In 2025, there were an estimated 8.6 million businesses in the US. The owners of each one had to decide how to legally structure their business since the legal structure affects everything that follows. It determines how the business is recognized under US law, how it handles risk, and how money moves between the company and its owners. It also has implications for personal liability, taxes, reporting requirements, long-term growth, and more.

Below, we explain how different business legal structures work in practice, and how to decide which structure makes sense for your business.

What’s in this article?

• What is the legal structure of a business?
  
• What are the main legal business structures in the US?
  
• What documents establish a business’s legal structure?
  
• How does a business’s legal structure affect personal liability?
  
• How does a business’s legal structure affect taxes and reporting?
  
• How do you choose the right legal structure for your business?
  
• Can you change your business’s legal structure later?
  
• How Stripe Atlas can help
  

What is the legal structure of a business?

A business’s legal structure is the formal way the law recognizes that business. It legally defines important aspects of the business, such as who owns it, how it’s allowed to operate, how it’s taxed, and where responsibility falls when something goes wrong.

What are the main legal business structures in the US?

The US offers a small set of core legal structures for businesses. Each involves trade-offs between risk, taxes, control, and growth.

Here are the options:

• Sole proprietorship: When one person runs a business without forming a separate entity, it’s a sole proprietorship by default. This structure is simple and inexpensive, but the owner is personally responsible for all obligations, debts, and legal claims.

• General partnership: A general partnership is a business owned by two or more people who share profits, losses, and management. Each partner is personally liable for the business’s actions and obligations, as well as for actions taken by the other partners.

• Limited partnership (LP): An LP involves at least one general partner as well as one or more limited partners. The general partner manages the business and bears full liability, while the limited partners have liability capped at their investment and don’t typically participate in day-to-day control.

• Limited liability partnership (LLP): In an LLP, partners generally have limited personal liability for their partners’ actions, but can still be liable for their own misconduct. LLPs are a common structure for professional services firms where partners are actively involved but opt for liability protection.

• Limited liability company (LLC): An LLC combines limited liability with pass-through taxation. It’s a flexible structure: LLCs could have one owner or many, and they can choose from flexible management arrangements and make optional tax elections.

• C corporation: A C corporation is legally separate from the people who own and run it. It’s owned by shareholders, managed by directors and officers, and taxed independently from its owners. C corporations support complex ownership, stock issuance, and large-scale fundraising, but come with double taxation and formal governance requirements.

• S corporation: An S corporation is a tax status election for qualifying corporations or LLCs. This legal structure allows income to pass through to owners without being subject to corporate income tax. S corp ownership is restricted, and profits are generally allocated based on ownership percentage.

• Nonprofit corporation: A nonprofit corporation must be formed for charitable, educational, or publicly beneficial purposes rather than for profit. Nonprofits can qualify for tax-exempt status, but they must reinvest surplus funds into their mission and follow strict compliance rules.

• Specialized variants: Some states recognize benefit corporations (B corps), professional corporations (PCs), or cooperatives for specific use cases. These structures serve narrower purposes and are governed by additional rules tied to a business’s mission, profession, or member ownership structure.

What documents establish a business’s legal structure?

A business’s legal structure must be backed by the right filings. Banks, regulators, courts, and counterparties rely on these records when transacting or interacting with the business. Internal documentation is important as well.

Here’s what’s required:

• Formation filings with the state: LLCs and corporations are created by filing articles of organization or articles of incorporation with the state. These documents legally establish the entity and confirm its name, jurisdiction, and basic structure.

• Certificates issued by the state: Once the state accepts the formation documents, it issues a certificate of formation or incorporation. This certificate proves the business was legally created.

• Operating agreements and bylaws: LLC operating agreements and corporate bylaws define how the business is governed, how ownership works, and how decisions are made. Although these aren’t usually filed publicly, they’re critical for internal clarity.

• Partnership agreements: Written agreements define ownership percentages, responsibilities, profit sharing, and authority within partnerships.

• Employer identification number (EIN): An EIN is issued by the Internal Revenue Service (IRS) to identify the business for federal tax purposes. It’s generally required for tax filings, payroll, and banking. It confirms that the business is recognized as a separate taxpayer.

