Business structures/Legal entities

  • by admin
  • November 28, 2021

What are the types of Business Entities & corporations in the USA? Your business is growing in the USA? Is it a good idea to incorporate a small business? The answer is not simple in the case of cross-border taxation. Before discussing this further let’s discuss, all the options you have in the United States, and what are the benefits, complications, and taxation.

 

Business structures and related aspects

The choice of business structure can be one of the most important decisions when you plan to start a business. That’s because procedural formalities related to the business, like taxation matters, statutory filings, and reporting requirements, all differ depending on the type of business structure selected. Let’s discuss the details based on ownership perspectives, legal basis, liability protection, transferring ownership, taxation, etc.

In the United States of America, possible business structures include sole proprietorship, partnerships, limited liability companies, and corporations. Let’s discuss related aspects of these business structures.

Sole proprietor

It’s a simple business structure with no line of demarcation between your personal and business assets/liabilities. As a business owner, it gives you supreme power to decide and direct all the operational and strategic matters of the business. Another good thing about this structure is that you don’t have to worry about the hustles of legal compliance and procedural formalities of registrations. You just need to focus on your business matters.

However, the problem with this structure is that if the business makes losses and goes for liquidation, you may have to pay the creditors from your personal assets if business assets are not sufficient to cover the balance of the creditors.

For the taxation of “Non-resident and resident alien“, please visit our other blog. If want to know the individual income tax rates, please visit our page “Latest News.”

This type of business structure is recommended when you’ve low-risk business operations.

Partnership

It’s a business arrangement where two or more persons own a single business. They may share capital/resources/competence and run a business.  There are could be three combinations of partnerships: a General partnership, a limited partnership,) and a limited liability partnership.

A general partnership (GP) is like a sole proprietorship where each partner is liable personally for the liability of the partnership.

A limited partnership (LP) is when a business has one general partner with unlimited liability and control, and all other partners have limited liability and controls. Their controls and limitations of the liability are documented in the partnership agreement, and the profit of each partner passes through their personal tax return. However, general partners with unlimited controls and liability must also pay taxes under self-employed. In this scenario, the general partner is personally liable for the debts of the partnership while limited partners are only liable to the extent of their invested capital in the partnership.

Limited liability Partnership (LLP) is when each member of the partnership has limited controls and limited partnership. This model of partnership protects each partner from the actions of other partners. Further, the loss is limited to the assets of the partnership.

This structure can be an excellent option for professionals who rely on their skills and professional competence. As no partner is responsible for the deeds of another partner and working as a single business can bring massive synergy and reputation.

Limited liability Company (LLC)

This type of business structure or legal entity is not available in Canada. Limited Liability Company contains characteristics of both partnership and corporations. LLC protects your assets from claims of creditors in case of liquidation. It means creditors cannot run after you for their claims on the company as their right to claim is restricted to the company’s assets. So, your property and personal assets won’t be at risk in case of lawsuit/bankruptcy.

For the taxation of LLC in the United States, please visit our blog “Taxation for limited liability companies – in the United States”.

LLC can be a better choice when you want to initiate some high-risk business and protect your wealth. Further, the tax rate applicable on this type of business arrangement is less than corporate taxes.

Note: All LLC formed in Arizona, Nebraska, and New York are required to publish a notice in the local newspaper and provide an affidavit of publication to the state.

Corporation

You can form mainly two types of corporations in the United States, however, S-Corp is not available in Canada.

C – Corp

Corporation/C-Corp is a separate legal entity that can perform operations, make a profit, enter into business deals, and be held responsible for its acts. This business structure is expensive for compliance, business reporting, taxation, record-keeping, legal matters, corporate filings, and other procedural formalities.

However, strong liability protection offered by this structure compensates for the higher cost. Further, the status of the corporation is not affected by whether shareholders dispose of/acquire ownership. The company remains in business without being disturbed. Further, corporations are at ease of raising capital as they can sell the stock.

The problem with this business structure is that profits are taxed twice as the company has to pay tax on their profits, and shareholders are liable to pay income tax on receipt of the same profit (dividend). For taxation of C Corporation, please visit our blog “Taxation of a corporation.”

C-Corp can be an excellent choice for the business that opts to operate in the high-risk business, intend to raise capital for the massive development, and businesses with plans to get listed.

 

S – Corp

Corporation/S-Corp is a separate legal entity same as C-Cop. However, S-Corp is designed to protect shareholders from double taxation on shareholders (tax on profit of the company and subsequent distribution as a dividend). All the profits and losses are passed directly to the shareholders without taxing the company on the profits earned.

However, profit treatment of the S-Corp differs from state to state, like some states charge tax on the company’s profit if it’s more than a certain threshold. On the other hand, some states do not charge taxes at all.

The corporation needs to comply with certain filing requirements of IRS for getting the status of the S – Corp. Further, it’s important to note that all company shareholders must be US citizens and not be more than 100 in the number of total shareholders. Hence, the status of S-Corp is only available to companies that comply with eligibility requirements.

Note: All Corporations formed in Pennsylvania, Georgia, Arizona, and Nebraska are required to publish a notice in the local newspaper and provide an affidavit of publication to the state.

Some other business structures include B-Corp, close corporations, non-profit corporations, and cooperatives. These structures differ in respect of their purpose of formation, matters of taxation and, procedural compliance, etc.

Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.

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