Different Types of Company Structures in&n...

Different Types of Company Structures in the USA

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Posted 2023-04-08 07:44:57

Introduction

When it comes to choosing a corporate structure, there are various objectives to

consider. One such objective is security, as each structure offers different levels of

protection. Another objective is to manage taxes, by setting up a separate company,

which enables you to maximize write-offs and exemptions. Additionally, setting up a

corporate structure can provide access to health benefits packages that are not

available to individuals operating as a sole proprietorship.

Business Structure in the USA

The term "business structure" refers to the legal framework that governs an

organization within a specific jurisdiction. It defines the rights and responsibilities of

the company and its owners, including the ability to raise capital, assume liabilities,

and pay taxes. Choosing the right legal structure for a business requires careful

consideration of its goals and objectives, as well as the unique features of each

option. In the United States, the most commonly used business structures are the

LLC (Limited Liability Company), Sole Proprietorship, Corporation, and Partnership.

What are the different types of legal business structures in the USA?

1. Sole proprietorship business structure

The legal structure of a sole proprietorship is easy to set up and offers complete

control over the business. If you run a business without registering it as another type

of business, it is automatically considered a sole proprietorship. Sole proprietorships

do not have a separate legal entity, meaning that business assets and liabilities are

not distinct from personal assets and liabilities. This implies that you may be held

personally liable for any debts or obligations of the business. However, sole

proprietors can still obtain a trading name.

Since you cannot sell shares, raising funds can be difficult, and banks may be

hesitant to lend to sole proprietorships. Sole proprietorships are a good option for

low-risk businesses and owners who want to test their business idea before joining a

more formal company.

2. LLC (Limited Liability Company)

It is a business structure that combines the best aspects of partnerships and

corporations. It offers owners protection from personal liability and reduces tax and

regulatory burdens. Profits and losses of the business are distributed to owners who

must report a portion of them on their tax returns.

Compared to an S-corporation, which has a limit of 100 stockholders, there are no

such restrictions on the number of owners in an LLC. To establish an LLC, it must fileits articles of association with the Secretary of State where it intends to operate. Depending on the state, the entity may also be required to submit an operating agreement. One of the benefits of forming an LLC instead of a corporation is that it has fewer restrictions and requires less paperwork. Owners have limited liability, which protects their assets from being used to pay off the company's debts. Additionally, there are no limits on the number of shareholders an LLC can appoint. On the other hand, forming an LLC can be costly since it must register with the state and comply with tax and regulatory obligations. The organization may need to hire an accountant and attorney to ensure compliance.

3. Partnership business structure

A partnership is a type of business structure where two or more individuals share ownership. It is the most straightforward structure for a business with multiple owners. Similar to 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 passed on to the partners, and each partner must report their share of the profits or losses on Form 1065 with their tax returns. Additionally, partners may be required to pay self-employment tax, depending on their share of the company's profits. Schedule K-1 should be attached to Form 1065, which details the gains or losses.

4. Corporation A corporation is a type of business structure that separates the entity from its owners legally. It is a complex and expensive process to set up and involves complying with additional tax and regulatory requirements. Many businesses hire lawyers to oversee the registration process and ensure that the company complies with all relevant state laws. Before a company can go public by selling common stock to the public, it must first become a corporation. Corporations are subject to both federal and state taxes, and shareholders must report any dividend distributions on their income tax returns. The two most common types of corporations are C-corporations and S-corporations. A C-corporation is an independent legal entity separate from its owners, while an S-corporation can have up to 100 shareholders and operates similarly to a partnership. One advantage of a corporate structure is the ability to raise capital by selling stock to the public. Additionally, the corporate form provides limited personal liability protection, shielding the owners from the company’s debts and obligations. Howevr, a corporation also comes with more requirements, such

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