• Ownership records: Ownership records establish who owns the business and in what proportions. Corporations generally issue stock certificates or maintain shareholder ledgers, while LLCs track membership interests internally.

• State and local licenses: Although business licenses and permits don’t create legal structure, they can serve as proof that the entity is authorized to operate. Many institutions request them alongside formation documents.

• Annual reports and compliance filings: Ongoing state and federal filings help demonstrate that the business remains active and compliant.

How does a business’s legal structure affect personal liability?

The degree of personal liability in a business’s legal structure determines whether risk borne by the business stops at the company or extends into the owners’ personal lives and finances. Different legal structures come with different amounts of personal liability for owners, managers, or members.

There are a few different scenarios for how liability can play out:

• No legal separation: In sole proprietorships and general partnerships, there is no liability shield between a business and its owner. Any debt, lawsuit, or obligation of the business is automatically a personal responsibility, and creditors and plaintiffs can pursue personal bank accounts, property, and other assets to satisfy business obligations. There’s no cap on exposure even when the issue arises from business activity.

• Limited liability protection: LLCs and corporations create a separate legal entity that owns the business’s risks. Owners are generally liable only up to the amount they’ve invested in the company. Claims against a limited liability business are brought against the company itself, not the owners individually (though owners can still be personally liable for personal wrongdoings), and damages are paid from business assets unless specific exceptions apply.

• Partnership-specific exposure: In general partnerships, each partner can be personally liable for contracts, debts, or misconduct created by another partner. LLPs reduce this risk (depending on state law) by shielding partners from each other’s actions, while limited partnerships protect passive investors but not managing partners.

• Situations where liability passes through: Personal guarantees, illegal acts, fraud, or failure to keep business and personal finances separate can make owners personally responsible, even when the legal structure includes separation. Liability protection depends on maintaining clear legal boundaries.

How does a business’s legal structure affect taxes and reporting?

Legal structure determines how money is taxed and how it reports income to the IRS. It affects what gets taxed and when, as well as how many filings are required.

Income tax

Sole proprietorships, partnerships, and LLCs are generally taxed as pass-through entities. This means the business itself doesn’t pay federal income tax at the entity level, though it could still need to file informational returns. Instead, profits and losses flow straight to the owners’ personal tax returns.

S corporations pass income through to shareholders and avoid corporate income tax. Profits are generally allocated based on ownership percentage.

C corporations can be subject to double income tax. The business pays corporate income tax on its own profits, and shareholders pay personal income tax again when profits are distributed as dividends. This structure trades tax efficiency for flexibility in ownership and capital raising.

While LLCs default to pass-through taxation, they can elect to be taxed as S corporations or as C corporations without changing their legal structure.

State and local taxes

Depending on its legal structure, a business could be subject to annual fees, franchise taxes, or gross receipts taxes levied by the state. These obligations vary widely from place to place and aren’t dependent on profitability.

Self-employment taxes

Owners of sole proprietorships, partnerships, and often LLCs pay self-employment tax on business earnings.

In S corporations, salaries are subject to payroll taxes, while distributions are generally not, which can reduce total tax liability.

Payroll taxes

Regardless of their legal structure, businesses with employees must handle payroll taxes. C corp and S corp owners who also work in the business must follow formal payroll rules.

Required filings

Pass-through entities such as sole proprietors and LLCs report business income on their personal returns. Partnerships and multimember LLCs also file informational returns. Corporations file separate corporate tax returns and issue tax documents to owners.

Typically, corporations and LLCs must also file annual or biennial reports with the state to remain in good standing.

All businesses with employees must handle wage reporting and employment filings.

In general, more formal legal structures bring higher expectations for documentation. Sole proprietorships operate with minimal formal reporting beyond tax filings. On the other end of the spectrum, corporations often face high scrutiny.

How do you choose the right legal structure for your business?

The right legal structure for your business depends on its specific situation and considerations around risk, taxes, control, and flexibility.

Here’s what to consider:

• The business’s level of risk: Businesses that take on debt, work with the public, handle customer data, or operate in regulated environments tend to benefit from limited liability structures, though liability protection is not absolute and does not cover personal misconduct. The more exposed the business is, the more important it is to separate liability.

• How the business makes and holds money: Pass-through structures are often a good fit when owners opt for business income to be taxed on their personal returns, especially when profits are distributed regularly. Corporations can make sense when profits are reinvested for growth or when the business plans to scale or raise outside capital.

