How to Choose a US Business Structure

What Is a Business Structure?

A business structure indicates the legal and operational representation of a business organization. It determines how a business is owned, managed, organized, operated, and taxed. A business structure is specific guidance about how your business will be run under the law.

Your business structure is the identity of your company in the market. The structure’s choice will determine how you want your company to be represented, how you want it to operate and by how many people, how the taxes will apply once the setup is ready, and how the investments and liabilities will be determined.

What Is Legal Structure, and How Does It Connect to Business Structure? 

The term “legal structure” refers to a corporate structure that follows the rules and laws. It defines the rights, responsibilities, and obligations of a business. The legal business structure determines how the government recognizes a business. 

When you choose a business structure such as an LLC, that means you choose a legal structure according to government law. The business structure not only contains the legal structure but also includes additional operational and managerial aspects of the business.

Business Structure Can Determine Some Facts

Do you know deciding on a structure for your business will determine your company’s future success or failure? So, choose the one that best suits your business needs. 

Your business’s legal structure determines your tax rates, management and paperwork requirements, fundraising abilities, and more. Some facts are below that a business structure can determine:

• How much tax do you pay?
• Whether you hire employees?
• Whether you have a partner or investor in your company?
• Whether you change a shareholder of the business?
• Your potential personal liability.
• How much control do you have over the company?
• Ongoing costs for your business.
• Amount of required paperwork for your business.
• Flexibility to change your business structure.
• Flexibility to have the chance of company dissolution.
• Liability protection on your business.
• Flexibility of taxation.
• Increase the business’s credibility.
• Ability to raise capital funds.
• Business goals and marketing plans.
• The licenses you require.

Why Is Business Structure Important to Choose?

Do you desire to expand your business quickly? For everyone, their company is childlike. They invest their time, capital, and hard work to build a company. So, you must choose an appropriate business structure to put in extra effort for your company’s betterment. Now, we will discuss some facts to decide why choosing a business structure is important.

Tax Implications

Choosing a business structure can help you select the taxation process you want to use for your business. Understanding each structure’s tax advantages and disadvantages can help optimize your business’s tax efficiency. Each structure is subject to different tax rules and rates.

For example, sole proprietorships, S corp, and partnerships are typically based on pass-through taxation, where business profits and losses pass through to the owners’ personal income tax. On the other hand, C corp and single-member LLCs taxation is separate from the owner’s personal income. Multi-member LLCs also follow pass-through taxation.

Liability Protection

Different business structures offer diverse levels of liability protection. For example, LLC structures can protect your personal assets in the event of a lawsuit. On the other hand, in a sole proprietorship or partnership, the business owners have unlimited personal liability, meaning their personal assets can be at risk if the business is sued. So, choosing a business structure can provide you with the security or risk of your assets.

Ownership and Management

Choosing a business structure can determine how the ownership will be divided between the shareholders. And also how the management will operate the company. For instance, multi-member LLCs allow multiple owners to share ownership and management responsibilities. Picking the proper structure ensures that the ownership and control arrangements align with your business goals.

Fundraising

Your company’s business structure can also help you to raise funds for your business. Suppose you build a corporation; as a benefit, you can issue stock shares to investors in exchange for capital contributions. But you can’t have the facility if you make a sole proprietorship.

Hierarchy

If you choose a specific business, you can have the chance to prevent your business from closing. Suppose you formed a corporation, but when an owner transfers shares or exits the company, or a founder dies, the company can take the proper steps to protect the corporation. 

Planning for the Future

The choice of business structure can also determine the future of your business. According to the country, choosing the preferred business structure can offer several benefits for your company. If you choose an LLC in the US, you can have business security here. 

Analyzing the above facts, you can now realise that choosing the perfect business structure can determine your company’s success or failure. Consider the region and market diversity before selecting your business structure.

What Are the 4 Types of Business Structures?

Do you want to organize your business correctly so that it can reap benefits? Then, you should build your company according to a business structure. Although several business structures are available, the four main ones are mostly used for their advantages.

They are: 

• Sole Proprietorship.
• Partnership.
• Corporation.
• Limited Liability Company.

We will describe to you those four main business structures for your convenience.

