By Jacob C. DeRue and James W. Hundley (January 9, 2025)

Introduction

There are many different types of business entities, each offering its own benefits and costs. Ensuring you employ the right business entity for your needs will maximize the benefits of the specific entity and will help your business grow in the future. This article serves as a brief overview of the various types of business entities in the United States of America.

The business entities covered in this article are: (1) trusts, (2) sole proprietorships, (3) limited liability companies, (4) national associations, (5) general partnerships, (6) limited partnerships, (7) limited liability partnerships, (8) limited liability limited partnerships, (9) low-profit limited liability corporations, (10) S corporations, (11) C corporations, (12) B corporations, (13) Public benefit corporations, and (14) professional corporations.

Trusts

The main two types of trusts are: (1) revokable trusts, and (2) irrevocable trusts. Revokable trusts are trusts that are created during the lifetime of the individual that can be changed after their creation. An irrevocable trust differs from a revokable trust because it cannot be changed after it has been created.

The parties in a trust are the grantor (the party granting the rights in the trust), the beneficiary (the party receiving the rights in the trust), and the trustee (the party in charge of managing the trust).

A trust’s key formation document is the trust itself. Lastly, charities – especially Private Foundations – are often formed as trusts.[1]

Sole Proprietorships

A sole proprietorship is the simplest type of business entity. You are automatically considered a sole proprietorship if you do business activities and do not register as any other type of business entity. In a sole proprietorship, one individual owns and operates the entire business. Sole proprietorships are often not sought after because as a sole proprietor, you are personally responsible for all aspects of the business, including any debts, legal issues, or other monetary issues arising from the business.

While a sole proprietorship is easy to set up, it offers little protection for your personal assets because the business owner is personally responsible for the losses of the business, meaning that your personal assets could be lost in lawsuits against your business.

Sole proprietorships are unable to sell stock and banks are often hesitant to lend to sole proprietorships. However, sole proprietorships may be a good choice for business entity for low-risk businesses.[2]

Limited Liability Company (LLC)

An LLC is a business structure that is organized under state statutes. Therefore, each state may regulate LLCs in slightly different ways, so it is important to always check with your state if you plan to start an LLC. LLCs have grown in popularity in recent years, with individuals creating LLCs for multiple purposes from their dog-walking business to noteworthy businesses such as Blockbuster L.L.C. and Google LLC.

Owners of an LLC are called “members.” In most states, members may be individuals, corporations, other LLCs, or foreign entities. Generally, there is no maximum number of members an LLC may have, and most states allow “single-member” LLCs (LLCs with one owner).

Some businesses are unable to be LLCs (i.e., banks and insurance companies). It is however important to check with your state’s requirements and the federal tax regulations before creating an LLC to ensure that you comply with the laws. There are also special rules for foreign LLCs.

Lastly, depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a: (1) corporation, (2) partnership, or (3) a disregarded entity (as part of the LLC’s owner’s tax return). A domestic LLC with two or more members is classified as a partnership for federal income tax purposes unless it files Form 8832 and elects to be treated as a corporation. An LLC with one member is treated as a disregarded entity for income tax purposes unless it files Form 8832 and elects to be treated as a corporation. Further, an LLC with one member will be considered a separate entity for purposes of employment tax and certain excise taxes.[3]

Low-Profit Limited Liability Company (L3C)

L3Cs are business entities that are allowed in a minority of states. An L3C is typically created for charitable purposes but differ from non-profit corporations because L3Cs can make a profit for its owners if the charitable goal of the L3C comes first. Further, an L3C allows the owners to have all the advantages of the LLC form.

L3Cs typically must follow the corporate formalities of LLCs, including filings, taxes, and management requirements, but L3Cs may have to provide additional evidence of their charitable activities. Lastly, L3Cs are often created to meet program-related investment requirements.[4]

Partnerships

General Partnerships (GP)

Partnerships are the simplest business entity structure for two or more people to do business together. GPs are the default form of partnership and generally do not require any forms to be filed with state agencies.

In a GP, all partners share in the profits, managerial responsibilities, and liability for debts equally. However, if the partners wish to share profits and losses unequally, they can document this in a partnership agreement to avoid future disputes.

