Choice of legal entity

The legal entity you choose for your business will dictate your filings and taxes. To create this page for you, Cathy Keeps Books consulted a very important resource: Bookkeeping For Dummies. Actually it was Bookkeeping All-in-One for Dummies, by Lita Epstein and John A. Tracey; all quotes below are taken from this edition, and most of the rest is paraphrased. Remember, Cathy Keeps Books is not a tax-advice or accounting website! Look these up yourself and verify all information with a CPA before you make any decisions!

In ascending order of complexity, the legal structures available for a small business are:

Sole proprietorship

A sole proprietorship is a company founded, owned and operated by a single person. It does not have to incorporate (i.e., “follow a process that makes the business a separate legal entity”).

Tax type: Self-employment taxes
Tax forms: Schedule C, Profit or Loss from Business; Schedule SE, Self-Employment Tax
Payment schedule: Pay estimated taxes quarterly


Any business started by more than one person is a partnership. Before you two (etc.) start the business, though, you need to sort out a number of issues—including how you divide profits and how to dissolve the partnership when/if necessary.

Tax type: “Partnerships aren’t taxable entities, but partners do have to file a ‘U.S. Return of Partnership Income’ using IRS Form 1065” (an informational return that does not include any taxes). This is also called Schedule K-1, apparently.
Tax forms: Each partner files Schedule E, Supplemental Income and Loss.
Payment schedule: Annual

Limited liability company

Both partnerships and sole proprietorships can become LLCs. An LLC status offers your company the same legal protection from lawsuits granted to a corporation, without imposing a corporation’s reporting and tax requirements. A partnership can also choose to become an LLP—a limited liability partnership—which protects each partner from the actions of the other(s).

Tax type: Exactly the same as for sole proprietors or partnerships, depending on what you are.

S or C corporation

The main reason to become a corporation is to protect your personal assets. Epstein and Tracey write: “The courts have clearly determined that corporations are separate legal entities, and their owners are protected from claims filed against the corporation’s activities (provide the corporation follows all [pertinent] rules and regulations).” What they term “the veil of protection” is powerful—but, they note, the downside is “tremendous” reporting and tax obligations.

S corporations “have fewer than 100 shareholders and function like partnerships but give owners additional legal protections.”

C corporations “are separate legal entities formed for the purpose of operating a business.”

Tax type: Consult an accountant, this is over CKB’s head. And a lawyer!