BUSINESS FORMATION & TAX GUIDE

Choosing a Business Structure

Your legal business structure and your federal tax classification are related, but they are not always the same thing. Understanding the difference can help you ask better questions before registering.

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Sole proprietorship

An unincorporated business owned by one individual is generally reported on the owner’s individual income tax return, often using Schedule C. The business is not a separate legal entity from the owner.

Limited liability company (LLC)

An LLC is formed under state law. For federal income tax purposes, a domestic single-member LLC is generally disregarded by default, while a domestic multi-member LLC is generally taxed as a partnership by default, unless a valid corporate tax election applies. Employment and certain excise taxes may treat a single-member LLC differently.

Partnership

A partnership generally involves two or more people carrying on a business. It generally files Form 1065 and provides Schedule K-1 information to partners, who report their shares of applicable items. Partnership and partner-level tax rules can be complex.

C corporation

A C corporation is generally a separate federal income-tax-paying entity that files Form 1120. Distributions to shareholders may create additional tax consequences.

S corporation

S corporation status is a federal tax election available to eligible entities. An S corporation generally files Form 1120-S and passes through certain tax items to shareholders. Eligibility, elections, payroll treatment, and reasonable compensation can matter.

Formation versus taxation

Registering an LLC does not automatically make it an S corporation. State formation filings, federal tax elections, EIN applications, business licenses, and annual obligations are distinct steps. State-law liability and formation questions should be reviewed with a qualified attorney.

Educational overview of U.S. federal tax rules; not individualized tax or legal advice. Tax rules and filing requirements can change, and exceptions may apply. North Carolina and other state rules may differ. Last reviewed October 2026.

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