states, "public benefit corporation") is a legal entity type — a modified C-Corp or LLC that explicitly authorizes the board to consider stakeholder interests beyond shareholders. About 36 US states recognize benefit corporations as a legal form. Becoming a benefit corporation doesn't require B Lab certification, and being B Lab certified doesn't require legal benefit corporation status; many companies are one without being the other.
Limited partnership (LP)
A limited partnership has two classes of partners: general partners, who manage the business and have unlimited personal liability, and limited partners, who invest capital but don't manage and have liability limited to their investment. The structure is the standard for venture capital funds and private equity funds: the GPs (the firm's partners) manage, the LPs (institutions, family offices, individuals) provide most of the capital.
For operating businesses, LPs are uncommon — LLCs offer similar liability structure with simpler governance. They remain dominant in fund structures because the legal framework is well-established for the asymmetric management/investment relationship that characterizes professional fund management.
Limited liability partnership (LLP)
LLPs are partnerships in which partners have limited liability for the firm's obligations and for other partners' malpractice. They're commonly used by professional service firms — law, accounting, architecture — where state regulations have historically required partnership structure but where partners want protection against being personally liable for another partner's professional negligence.
LLP availability and rules vary significantly by state. Some states permit any business to form as an LLP; others restrict LLPs to specified professional services. The taxation is partnership pass-through. For non-professional businesses, LLCs are usually a cleaner choice; LLPs persist primarily where professional licensing rules favor or require them.
Delaware advantage
Delaware is the dominant US state for incorporation: about two-thirds of Fortune 500 companies and the overwhelming majority of venture-backed startups are Delaware corporations, regardless of where they actually operate. The reasons: a specialized Court of Chancery that handles corporate disputes without juries, producing fast and predictable decisions; a deep body of case law on corporate governance issues; statutes that permit flexible corporate structures; and a sophisticated bar and judiciary specializing in corporate law.
The trade-off: Delaware companies that operate elsewhere must register as a "foreign corporation" in their operating state, paying franchise taxes in both. For most small businesses operating in a single state, incorporating in the home state is simpler and cheaper. For companies expecting institutional investment, expansion across states, or eventual public offering, Delaware C-Corp is the default and is essentially expected.
Pass-through taxation
Pass-through entities — sole proprietorships, partnerships, LLCs (by default), and S-Corps — don't pay federal income tax at the entity level. Profits and losses pass through to the owners' personal returns. The owners pay tax on their share of profits regardless of whether the cash was actually distributed (the so-called "phantom income" problem when retained earnings are taxed but not received).
The opposite is the C-Corp model, where the entity pays corporate tax and shareholders pay personal tax on dividends — "double taxation." For most small profitable businesses, pass-through is the right choice because it avoids double taxation. For growth companies that retain all profits to fund growth, the double-taxation cost is theoretical (no dividends), and the C-Corp form's compatibility with institutional investment matters more than the tax preference.
Piercing the corporate veil
Limited liability isn't absolute. Courts can "pierce the corporate veil" — disregard the entity's separate legal existence and hold owners personally liable — when the owners have abused the entity form. Common factors leading to piercing: commingling personal and business funds, undercapitalization, failure to follow corporate formalities, fraud, and using the entity as an alter ego rather than as a separately operated business.
Avoiding veil-piercing is straightforward: maintain separate bank accounts, sign contracts in the entity's name, keep proper records, document major decisions, and don't treat the entity as a personal piggy bank. Single-member LLCs are particularly vulnerable to piercing because the absence of other owners makes "alter ego" arguments easier; documentation discipline matters even more for solo founders.