General partners have a fiduciary duty to act in the best interests of other members and the partnership generally. While GPs may be beneficial for some business ventures, they do not afford as much protection as LPs or LLPs.[5]

Limited Partnerships (LP)

An LP provides more protection for the partners than a GP. In an LP there must be at least one general partner who participates in management of the partnership and is personally liable for partnership obligations. Also, there must be at least one limited partner who is not personally liable for the partnership obligations, shares profits of the partnership, and does not have a right to manage the partnership.

In a LP, the limited partners are only liable up to the amount of their investment in the LP.[6] However, if a limited partner takes a more active managerial role in the LP, they could lose their limited partner status and become personally liable.[7]

Generally, LPs need to be registered with the Secretary of State. The foundational document for partnerships is an internal document called a “partnership agreement” that includes how profits and losses are distributed and how partners are to deal with selling their stake in the partnership.

LPs are generally used as investment vehicles for investing in assets, such as real estate. Further, LPs are pass-through business entities that offer low reporting requirements.

Limited Liability Partnerships (LLP)

LLPs are a hybrid business entity that combines aspects of partnerships and LLCs. LLPs are a popular alternative to LLCs for business owners. In an LLP, all partners have limited liability, and all partners can manage the LLP. LLPs are often used to form professional services companies, such as law firms and accounting firms and some states limit what an LLP can be used for.[8]

Limited Liability Limited Partnership (LLLP)

An LLLP is composed of one or more general partners and one or more limited partners. The general partners manage the business, and the limited partners share in the profits of the business. General partners share fully in its profits and losses, while limited partners share in the profits of the business, but their losses are capped at the amount they invested in the business.[9]

LLLPs are essentially an ordinary limited partnership, but it elects to add limited liability. LLLPs are a newer type of business entity that are available in some states. The LLLP usually must file a Limited Liability Limited Partnership Registration with the Secretary of State to acquire limited liability status. LLLPs are beneficial because the business structure limits the liability of general partners. Besides the limited liability of the general partners, LLLPs operate and are treated the same as limited partnerships.[10]

Corporations

C Corporation (C Corp) Closely Held or Publicly Trade

A C Corp is the most basic type of corporation. It is a legal entity that is separate from its owners. C Corps can make profits, be taxed, and are viewed as independent legal entities so they are able to be sued and held legally liable.

Corporations offer strong protection to its owners from personal liability, but require more extensive record-keeping, operational procedures, and reporting requirements than other business entities.

Unlike sole proprietorships, partnerships, and LLCs, corporations pay income tax on their profits. If a corporation does not have pass-through taxation, then corporations can be taxed twice.

C Corps can be either closely held or publicly traded. Closely held C Corps resemble B Corps but have a less traditional corporate structure. Closely held corporations typically do not follow most of the formalities that govern publicly traded corporations. Close corps are typically barred from public trading and can be run by a small group of shareholders without the typical board of directors.

Corporations that are publicly traded can also raise capital through selling stocks of the corporation, which can be an employee benefit. Due to the nature of corporations, a corporation has a completely independent life separate from its shareholders.[11]

S Corporation (S Corp)

An S Corp is a type of corporation that is designed to avoid the double taxation of C Corps. While some states do not recognize S Corps, they are a valuable business entity. S Corps allow for profits and some losses to be passed through directly to owners’ personal income without ever being subject to corporate tax rates.

S Corps, like other corporations, are governed by state law, so taxation on S Corps varies between states. Some states tax S Corps on profits above a specified limit.

To obtain S Corp status, the corporation must file with the IRS, which is a different process from registering the corporation with the state. Due to the pass-through taxation, there are additional requirements for a corporation to be able to benefit from the perks of being an S Corp.

S Corps must follow all the strict filing and operational requirements that C Corps must follow; however, S Corps have additional requirements as well.[12]

Benefit Corporation (B Corp)

A B Corp is a for-profit corporation recognized by most U.S. states. B Corp status is a certification granted by the nonprofit network B Lab that shows a company meets high social and environmental performance standards. B Corps are corporations that are intended to benefit the public good. Thus, B Corps are driven by both mission and profit. Shareholders in a B Corp ensure the corporation produces a public benefit while making a financial profit. Some states require B Corps to submit annual benefit reports that show their contributions to the public good to regulate the “public good” aspect of B Corps.

B Corps differ from C Corps and S Corps because they serve a different overall purpose than the other two corporation models. B Corps differ from C Corps in accountability and transparency, but they are the same as C Corps in how they are taxed.

