Before you start or incorporate a company in the USA, it is important to carefully choose the best type of legal entity. Finding the best business structure for the desired firm is one of the first concerns that comes to mind when someone decides to start a business. Making this choice is crucial for tax reasons and aids an entrepreneur in making plans for future business growth.
Understanding the variations between the various types of legal entities in the USA is crucial for a non-resident starting a new firm. In creating a new business in the USA, state laws, and not federal laws, are applied. This is why corporate laws vary from state to state.
Which of the legal entities in the USA is best for you? This guide will assist you in making that choice.
Types of legal entities in the USA
There are many types of corporate entities in the U.S., but the four most common types are:
1. Sole Proprietorship
A single individual or group of individuals owns and runs sole proprietorships. Accordingly, there is no formal legal distinction between the owner and the company. Small enterprises in the USA are more likely to use this specific business structure than other types of legal entities. Sole proprietorships use pass-through taxation like limited liability companies (LLCs). However, with sole proprietorships, the owners are personally liable for damages or any legal concerns that may arise while running the company.
Features:
- Cheap to produce
- Simple to dissolve
- Typically have no tax implications
- There are hardly any formalities to be followed aside from basic bookkeeping
- Liabilities of the company are personal liabilities of the owner
- A sole proprietorship immediately ends upon the death of the owner
Due to its simplicity in formation, sole proprietorship is the most commonly chosen legal entity in the U.S.
2. Partnership
Like a sole proprietorship, a partnership has no legal distinction between the owner and the company, but it may have multiple owners. In the USA, when multiple parties are vying for a single business idea’s profit, a partnership is the ideal legal entity to choose. In these situations, partners must draft a profit-sharing and operating agreement. A yearly return must be filed, and tax information must be reported by partnerships. Based on their share of the earnings, each partner must file tax returns and pay taxes.
Features:
- Affordable to create
- Each partner has limited liability to the partnership on a joint and several basis
- The partnership does not pay any taxes
The structure and administration of a partnership can be as straightforward or complicated as the parties choose. When a partner passes away or files for bankruptcy, among other conditions, a partnership ends. It can also be ended by the partners themselves.
3. Limited Liability Company (LLC)
This type of legal entity in the USA is popular because it offers liability protection and tax advantages. The income from LLCs is carried on to individual tax returns due to pass-through taxation. LLC members have liability protection from legal concerns, bankruptcy, debts, claims, etc. This means that the individual members will not be held personally accountable if the company is held liable in any way. This safeguards any business members’ personal assets.
4. Business Corporation
A business corporation is a legal entity created by one or more people under the laws of a state to carry out specific kinds of business or transactions in the USA.
Compared to a partnership or a single proprietorship, a business corporation is more complex. A corporation exists independently of its owners; as a result, the corporation endures until formally dissolved.
A corporation may only have one owner, one director, and one officer under the laws of the respective state. The term “shareholder” refers to a corporation’s owner or owners. To determine the corporation’s policies and represent its interests, the shareholders elect directors. Officers of the corporation are chosen by the directors to run the daily business.
In comparison to other entities, corporations are legally compelled to follow more formalities, such as yearly shareholder and director meetings and board approval of the majority of the corporation’s main actions. Unlike its shareholders, a corporation is distinct. It means that a shareholder cannot just withdraw money from the corporation for personal use without providing justification and recording a board resolution into the corporate records.
Features:
- Shareholders, directors, and staff are all independent parties from the corporation.
- A corporation qualifies as a “person.” It has the same rights and obligations as a person and conducts business in the same way.
- The business can enter into agreements, take on liabilities, bring legal action, and be sued.
- Specific responsibilities and obligations are owed by the corporation to its shareholders, directors, and other stakeholders.
- The number of shares that shareholders own determines their liability.
- Centralization of Management
- Shareholders may assign their ownership stakes.
- Continued existence until legally dissolved
Summary
Your decision about your company’s legal structure is crucial. The entity you select has a significant impact on your legal exposure, money, and how others perceive your company.
In choosing between the various types of legal entities in the USA, you should bear the following points in mind:
- The best “starter” entities are sole proprietorships and partnerships.
- You might think about registering as an LLC or corporation as your company expands and brings in more revenue.
- Examine the advantages and disadvantages of each type of business entity in terms of legal protection, taxation, and governmental regulations.
- To acquire specialized assistance for your business, consult with a business attorney and accountant.
Launching your business with Bolder Launch
Although there is no single ideal business entity option for all small enterprises, you can choose the best for yours by seeking assistance from our legal and financial experts. We can help you choose the best legal entity based on your needs and goals for your company in the USA. Contact us for a free consultation with our Launch Crew.
This guide is part of Company Formation in our Launch Guide.
