If you’re reading this article, it’s probably because you want to form a small business in the United States.
However, you need guidance on which legal structure to choose for your business.
It’s something that needs to be considered, takes time, and depending on the structure you choose, it can affect the control of the company, taxes, and responsibilities.
So, in this post, we will provide details on each of the structures for forming a business.
What are the main structures for forming a small business?
We will discuss four types of structures that you can choose for your business. These are:
- Sole Proprietorship.
- Limited Liability Company (LLC).
Let’s define each of them…
1. Sole Proprietorship
This structure is the most common and straightforward for a sole proprietorship because it’s a structure for a single owner.
In this case, both the business and the owner form a single entity when it comes to paying taxes.
As well as the business’s profits will be taxed as personal income.
A sole proprietorship is one of the best options for small businesses or startups because it doesn’t require a lengthy process, high costs, and you can have complete control of the company, manage it from home, and more.
These types of structures work for small business owners who work as coaches, accountants, independent lawyers, freelancers, writers, etc.
Just to clarify, for this type of structure, in case of any lawsuit or company debt, your personal assets will be used.
The risk of a sole proprietorship is that if the business starts to grow, you’ll have to hire employees, buy equipment, rent a space… and all on your own.
2. Partnership for a Small Business
A partnership works in a very similar way to the previous structure. The difference in this case is that it has two or more owners.
There are two types of partnerships:
- General partnership: where everything is shared equally.
- Limited partnership: where one partner controls the operation of the business.
If your business idea is a family idea or something you’ve planned with friends, this type of structure is ideal for your small business.
It’s necessary that the partnership arrangement has the assistance of a lawyer to make all the conditions clear. However, this type of structure doesn’t require much bureaucracy, just the most basic process.
Being made up of more than one owner makes the process of obtaining loans or financing easier compared to the previous structure, where this becomes more complicated.
3. Limited Liability Company (LLC)
An LLC is a type of structure with many benefits, especially in the case of any debt or lawsuit against the company, as in such cases, only the company is affected, but never the personal assets of the owners.
In a Limited Liability Company, owners, partners, or shareholders enjoy the great flexibility of this type of structure and certain tax benefits.
There are some costs when forming an LLC, but believe me, they are not very high, and the process is quite straightforward.
If you need help forming an LLC, Rex Legal is here to assist you. Contact us here.
Corporations are the most complex type of business structure when it comes to forming your company.
There are four types of corporations; let’s look at their differences:
C Corporation (C Corp)
This is a separate structure from its owners or shareholders. Within a C Corp, there is also protection for personal liabilities or assets.
This entity has its rights, as if it were a person. It can earn profits or losses, sue or be sued, pay taxes, transfer ownership rights through its shares, and buy and sell assets.
When it comes to taxes, corporations pay taxes on their profits, unlike the previously mentioned types of structures. In some cases, shareholders also pay taxes on the profits from their shares.
It’s worth noting that the cost of forming a C Corp is high, more so than the previous structures. Extensive records, extensive reporting, and operational processes must be maintained as well.
However, the advantage is that you can raise capital by selling your shares and with low personal financial risk for the owners.
S Corporation (S Corp)
They are called S Corps because they are found in Subchapter S of the Internal Revenue Code and it is precisely because they work for those small businesses with a single owner who want to be legally treated as a corporation and avoid double taxation.
Taxes for this type of structure are quite similar to those of the previous structures: Partnerships or partnerships.
Because the deductions, income, and tax credits of an S Corp are passed through annually to the shareholders. This means that profits are taxed at the shareholder level, not at the corporate level.
The advantages of an S Corp include:
- Income from capital gains or exemptions is passed directly to shareholders.
- Tax credits are passed on proportionally to the partners.
- If the company incurs losses, these are passed directly to its shareholders and can be used to reduce income taxes.
B Corporation (B Corp)
A B Corp is a for-profit company with the goal of creating social, environmental, and economic value for all people within the company: employees, customers, and shareholders.
The advantages of a B Corp include:
- Attracts many investors.
- Gets more exposure.
- Generates many opportunities.
These types of structures are formed differently from C Corps in terms of responsibilities and purposes. But when it comes to taxes, they are taxed in a very similar manner.
Non-profit Corporation (501)(C)(3) Organization or Non-profit)
Non-profit corporations are those that perform charitable work, such as education, science, religion, and more.
Since the aim of these companies is non-profit, they may be exempt from state or federal taxes on their earnings.
They are organized similarly to C Corps, although they have certain rules for company earnings:
Profits cannot be distributed to the members or owners of the company, nor can they be used to support political campaigns.
Now, you just need to decide which type of structure best suits your small business
We are Rex Legal, and remember that we will be happy to help you form your company in the USA.
So if you need our services, just contact us.