Key Takeaways

  • U.S. corporations vary in structure, taxation, and liability protection, with C corporations, S corporations, and nonprofit corporations being the primary forms.
  • Corporations are generally distinct legal entities, limiting owners’ liability to their investment, but formalities and regulatory requirements differ by type.
  • Choosing a corporation type impacts tax treatment, fundraising ability, governance requirements, and operational flexibility.
  • Additional corporate forms include professional corporations, benefit corporations, and close corporations, each suited to specific needs.
  • Partnerships, LLCs, and sole proprietorships are alternative entity types that may be simpler but offer different liability and tax implications.

Most Common Types of Business Entities

In the United States, there are two main categories of business entities. The first category consists of businesses that are filed at the local county clerk's office. The second category consists of businesses that are filed with the office of the state government or filed with the Secretary of State. 

Corporations and limited liability companies (LLC) are the most common types of business entities in the United States. Every US corporation needs to have a federal tax return on file. In many states, it is required for corporations to file a tax return every year.

The simplest type of business is the sole proprietorship. The sole proprietorship refers to a business that is controlled and owned by just one person. The sole proprietorship is responsible for all profit, loss, and liability. The sole proprietorship is responsible for the overall business.

Sole proprietorships have few tax aspects, are inexpensive, easy to disband, and have few formalities that need to be followed. Basic bookkeeping are the main formalities that need to be followed when it comes to sole proprietorships. For sole proprietorships, the liabilities are viewed as the personal liabilities of the business's owner. Upon the death of the owner, the sole proprietorship closes immediately. 

A partnership refers to an association of at least two persons. In this context, a person can refer to people, partnerships, LLCs, corporations, trusts, and more. The purpose of the association is to work together as co-owners to run a for-profit business.

It is relatively inexpensive to form a partnership. The partners will join and the taxation and liability to the partnership can get complex. However, the partnership is not subject to taxes.

The three types of partnerships are as follows:

  • General partnership
  • Joint venture
  • Limited partnership

General partnership operates under the assumption of equal partnership and equal management, ownership, and liability distributed between the partners. However, there are exceptions to this rule.

When it comes to a limited partnership, at least one of the general partners is responsible for managing the business and is personally liable for the debts incurred by the partnership. The other limited partners contribute capital to the business and share profits but are not responsible for running the business. These limited partners are also not liable for any other obligations outside of contribution.

Joint venture is a partnership that is time-based when at least two individuals work together for a certain amount of time or a certain project. Upon completion of the project or when the duration of time is over, the joint venture is dissolved. The individuals will need to register as general partners if they want to keep working together after the dissolution of the joint venture.

Additional Types of Corporations

While C corporations and S corporations are the most widely known, there are several other types of corporations recognized in the U.S., each tailored to specific business needs and legal requirements:

  • Nonprofit Corporation – Formed for charitable, educational, religious, or similar purposes, nonprofit corporations are exempt from federal income tax under IRS Section 501(c). They must reinvest profits into their mission and cannot distribute earnings to members or directors.
  • Professional Corporation (PC) – Designed for licensed professionals such as doctors, lawyers, and accountants. PCs provide liability protection for general business debts but do not shield against professional malpractice claims.
  • Benefit Corporation (B Corp) – A for-profit corporation that also commits to social or environmental goals in addition to generating profit. These corporations are legally obligated to consider the impact of their decisions on stakeholders, not just shareholders.
  • Close Corporation – Typically owned by a small group of shareholders, close corporations have fewer formalities and often allow for more flexible management structures. They are ideal for family-owned or closely held businesses.
  • Cooperative (Co-op) – Owned and operated for the benefit of its members, who use its services. Profits are distributed among members based on usage rather than share ownership.

Tax Choices

When a business corporation is first formed, it is considered a "C" corporation. However, if the shareholders are willing and qualified, the corporation can choose to become an S corporation. Shareholders should consider the advantages and disadvantages of this decision before making an election.

Tax ruling is complicated yet flexible for a limited liability company (LLC). An LLC with just one member is not in existence when it comes to federal tax purposes under the default rules. An LLC with more than one member is considered a partnership. If such an LLC decides to file an IRS form, the LLC can choose to become an S or C corporation for tax purposes.

Both nonresident- and resident-owned corporations face an identical tax rate. However, corporations that are foreign-controlled have to file more information on the tax return. 

LLCs are automatically fiscally-transparent, which can be an issue for companies that are non-resident-owned.

Tax Considerations by Corporation Type

Each type of corporation is subject to specific tax rules that can significantly affect profitability and compliance obligations:

  • C Corporation Taxation – Pays corporate income tax at the entity level, and shareholders are taxed again on dividends (“double taxation”). However, C corporations can deduct many business expenses and retain earnings within the business.
  • S Corporation Taxation – Avoids double taxation by passing income, losses, deductions, and credits directly to shareholders’ personal tax returns. However, S corporations must meet strict eligibility criteria, including a limit of 100 shareholders and U.S.-only ownership.
  • Nonprofit Tax Exemption – Qualifying nonprofits are exempt from federal income tax but must adhere to rules against political campaigning and profit distribution.
  • State and Local Variations – Many states impose additional corporate taxes or franchise taxes, and rules for electing S corp or benefit corp status may differ by jurisdiction.

How Liability Differs Across Corporation Types

Although most corporations shield owners from personal liability for business debts, the extent of that protection depends on the corporate form:

  • C and S Corporations – Shareholders are generally only liable for the amount invested in shares. Corporate formalities, such as maintaining separate finances and proper documentation, must be followed to preserve liability protection.
  • Professional Corporations – Provide liability protection against debts and claims unrelated to professional services, but owners remain personally liable for malpractice in their field.
  • Close Corporations – Shareholder liability is similar to that in C or S corporations, but the reduced formalities can increase the risk of “piercing the corporate veil” if records are poorly maintained.
  • Benefit Corporations – Liability protections mirror those of traditional corporations, but directors are explicitly allowed to prioritize social and environmental goals, which can influence shareholder claims.

Liability Protection

Liability simply means that a shareholder, owner, partner, or member is responsible for paying unpaid bills or paying any incurred costs of a court case lost by the company. These individuals will have to use their personal assets or funds to pay for the unpaid bills or costs.

For a corporation, a shareholder is only liable when it comes to the amount of capital they have opted to invest in a company.

If the share capital is not paid in full and the corporation files for bankruptcy, the shareholders may be responsible for paying the rest of the share capital.

Frequently Asked Questions

  1. What is the difference between a C corporation and an S corporation? A C corporation is taxed separately from its owners, leading to double taxation, while an S corporation passes income and losses directly to shareholders’ personal tax returns.
  2. Can a nonprofit corporation make a profit? Yes, nonprofits can earn a profit, but it must be reinvested into the organization’s mission rather than distributed to members or directors.
  3. Who should form a professional corporation? Licensed professionals such as doctors, lawyers, and accountants often form PCs to limit personal liability for business debts while complying with licensing regulations.
  4. What makes a benefit corporation different from a regular corporation? Benefit corporations pursue both profit and a stated public benefit, with directors legally required to consider social and environmental impacts alongside financial returns.
  5. Do all corporations provide the same liability protection? Most corporations protect owners’ personal assets from business debts, but professional malpractice and failure to follow corporate formalities can still create personal liability.

If you need help with the types of US corporations, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.