• The number and type of owners: Single-owner businesses have a wide range of structural options, but bringing on co-owners, passive investors, or foreign owners often makes a multimember LLC, partnership, or corporation a better fit.

• Who’s in control: Some structures centralize authority, while others work through shared governance. Consider whether your business would benefit from full individual control, shared control, or formal oversight through boards and voting rules.

• Long-term funding plans: If the business will raise venture capital, issue stock options, or prepare for acquisition or initial public offering (IPO), a C corporation, often a Delaware C corporation, is usually the easiest path. Simpler businesses can stick with simpler structures.

• Tax strategy: Legal structures can influence self-employment taxes, payroll requirements, and how losses or profits are used. The right choice balances simplicity with staying compliant as revenue grows.

• Administrative tolerance: Greater protection and flexibility often mean more paperwork. The best structure is one that the business can realistically maintain without cutting corners.

Can you change your business’s legal structure?

You can change your business’s legal structure, but be intentional and careful. Many businesses take on a different legal structure alongside revenue or ownership changes. Businesses can move from sole proprietorship to LLC, from partnership to LLC, or from LLC to corporation as they expand.

Here’s what’s involved:

• Legal changes: Some states allow statutory conversions or domestications, which means an existing business can change its structure. In other cases, a legal change involves forming a new entity and transferring assets, contracts, and operations.

• New registrations and updates: Changing a business’s legal structure often involves making new state filings, getting a new EIN, updating bank accounts, and amending contracts or licenses.

• Tax consequences: A legal structure change can be tax-neutral or taxable depending on how it’s done. Conversions involving corporations require particular care, especially if the business has appreciated assets.

• Liability holdovers: If the change involves new liability protection, that only applies going forward. Personal liability still applies to any prior obligations, personal guarantees, or contracts.

How Stripe Atlas can help

Stripe Atlas sets up your company’s legal foundations so you can fundraise, open a bank account, and accept payments within two business days from anywhere in the world.

Join 75K+ companies incorporated using Atlas, including startups backed by top investors like Y Combinator, a16z, and General Catalyst.

Applying to Atlas

Applying to form a company with Atlas takes less than 10 minutes. You’ll choose your company structure, instantly confirm whether your company name is available, and add up to four cofounders. You’ll also decide how to split equity, reserve a pool of equity for future investors and employees, appoint officers, and then e-sign all your documents. Any cofounders will receive emails inviting them to e-sign their documents, too.

Accepting payments and banking before your EIN arrives

After forming your company, Atlas files for your EIN. Founders with a US Social Security number, address, and cell phone number are eligible for IRS expedited processing, while others will receive standard processing, which can take a little longer. Additionally, Atlas enables pre-EIN payments and banking, so you can start accepting payments and making transactions before your EIN arrives.

Cashless founder stock purchase

Founders can purchase initial shares using their intellectual property (e.g., copyrights or patents) instead of cash, with proof of purchase stored in your Atlas Dashboard. Your IP must be valued at $100 or less to use this feature; if you own IP above that value, consult a lawyer before proceeding.

Automatic 83(b) tax election filing

Founders can file an 83(b) tax election to reduce personal income taxes. Atlas will file it for you—whether you are a US or non-US founder—with USPS Certified Mail and tracking. You’ll receive a signed 83(b) election and proof of filing directly in the Stripe Dashboard.

World-class company legal documents

Atlas provides all the legal documents you need to start running your company. Atlas C corp documents are built in collaboration with Cooley, one of the world’s leading venture capital law firms. These documents are designed to help you fundraise immediately and ensure your company is legally protected, covering aspects like ownership structure, equity distribution, and tax compliance.

A free year of Stripe Payments, plus $50K in partner credits and discounts

Atlas collaborates with top-tier partners to give founders exclusive discounts and credits. These include discounts on essential tools for engineering, tax, finance, compliance, and operations from industry leaders like AWS, Carta, and Perplexity. We also provide you with your required Delaware registered agent for free in your first year. Plus, as an Atlas user, you’ll access additional Stripe benefits, including up to a year of free payment processing for up to $100K in payments volume.

Learn more about how Atlas can help you set up your new business quickly and easily, and get started today.