BUSINESS BASICS
Choosing a Business Structure
Hobby, sole proprietorship, LLC, partnership, S corporation or C corporation—understand the basic differences before you decide.
Your choice can affect tax filings, payroll, recordkeeping, liability and future growth. The best answer depends on your ownership, income and goals.
Educational information only. Business formation is governed by state law, while federal tax treatment follows federal rules. This guide is not legal advice. Our business entity creation and EIN assistance services are available only to Florida residents. Last reviewed September 10, 2026.
Hobby or Business?
The IRS looks at all the facts and circumstances. No single factor decides whether an activity is operated for profit.
Signs of a Businesslike Activity
- You keep complete books and records.
- You devote meaningful time and effort to earning a profit.
- You change methods to improve profitability.
- You or your advisers have relevant expertise.
- The activity has a profit history or realistic profit potential.
Tax Treatment at a Glance
Business: Income and ordinary, necessary expenses are generally reported on the appropriate business schedule or return. Self-employment tax may apply depending on the structure and activity.
Hobby: Income still must be reported. Hobby-expense rules have changed over time, so confirm the rules for the specific tax year before claiming any deduction.
Business Structures at a Glance
Sole Proprietorship
One person owns an unincorporated business. Income and expenses are usually reported on Schedule C with the owner’s Form 1040.
- Advantages: Simple, inexpensive and direct tax reporting.
- Considerations: No separate liability shield; net earnings are generally subject to self-employment tax.
Limited Liability Company (LLC)
An LLC is created under state law. It is a legal structure—not a single federal tax classification.
- One-member LLC: generally disregarded for federal income tax unless a corporate election is made.
- Two-or-more-member LLC: generally taxed as a partnership unless a corporate election is made.
- An eligible LLC may elect S corporation taxation.
Partnership
Two or more people carry on a trade or business together. A partnership generally files Form 1065 and provides Schedule K-1 to each partner.
- Advantages: Pass-through federal taxation and flexible ownership arrangements.
- Considerations: A written agreement is important; liability depends on the legal form and state law.
S Corporation
An eligible corporation or LLC may elect S corporation tax treatment. It generally files Form 1120-S and passes tax items to shareholders on Schedule K-1.
- Advantages: Pass-through treatment; qualifying distributions generally are not self-employment income.
- Considerations: Eligibility restrictions, payroll administration and reasonable W-2 compensation for working owners.
C Corporation
A C corporation is a separate taxable entity that generally files Form 1120. Corporate profits are taxed at the entity level, and dividends paid to shareholders may also be taxed to them.
Potential advantages
- Familiar structure for outside investors.
- Multiple stock classes and broad ownership possibilities.
- Potentially broader employee fringe-benefit options.
Important considerations
- Possible double taxation of corporate earnings distributed as dividends.
- More administrative and compliance formalities.
- Losses generally do not pass through to shareholders.
Quick Federal Filing Comparison
| Structure or treatment | Common federal filing | General tax pattern |
|---|---|---|
| Sole proprietorship | Form 1040 + Schedule C | Owner reports business profit or loss |
| Partnership | Form 1065 + Schedules K-1 | Pass-through to partners |
| S corporation | Form 1120-S + Schedules K-1 | Pass-through to shareholders |
| C corporation | Form 1120 | Tax generally paid by corporation |
Questions to Answer Before Choosing
- How many owners will the business have?
- Do you expect employees, payroll or outside investors?
- How much profit do you reasonably expect?
- How important are liability protection and ownership flexibility?
- Can you maintain separate records, accounts and required formalities?
- Will the business operate only in Florida or in multiple states?
Official IRS Resources
- Business Structures
- Federal Tax Classification of an LLC
- Publication 583: Starting a Business and Keeping Records
- Publication 541: Partnerships
- S Corporations
Ready to choose your next step?
Florida residents can request business entity creation or EIN application assistance. Already operating? Visit our business return page for filing support.