US Business Entity Tax Structure Comparison
This tool provides a general overview of how different common U.S. business entity structures are typically taxed at the federal level. Understanding these differences is crucial when choosing or evaluating your business structure. State tax treatment can vary.
Note: An LLC's tax treatment depends on its number of members and any election made (e.g., taxed as a Sole Prop, Partnership, S-Corp, or C-Corp).
US Business Entity Tax Structure Comparison
This table summarizes the general federal tax treatment of common U.S. business entities. State tax treatment can vary.
Note: An LLC's tax treatment depends on its members and tax election.
| Tax Aspect | Sole Proprietorship | Partnership / LLC (Default) | S-Corporation | C-Corporation |
|---|---|---|---|---|
| Tax Method | Pass-through (taxed on owner's personal return) | Pass-through (profits/losses passed to partners/members) | Pass-through (profits/losses passed to shareholders) | Corporate tax rate on company profits (separate entity) |
| Tax Forms (Federal) | Form 1040 Schedule C | Form 1065 (Informational), K-1s to partners/members | Form 1120-S, K-1s to shareholders | Form 1120 |
| Self-Employment / Payroll Tax on Profits | Owner pays self-employment tax on all business profits. | Partners/Members pay self-employment tax on their distributive share of profits and guaranteed payments. | Owner-employee pays payroll tax (Social Security & Medicare) on a "reasonable salary". Remaining profits are not subject to SE/Payroll tax. | Owner-employee pays payroll tax on salary. Corporate profits are not subject to SE/Payroll tax (until distributed as dividends). |
| Owner Compensation Tax Treatment | Owner takes "draws" which are not considered salary or deductible expenses. | Partners receive "guaranteed payments" (similar to salary) and distributions of profits. Guaranteed payments are deductible by partnership. | Owner-employee receives a W-2 salary (taxable) and distributions of remaining profits (generally not taxable up to basis). Salary is deductible by S-corp. | Owner-employee receives a W-2 salary (taxable). Profits can be reinvested or distributed as dividends (taxable to shareholder). Salary is deductible by C-corp. |
| Deductibility of Owner Health Insurance & Benefits | Self-Employed Health Insurance Deduction (above the line deduction on 1040). Other benefits not deductible by business. | Partners/Members deduct health insurance on personal return. Other benefits not deductible by partnership. | Health insurance and other benefits for owner-employees (who own > 2%) are deductible by the S-corp, but the value of health insurance is added to the owner's W-2 wages for income tax purposes (but not for payroll tax). | Health insurance and other benefits for owner-employees are deductible by the C-corp and generally not taxable income to the employee. |
| Tax Filing Complexity | Generally the simplest. | More complex than Sole Prop, requires separate informational return. | More complex than Partnership, requires corporate return and payroll. | Generally the most complex, requires corporate return and potential double taxation considerations. |
Selecting the optimal business entity tax structure is one of the most critical decisions for any entrepreneur in the USA. Your choice directly influences how your business is taxed, the forms you file, the level of personal liability you face, and your ability to grow. Our free Business Entity Tax Structure Comparison Tool demystifies these options, providing a clear overview of federal tax implications.
Common business structures and their tax characteristics include:
Sole Proprietorship:
Taxation: Pass-through entity. Business income and expenses are reported directly on your personal Form 1040 via Schedule C.
Self-Employment Tax: You pay full self-employment tax (Social Security and Medicare) on net earnings.
Liability: No personal liability protection; personal and business assets are not separate.
Partnership:
Taxation: Pass-through entity. Files an informational return (Form 1065) and issues Schedule K-1 to partners, who report their share of profit/loss on their personal Form 1040.
Self-Employment Tax: General partners pay self-employment tax on their share. Limited partners generally do not.
Liability: General partners have unlimited liability. Limited partners/LLP partners have limited liability.
Limited Liability Company (LLC):
Taxation (Default): Highly flexible. Single-member LLCs are typically taxed as sole proprietorships. Multi-member LLCs are typically taxed as partnerships.
Taxation (Elective): Can elect to be taxed as an S-Corporation or a C-Corporation.
Self-Employment Tax: Members are generally subject to self-employment tax on their earnings.
Liability: Provides personal liability protection; separates personal and business assets.
S-Corporation (S-Corp):
Taxation: Pass-through entity (avoids double taxation). Files Form 1120-S and issues Schedule K-1 to shareholders.
Self-Employment Tax: Owner-employees can pay themselves a “reasonable salary” (subject to payroll taxes) and take remaining profits as distributions, which are not subject to self-employment tax. This can offer tax savings.
Liability: Provides limited personal liability protection.
Compliance: More administrative requirements than sole props/partnerships.
C-Corporation (C-Corp):
Taxation: Pays its own corporate income tax (currently 21% federal). Profits distributed as dividends are taxed again at the shareholder level (“double taxation”). Files Form 1120.
Self-Employment Tax: Not applicable to owners on distributions; owners who work for the company are employees and pay standard payroll taxes on their salaries.
Liability: Strongest personal liability protection.
Growth: Best for raising capital through stock issuance. Highest administrative burden.
Our tool helps you compare these structures based on your specific business goals, anticipated income, and comfort with liability, guiding you toward the most tax-efficient setup for your US business.