Introduction
When deciding on a corporate structure, there are several factors to consider, such as the level of security each structure provides. Another important factor is tax management, as setting up a separate company allows for greater potential write-offs and exemptions. Moreover, creating a corporate structure can also grant access to health benefit packages that may not be accessible to individuals operating as a sole proprietorship.
Business Structure in the USA
In the United States, the term “business structure” pertains to the legal system that regulates an organization within a particular jurisdiction. It establishes the privileges and obligations of both the company and its proprietors, such as the ability to raise funds, incur liabilities, and fulfill tax obligations. Selecting the appropriate legal structure for a business necessitates thoughtful examination of its aims and objectives, as well as the distinctive aspects of each option. The most frequently utilized business structures in the US are the Limited Liability Company (LLC), Sole Proprietorship, Corporation, and Partnership.
Types of Business Structure in USA
Sole proprietorship business structure: A sole proprietorship is a straightforward legal structure that provides full authority over the business to the owner. If you operate a business without registering it as a different business type, it is automatically considered a sole proprietorship.
- Business assets and liabilities are not separate from personal assets and liabilities in a sole proprietorship, making you personally accountable for any business debts or obligations.
- Despite this, sole proprietors may still obtain a trading name. Since you cannot sell shares, obtaining funds may be challenging, and banks may be hesitant to lend to sole proprietorships.
- Sole proprietorships are a viable option for low-risk businesses and owners who want to test their business concept before committing to a more formal enterprise.
LLC (Limited Liability Company): LLC, or Limited Liability Company, is a business structure that offers the benefits of both partnerships and corporations. It provides owners with protection from personal liability and reduces the burden of taxes and regulations.
- In an LLC, profits and losses are distributed among owners who must report a portion of them on their tax returns. Unlike S-corporations, which limit the number of stockholders to 100, there are no such restrictions on the number of owners in an LLC.
- To establish an LLC, it must file its articles of association with the Secretary of State where it intends to operate, and depending on the state, an operating agreement may also be required.
- One of the main advantages of forming an LLC is that it has fewer restrictions and requires less paperwork than a corporation.
- Owners have limited liability, which protects their assets from being used to pay off the company’s debts.
- Moreover, there are no limitations on the number of shareholders an LLC can have. However, forming an LLC can be expensive since it needs to register with the state and comply with tax and regulatory obligations.
- The organization may also need to hire an accountant and attorney to ensure compliance.
Partnership business structure: The partnership is a type of business structure where ownership is shared among two or more individuals. It is the most simple structure for businesses with multiple owners. Like a sole proprietorship, the business and its owners are not separate legal entities, and the owners are personally responsible for the company’s debts and obligations.
- When filing taxes, the profits and losses of the business are distributed to the partners, and each partner must report their share of the profits or losses on Form 1065 with their tax returns.
- Partners may also need to pay self-employment tax, depending on their share of the company’s profits. Schedule K-1 should be attached to Form 1065, which provides details of the gains or losses.
Corporation: Corporation is a business structure that separates the legal entity of the company from its owners. Establishing a corporation is a complicated and expensive process that involves compliance with additional tax and regulatory requirements.
- Companies often hire lawyers to manage the registration process and ensure adherence to state laws. Before a company can go public by selling common stock, it must become a corporation. Corporations are subject to both federal and state taxes, and shareholders must report dividend distributions on their tax returns.
- The two most common types of corporations are C-corporations and S-corporations. A C-corporation is an independent legal entity, while an S-corporation operates similarly to a partnership and can have up to 100 shareholders.
- One benefit of a corporate structure is the ability to raise capital by selling stock to the public. Additionally, corporations provide limited personal liability protection for the owners, shielding them from the company’s debts and obligations.
- However, corporations come with more requirements, such as meetings, voting, and director elections, and are more expensive to set up than a sole proprietorship or partnership.
In summary, choosing the appropriate business structure is essential as it impacts multiple facets of your enterprise, such as taxes, capital generation, documentation, and personal responsibility. Hence, before officially establishing your business with the government, it’s critical to carefully evaluate all available alternatives. Moreover, you might have to secure licenses, permits, and a tax identification number. While altering your business structure later on is feasible, you should be aware that geographical limitations could arise, resulting in tax consequences and unforeseen problems such as dissolution.
