Before initiating a business in the United States, it is crucial to determine the type of business you wish to establish and its structure.
Understanding your business structure is essential and fundamental, as it influences various aspects, including taxes and day-to-day operations, among others.
Generally, entrepreneurs are encouraged to select a business structure that provides the right balance of legal security and benefits.
Experts always advise taking the time to choose wisely, as your decision in this regard will affect crucial elements such as paperwork, tax payments, personal liability, and more.
How many business structures are in the U.S?
Legally, business structures are categorized into four in the United States, however, there are other bub-structures – that fall under two of these organisational structures.
The main structures are:
- Sole proprietorship,
- Partnerships,
- Corporations and
- Limited liability companies
Before registering a business in the U.S, one has to choose a business structure before anything else.
An entrepreneur can upgrade from a lower organizational structure to an elaborate one that requires many paperwork.
Therefore, if you are not sure of what to settle for, it is helpful to patronize accountants and other business experts, so you can limit legal issues.
Sole Proprietorship
The most basic and simple form of a business structure available to an entrepreneur is a sole proprietorship. It is essentially a one-person business.
The sole proprietor assumes multiple roles, acting as the generalissimo: managing accounting, auditing, sales, and overall operations, and is accountable for both profit and loss. Nevertheless, the proprietor may choose to enlist a few employees to assist in these tasks.
However, certain intricacies are associated with a sole proprietorship. It should be noted that when operating in this manner, the business is not considered a separate entity from its owner.
This implies that the business owner can be held personally liable for the debts and other legal issues of the business.
Despite these considerations, this structure is recommended for entrepreneurs engaging in low-risk enterprises and seeking to test their business ideas before transitioning to a higher-scale enterprise.
Additionally, even as a sole proprietor, you can operate with a business name but is always challenging for a sole proprietor to have access to credit products in banks.
Partnership
As the name sounds, it is a partnering with one person or more people to form a business. A partnership is sub-divided into two:
- Limited Partnerships (LP)
- Limited Liability Partnerships (LLP)
Limited partnerships share certain similarities with limited liability partnerships, but both have certain differences.
Limited Partnerships (LP)
For the LP, there is just one general partner with unlimited liability, and then all other partners in the business have limited liability.
There is a partnership agreement in place that ensures the partners with limited liability can have limited control over the firm.
Limited Liability Partnerships (LLP)
On the other hand, LLP gives limited liability to every owner in the company, and the partnership secures each partner from debts against the partnership.
Generally, you can form a partnership if you want to run a business idea with a group of people before you form a more formal enterprise.
Limited Liability Company (LLC)
If you are starting a formal business with someone else, opting for an LLC is advisable. It is designed to ensure that your personal assets are protected even if the company goes bankrupt.
One of the advantages of an LLC is that it allows you to enjoy the benefits of both the corporation and partnership business structures. This makes a lot of sense, especially if you are operating a high-risk business.
Compared to someone running a corporation, you generally pay lower taxes, and your personal assets are secured in case things go wrong with the business for any reason.
Corporation
The C corporation, also known as a C corp, is a complex and sophisticated business structure with higher costs compared to others.
Businesses falling under this category can operate with the primary goal of making profits and are subject to taxation. Despite being legally liable, the organization is distinct from its owners, providing formidable protection against personal liability.
Running a business as a corporation demands significant effort due to the need for extensive operational processes, among other considerations.
Despite being an independent entity separate from its owners, the corporation is obligated to pay income tax on its profits. This remains true even when dividends are distributed to shareholders, impacting their own tax returns.
It is important to highlight that corporations offer several advantages. For example, raising capital through stocks is more accessible compared to a sole proprietorship or partnership.
Furthermore, even if a shareholder decides to leave the company or sell their shares, the corporation can continue to operate seamlessly without encountering significant issues.
S Corporation (S Corps)
This is a specialized form of a corporation that is structured to avoid the double taxation attached to the standard C corps.
Also known as S corp, these companies allow profits to be passed through directly to the personal income of its shareholders without being subject to corporate tax rates.
Just like a regular corporation, S corporations also have an independent life from the owners. Even when a shareholder sells their shares, the business keeps moving undisturbed.
However, it should be noted that some states in the United States of America don’t recognize the S corp status at all, and they treat such as a regular corporation.
However, in territories where you are permitted, you must file with the IRS to get S corp status. You can check IRS website so you will be familiar with the eligibility requirements, as there are special limits.
Benefit Corporation (B corps)
Unlike the S corp model that is not recognized in several American states, B corps are more famous, and you will have no issue operating this in several states.
These are also specialized types of corporations, different from the regular ones in accountability, transparency, and purpose.
Benefit corporations are driven by both profit and mission, unlike a regular corporation that is all about profits.
The shareholders of a B corp, in addition to embracing financial profit, will also ensure the business keeps producing some sort of public benefit.
Therefore, there are places in the United States where business is obligated to keep submitting yearly benefit reports that show their contribution to the good of the public.
Close Corporation (C corp)
These specialized types are like Benefit corporations in some ways, but few differences. A close corporation is much simpler to run than the average regular corporation since it has nothing much to do with strict formalities.
Nonprofit Corporation
These are organizations intentionally formed to carry out charity, religious, or educational works, and are usually given tax-exempt status with ease (they won’t have to pay income taxes on their profits).
These things are done because the activities of these corporations are greatly beneficial to the public.
When forming a nonprofit corporation, you must take steps to file with the IRS to get tax exemption.
Even if you have registered in the particular state you are operating from, it is still necessary for you to file with the IRS at the federal level.
If your enterprise is running in this cadre, you must be committed to following organizational rules like that of a regular C corp.
However, you should also be aware of specific regulations that will govern what you do with any profits you earn. For instance, you won’t be permitted to share the profits of your business with political campaigns.
Cooperative
The major peculiarity of this organization is that it is managed for the benefit of those that are making use of the services it provides. When it makes profits, the resources are distributed among the members of the cooperative.
Usually, the members elect a board of directors and managers who are saddled with the responsibilities of running the business, retaining the right to control how the enterprise will be managed. In such a setting, to become a member of the cooperative, a person must purchase shares.
Summary:
There are four main business structures in the U.S – sole proprietorship, partnerships, limited liability companies, and corporations.
S Corporation (S Corps), Benefit Corporation (B corps), Close Corporation, Nonprofit Corporation, and Cooperative fall under corporations.
B corp is recognized in the majority of the US than C corp.
B corps and C corps are not the same in purpose, accountability, and transparency, however, they aren’t different in how they’re taxed.
Most individuals who start a fully home-based business are usually registered as a sole proprietorship.
Each organizational business structure comes with its unique peculiarities and you must choose the one that is consistent with your aims and goals.