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What is Business Structure in the USA?

What is Business Structure in the USA?

Introduction

Everything from regular operations to taxes and how much of your assets is on hold is influenced by the business structure that is chosen for you. You choose a business structure that provides the perfect mix of legal protections and advantages. The main purpose of selecting a corporate structure can be divided into various categories. One is security which means each structure provides a different level of protection, and the second purpose of choosing the business structure is to manage taxes as a separate company that allows you to take benefits of all of the available write-offs and exemptions. You also have the advantage of getting health benefits packages not available to people as a defined business.

Business Structure in the USA

Business structures mean legal forms of the organization of the companies. Law determined the legal framework of the respective legal structure of a company. Each structure of the company has different characteristics, modalities of incorporation, and participation in business life that are mentioned.

Importance of choosing the correct business structure 

The legal structure of a company decides on the obligation of tax as well as an operation based on legal and economic. When it comes to establishing companies, expanding companies, or merging companies then they are particularly important.

Types of Legal Business Structure in the USA

There are several types of Legal Business Structures in the USA but some are mentioned below:

1.    Sole Proprietorship Business Legal Structure: -

Setting up a sole proprietorship is very simple and gives the right of total control over your company. If you operate a business but do not register as any other kind of business then you are automatically deemed a sole proprietorship.

It does not have its own legal entity or firm which means your commercial assets and responsibilities are not separate from yours. You may be held personally accountable for the debts and obligations of the company. A Sole proprietor can still be obtained a name of trade because you cannot sell a stock and it might be difficult to raise funds as well as banks are also unwilling to lend to Sole Proprietorship. But that is a fantastic option for low-risk firms and owners who want to put their business idea for testing before joining a more formal company.

2.    Limited Liability Company (LLC): -

It is a hybrid business structure that incorporates the superior features of both partnerships and corporations. It shields business owners from personal accountability while also decreasing the tax and also the burden of regulations. The profits and losses of the business are distributed to the owners who are needed to report a portion of the profits and losses on their Income Tax Returns.

In addition, an S-corporation that has a limit of 100 stockholders and a limited liability company has no such limitations. The entity or company must file it is AOA (Article of Association) with the Secretary of State where it thinks of doing business when forming a limited liability company. The entity or firm may be required to submit an operating agreement in some states.

One of the main benefits of starting a limited liability company over a corporation is that it comes with fewer restrictions or liabilities. In which less paperwork and the owners have limited responsibility that protects their assets from being auctioned to cover the liabilities of the entity. There are no such restrictions or limitations on how many shareholders a limited liability company can appoint.

On the other hand, since it must register with the state in which it wishes to operate then forming a limited liability company is very costly. To guarantee that it conforms to the tax and regulatory obligations, the organization may require hiring an accountant and a pleader.

3.    Partnership:-

A partnership means a business structure in which two or more people share the ownership of the company or an entity. This is the most basic business structure for a company with two or more proprietors. A partnership firm and a sole proprietorship have a lot in common because the business does not exist as a separate legal entity from its owners, the owners and the entity or firm are considered as if they were one person. The profits and losses of the business are shared with all the partners and when filing the taxes then each partner must submit the information on Form 1065 with their tax returns. In addition, depending on their portion of the profit of the company the partners must pay self-employment tax. Form 1065 should be accompanied by Schedule K-1 which records the profit or losses.

A partnership business arrangement has several benefits. In the forming of a partnership less paperwork is necessary, and the partners do not need to meet the same level of criteria as limited liability firms. In addition, partnerships have a distinctive tax structure that needs participants to report their share of the profit or loss of business on their tax returns.

But the drawback of the partnership firm is that the partners are personally liable for the debts and liabilities of the company and their assets may be liquidated to cover the commitments of the company. 

4.    Corporation: -

A corporation that means a sort of company structure that distinguishes the entity from its owners legally. It is difficult and very costly to set up, and it demands owners adhere to extra tax and regulatory needs. Most businesses use solicitors to monitor the registration procedure and assure that the company conforms to all applicable state legislation.

When an institution wants to go public by selling common stock to the public then it must first become a corporation. It must pay both federal and state taxes and at that time shareholders must report dividend distributions on their Income Tax Returns.

Two types of a corporation that is mentioned here:

C-corporations and S-corporations. A C-corporation is a legal entity that is independent of its owners and whereas an S-corporation can have up to 100 shareholders and operates the same as a partnership firm.

Which U.S. business entity or company or firm is the right one for your company?

When choosing a U.S. company structure then we will analyze the objectives and activities of your business to meet your requirements. Later, reshuffling your business is possible, but the best strategy is to obtain it right from the start.

Options and advantages will depend upon which U.S. state you are in so that you understand the advantages and downsides of each state is critical when choosing the right business structure. Ultimately, the decision between different business entities or companies comes down to three factors which are as follows:

  • The flexibility and you have the freedom to want to run your business;

  • The personal liability protection you required; and

  • Benefits from the tax you can gain

The different types of legal entities are generally divided into two classes: partnerships and corporations. 

Comparison between different types of business structure

The Comparison between different types of business structures is given below:

Business Structure 

Basic requirements

Protection of liability for debts and lawsuits

Tax status

Sole proprietorship

 Only 1 person 

Unlimited personal liability

 Self-Employment and personal income tax

Partnerships

2 or more people

Unlimited personal liability unless the business structure is an LP or Limited Liability of a Partnership firm

Self-employment tax and Personal income tax

Limited Liability Company 

1 or more people, and approval of  professional licensing board and Articles of Organization if a PLLC 

Owners are not personally liable 

 “Pass through” Self-employment or Personal tax OR S-Corporation tax status- owner decide

C-Corporation

 1 or more people, Articles of Incorporation

Owners are not personally liable

 Corporate tax rate

S-Corporation

1 or more people and  all people must be U.S. citizens or residents, Articles of Incorporation

 Owners are not personally liable 

“Pass through” personal income tax only

B-Corporation

1 or more people, Articles of Incorporation, Certification to Operate for the benefit of the Public 

Owners are not personally liable which includes some exemptions from the traditional application of the business judgment rule

Corporate tax rate as either C-corporation or S-corporation, plus fees of annual B Lab for certification to operate for public benefit

Nonprofit Corporation 

1 or more people, Articles of Incorporation, Charitable Purpose, or Public Service 

 Owners are not personally liable

 No tax, but corporate profits cannot be assigned to owners

Cooperative Corporation 

 1 or more people, Articles of Incorporation, must be democratically operated for the benefit of members and owners

Owners are not personally liable

Normally taxed like a corporation with the possibility to deduct “patronage dividends” as pass-through income tax

 

Conclusion 

It concluded that law determined the legal framework of the respective legal structure of a company. Each structure of the company has different characteristics, modalities of incorporation, and participation in business life that are mentioned. The main purpose of selecting a corporate structure can be divided into various categories. One is security which means each structure provides a different level of protection, and the second purpose of choosing the business structure is to manage taxes as a separate company that allows you to take benefits of all of the available write-offs and exemptions.

eStartIndia is a one-stop solution for all your legal requirements for starting a business in the USA.

Author:

Radhika Punani
Ambala
I am Radhika from Ambala city. I qualified LLM from Kurukshetra University and B.A.LLB from Maharishi Markandeshwar University


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