When it comes to choosing a business structure, unincorporated options—such as sole proprietorships and partnerships—are some of the simplest. If you want to skip the formalities of creating a corporation, an unincorporated business allows you to get started with minimal setup and fewer ongoing requirements. However, since there’s no legal separation between you and the business, you’re personally liable for any debts or legal issues. This structure works well for freelancers, consultants, and small operations—organizations that prioritize simple operations over the need for liability protection.

Below, we’ll explain what an unincorporated business is, why it might—or might not—be the right choice for you, and how to handle practical concerns such as taxes and legal obligations.

What’s in this article?

• What is an unincorporated business?
  
• How does an unincorporated business differ from an incorporated business?
  
• What types of businesses are typically unincorporated?
  
• What are the legal and tax implications for unincorporated businesses?
  

What is an unincorporated business?

An unincorporated business is a type of business structure that is not legally separate from its owner. This means the business and its owner are legally considered the same entity and the owner is personally liable for any business debts and obligations. Common forms of unincorporated businesses include sole proprietorships, in which one person owns the business and has full control and liability for any debts, and partnerships, in which two or more individuals share ownership and responsibility. In a partnership, each partner is personally liable for any business debts and profits are typically shared.

Unincorporated businesses are simpler and less expensive to establish than incorporated businesses, since they don’t require formal registration. But owners of unincorporated businesses take on more personal risk.

How does an unincorporated business differ from an incorporated business?

Unincorporated businesses can operate as sole proprietorships or partnerships. Incorporated businesses can operate as limited liability companies (LLCs) or corporations. Incorporated businesses offer greater personal protection and continuity, but they require more formal management and might face more complex tax requirements. Unincorporated businesses are generally easier to manage and establish, but they involve more personal financial risk. Here’s a closer look at how they compare.

Unincorporated businesses

Legal structure and identity: The business and owner are legally the same entity. There’s no distinction between personal and business assets.

• Liability: Owners have unlimited personal liability. They are personally responsible for all business debts, obligations, and lawsuits. Creditors can go after personal assets if the business can’t cover its liabilities.

• Tax implications: Income is “passed through” to the owner’s personal tax returns. The business doesn’t pay corporate tax.

• Operational requirements and formalities: Sole proprietors and partners often have minimal recordkeeping and reporting requirements.

• Continuity and transferability: The business’s existence is often tied to the owner’s personal involvement. It might end or change if the owner leaves the business or dies.

Incorporated businesses

Legal structure and identity: The business is a separate legal entity from its owners, who are usually shareholders or members.

• Liability: Owners have limited liability. They’re typically protected from personal loss beyond their investments in the business.

• Tax implications: C corporations are subject to double taxation, where profits are taxed first at the corporate level and again at the personal level if profits are distributed as dividends. S corporations and LLCs are not subject to double taxation: their profits are passed through to personal tax returns, as with unincorporated businesses.

• Operational requirements and formalities: Corporations have formal requirements including registering with the state, adopting bylaws, holding regular board and shareholder meetings, and maintaining detailed records. These formalities help establish the business as a separate legal entity and maintain limited liability protection.

• Continuity and transferability: Corporations can exist perpetually. They can continue regardless of changes in ownership or management, which makes it easier to transfer or sell the business.

What types of businesses are typically unincorporated?

Unincorporated businesses are typically smaller, simpler operations with fewer regulatory requirements. Here are the business structures available for unincorporated businesses:

• Sole proprietorships: A sole proprietorship is a business owned and operated by a single individual, often a freelancer, consultant, or small local service provider. The owner has complete control over the business and full personal liability.

• Partnerships: A partnership is a business owned and operated by two or more individuals. They share profits, losses, and liabilities. Examples might include small family businesses, professional firms (such as law firms), or small retail operations where multiple people have equal stakes.

Business owners who prioritize ease of setup and low maintenance costs will typically choose to operate as unincorporated businesses. Small community organizations, clubs, or social groups often operate as unincorporated businesses, especially if they don’t intend to make a profit or want to avoid the formalities of incorporation. Individuals engaged in “gig economy” activities such as freelance writing, tutoring, and handyperson services often operate as unincorporated sole proprietors so they can start quickly and save money on setup costs.

What are the legal and tax implications for unincorporated businesses?

For unincorporated businesses, the legal and tax implications primarily involve personal liability, tax structure, and certain regulatory requirements. Compared to incorporated businesses, unincorporated businesses can require some additional planning for tax payments and continuity arrangements. Here’s what to expect.

Legal implications

• Liability: In an unincorporated setup, the business owner and the business are essentially one entity. So if your business runs into debt or legal trouble, your personal assets—such as your savings and even your home—can be on the line. Creditors or claimants can pursue your personal property if the business can’t cover its liabilities. If there is a contract dispute or other legal bind, you’re exposed in a way that shareholders in a corporation are not.

• Continuity: Unincorporated businesses often begin and end with the owner. If you’re a sole proprietor and you retire, fall ill, or die, the business doesn’t continue to exist unless you’ve made specific arrangements. Partnerships can continue with surviving partners if the partnership agreement addresses succession.

Tax implications

• Pass-through taxation: As an unincorporated business owner, you report profits and losses on your personal tax returns. Sole proprietors use the Schedule C form and partnerships use Schedule K-1 (Form 1065), which shows each partner’s share of the income or loss.

• Self-employment tax: Unincorporated business owners must pay self-employment taxes. You are responsible for the full share of Social Security and Medicare taxes, which would normally be split with an employer.

• Deductions: Unincorporated businesses can claim a range of deductions, such as home office expenses, business travel, and equipment costs. Record all funds spent on business expenses to maximize these deductions and prepare yourself for any potential audits.

• Estimated taxes: Unincorporated business owners need to pay quarterly estimated taxes if they expect to owe $1,000 or more in taxes when they file. Managing these payments helps prevent penalties later on.

Regulatory implications

• Licenses and permits: Depending on your field and location, you might need business licenses, permits, or professional certifications as an unincorporated business. Requirements can vary widely, so investigate what’s needed to avoid any surprises or compliance issues.

• Recordkeeping needs: While unincorporated businesses don’t have the formal recordkeeping requirements of corporations, they must keep accurate, organized records of business expenses, revenues, and deductions for tax purposes.