Lastly, while multiple third-party B Corp certification services exist, none are required for the company to be considered a B Corp by the state where the legal status is available.[13]

Statutory Public Benefit Corporation

A public benefit corporation is a corporation that is created to generate social and public good. A cornerstone of public benefit corporations is that they operate responsibly and sustainably.

Public benefit corporations created by the government are called statutory corporations or government-owned corporations. Statutory corporations generally provide free or subsidized services or benefits for the public. Examples of statutory corporations include transit systems, public libraries, and hospitals.[14]

Professional Corporations (PC)

A PC is a type of corporation organized under a state statute that allows certain licensed professionals to own shares in a corporation organized to render professional services. Examples of the professionals that states allow to incorporate PCs are attorneys, architects, accountants, engineers, and dentists. The benefit of a PC is that an owner of a PC will not be personally liable for the negligence or malpractice of the other owners. However, owners of PCs remain liable for their own negligence or malpractice.[15]

Conclusion

In conclusion, there are many different business entities with each business entity providing its own benefits and perks. By working with a skilled attorney, you can find out which business entity is best for your business’s needs.

This blog post is intended to overview the nature of business attorneys. Individuals who have questions about what type of lawyer may be best for their business, questions about business law, or seek experienced outside counsel for their business should contact Jacob DeRue at Briglia Hundley, P.C., through the Contact Page.

The information in this blog post may not reflect the current law in your jurisdiction. No information in this blog post should be interpreted as legal advice, and the blog post is not intended to substitute for legal counsel.

About the Author

Jacob DeRue is an associate attorney supporting BrigliaHundley, P.C.’s business litigation and corporate law practice groups. He joined the firm the summer after his first year of law school as a summer associate, then transitioned to a law clerk until passing the Virginia Bar after graduation and becoming an attorney. Mr. DeRue primarily practices in the firm’s corporate law practice group, commercial and business litigation practice group, and civil litigation practice group.

Briglia Hundley represent individuals and corporations throughout the Mid-Atlantic region, including Alexandria, Annandale, Arlington County, Ashburn, Burke, Centreville, Chantilly, Clifton, District of Columbia, Dulles, Fairfax County, Falls Church, Great Falls, Herndon, Leesburg, Loudoun County, Manassas, Manassas Park, McLean, Middleburg, Montgomery County, Oakton, Prince George’s County, Prince William County, Reston, South Riding, Springfield, Sterling, Tysons Corner, Vienna, Winchester and Woodbridge.

Contact the Authors

Jacob C. DeRue and Jim H. Hundley

Briglia Hundley, P.C.

Tysons Corner Office

1921 Gallows Road, Suite 900

Tysons Corner, Virginia 22182

Telephone: 703.883.0880

Fax: 703.833.0899

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[1] An Overview of Trusts, LegalNature, https://www.legalnature.com/guides/an-overview-of-trusts.

[2] Choose A Business Structure, SBA, https://www.sba.gov/business-guide/launch-your-business/choose-business-structure

[3] Limited Liability Company (LLC), IRS (Jan. 25, 2023), https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc.

[4] Low-Profit Limited Liability Company (L3C), Cornell Law School LII, https://www.law.cornell.edu/wex/low-profit_limited_liability_company_(l3c).

[5] See Evan Tarver, Limited Partnership: What It Is, Pros and Cons, How to Form One, Investopedia, (Sep. 5, 2022), https://www.investopedia.com/terms/l/limitedpartnership.asp.

[6] Id.

[7] Id.

[8] Id.

[9] Limited Liability Limited Partnership, Utah Department of Commerce, (Sep. 22, 2023), https://corporations.utah.gov/business-entities/limited-liability-limited-partnership/.

[10] Limited Liability Limited Partnership (LLLP), North Dakota Secretary of State, (Sep. 22, 2023), https://sos.nd.gov/business/business-services/business-structures/partnerships/limited-liability-limited-partnership-lllp.html.

[11] Choose A Business Structure, SBA, https://www.sba.gov/business-guide/launch-your-business/choose-business-structure.

[12] Id.

[13] Choose A Business Structure, SBA, https://www.sba.gov/business-guide/launch-your-business/choose-business-structure;

About B Corp Certification, B Lab, https://www.bcorporation.net/en-us/certification/; Public Benefit Corporation, LII,https://www.law.cornell.edu/wex/public_benefit_corporation.

[14] Public Benefit Corporation, LII,https://www.law.cornell.edu/wex/public_benefit_corporation.

[15] Professional Corporation, LII, https://www.law.cornell.edu/wex/professional_corporation.