When starting a business, there are several types of business entities that can be chosen:

sole proprietorship, partnership, S corporation, C corporation, or limited liability company

(LLC). Only a C corporation is a separate taxable entity from its owners and files its own tax
return. Taxes on the profits of the other entities are paid by the owners, using their own tax
return. The type of entity chosen will largely be determined by business, tax and legal objectives.
There are many factors to consider, and this article only gives an overview of the federal rules for
taxation. However, state laws applicable to business entities vary widely, and some options may
not even be available. For instance, professionals, such as architects or doctors, cannot form a
limited liability company in California. So for business entities other than a sole proprietorship,
the taxpayer should consult a lawyer or tax professional in deciding on what type of business
entity to form.

Tax treatment
C corporations are separately taxable entities and file a corporate tax return, reporting
profits or losses. Any profits are taxed at the corporate level, and losses don't pass through for
use by the shareholders to offset other taxable income. The profits of C corporations face
possible double taxation when corporate income is distributed to shareholders as dividends. First,
the corporation pays tax on its corporate income; then, the shareholders pay personal income tax
on the same income when it is distributed to them as dividends.
The standard corporation, or C corporation, is a separate legal entity owned by
shareholders. You form the corporation by filing incorporation documents with a state and
paying the related filing fees. The corporate structure limits each owners (shareholder's)
personal liability for the corporations business debts to the amount invested in the company by
the shareholder.
S corporations, however, are pass-through tax entities so there is no tax paid at the
corporate level. Profits and losses are passed-through the corporation and reported on the
shareholders individual tax returns. Any tax due is then paid by the shareholders at their
individual tax rates.
An S corporation is a standard corporation that has elected a special tax status with the
IRS. The formation requirements are the same as those for C corporations: incorporation
documents must be filed with the state and appropriate filing fees paid. The S corporation's
special tax status eliminates the double-taxation that can occur with a C corporations income. A
corporate income tax return is filed, but no tax is paid at the corporate level. Instead, business
profits or losses "pass-through" to shareholders and are then reported on their individual tax
returns. Any tax due is paid by shareholders at their individual tax rates.
A sole proprietorship is an unincorporated business with only one owner (or which is
owned by a husband and wife who elect to be treated as one owner). Although this is the most
common form for a new small businesses, it is not necessarily the best choice when both tax and
non-tax factors are considered.

For tax purposes, you do not have to elect to have your business treated as a sole
proprietorship if there is only one owner. If there is only one owner, the IRS will presume that it's
a sole proprietorshipunless you incorporate under state law or form a limited liability company
that elects to be treated as a corporation. A sole proprietorship is not a taxable entity. All of the
business's assets and liabilities are treated as belonging directly to you, the business owner. In the
same way, all the business income and expenses are considered to be your income and your
expenses.
Case of setting up
Legal treatment
Business benefits