Sole proprietorship
The simplest form. Business income and losses flow directly to your personal Form 1040 on Schedule C. You pay both income tax and self-employment tax (Social Security + Medicare) on net profit. No separate return is filed for the business.
LLC (Limited Liability Company)
An LLC is a state-law entity, not a federal tax classification. By default, single-member LLCs are taxed like sole proprietorships and multi-member LLCs are taxed as partnerships (Form 1065). An LLC can elect to be taxed as an S-Corp or C-Corp by filing the appropriate IRS form.
S-Corporation
A pass-through entity (Form 1120-S) where profits flow to owners and avoid corporate-level tax. Owner-employees must take 'reasonable compensation' as W-2 wages; remaining profit can be distributed without self-employment tax — a common reason small business owners elect S-Corp status.
C-Corporation
A separate taxpayer (Form 1120). Pays a flat 21% federal corporate tax. Distributions to shareholders as dividends are taxed again at the personal level — the classic 'double taxation.' Often used by companies that reinvest profits, raise venture capital, or offer stock-based compensation.