Sole Proprietorship

A sole proprietorship, also called a sole trader, is when a person is the sole owner of a business. It is the simplest and most inexpensive business structure of all. When you form a sole proprietorship, you are responsible for all of the company’s profits and debts. You can run your business from home, and you are the only boss of your business and can control it. 

For Whom Is a Sole Proprietorship? 

If you plan to be self-employed and run a small business, a sole proprietorship may be for you. Many freelancers choose to be sole proprietors because they have minimal formalities and full control of their business. Also, some small businesses, like retail stores, online businesses, and home-based businesses, have limited resources and operations.

How Do You Form a Sole Proprietorship? 

A sole proprietorship is the easiest business structure with fewer formalities, and no official registration action is required on your part. However, depending on your industry and location, there will likely be licensing and permits to jump through. You can get them from the local secretary of state’s office website. To form a sole proprietorship, you will need to complete some requirements:

• A business name
• Obtain required permits and licenses
• EIN
• Comply with Tax Obligations

Advantages of the Sole Proprietorship

• Easy Setup: A sole proprietorship is easier to start than other business structures. There are some minimal rules (forms and minimal fees) to follow when you are going to start a sole proprietorship business. 
• Low Cost: Although costs could vary by country or state you want to start, a sole proprietorship requires a minimal cost to start a business. And maintaining a sole proprietorship is also less costly, including license fees and business taxes. 
• Complete Control: You fully control your company as a sole proprietorship. You can make all the decisions without consulting anyone.
• Flexibility: As the only owner of your business, you have the freedom to adapt and modify your business as you prefer. For instance, you can change the business name, hire employees, or even change the business structure. 
• Tax Facility: A sole proprietorship is based on pass-through taxation. That means all the business profits and losses pass to the business owner’s personal income tax. As a benefit, you can use business losses to balance out the income you earned. Also, you get fewer tax returns in a sole proprietorship. 
• Hire Employees: If you form a sole proprietorship, it doesn’t mean you can’t hire employees. You can hire employees if you want, but in that case, the taxation can be complex. 
• Privacy: Filing an annual report to the government is not mandatory for a sole proprietorship, meaning the details about your company will not be publicly disclosed. And it leads to privacy for your business. 
• Easy Exit: Forming a sole proprietorship is easy, as is ending one. As a sole proprietor, you can close your business whenever you want.

Some Considerations of a Sole Proprietorship 

• Liability Risks: This is a crucial risk for a sole proprietorship owner. Because you are the single owner of your company, you are fully responsible for all your business debts. Because you and your business operate as a single entity, your personal assets may be at risk if the law sues your company.
• Financing Difficulty: As a sole proprietor, you can’t issue stock and sell stocks, so it would be challenging to increase business credibility. 
• Limited Expertise: As a single member of your company, you must handle many responsibilities, including operations, marketing, finance, etc., which can cause less efficiency to your business. 
• Difficulty Obtaining a Loan: Sole proprietorship business owners face challenges getting a loan. Because investors and banks don’t get attracted to sole proprietors due to less credibility and the burden of responsibility.

Partnership

A partnership business structure is kind of similar to a sole proprietorship, except that a partnership is owned and operated by two or more people. The partners share all the responsibility for tax returns, profits, and losses equally. Every partner signs an agreement (contract) to confirm their contribution to a partnership.

Types of Partnerships

Four common types of partnerships can be formed. 

1. General Partnership: In a general partnership, every partner has an equal opinion on how the company is run.
2. Limited Partnership: A limited partnership includes at least one general partner and one or more limited partners. General partners have unlimited personal liability and responsibility toward the business. On the other hand, limited partners only contribute capital to the partnership but have limited liability and do not contribute to the day-to-day operations. 
3. Limited Liability Partnership (LLP): A limited liability partnership combines a partnership and a corporation. It offers limited personal liability protection to all partners in the business. 
4. Joint Venture: A joint venture is formed to achieve a specific goal. In a joint venture, two or more business partners combine their resources and expertise to achieve a business goal.

For Whom Is a Partnership?  

Do you want to start your business with a friend or family member, or are you an entrepreneur who wants to form a startup with a trustworthy person? Then, a partnership would be the best choice for you because you could benefit from controlling your business with your business partner. 

Suppose you want to open a bakery, and your friend makes delicious muffins, cupcakes, etc. Now, you are building a partnership business where you handle the bakery, and your friend supplies you with the cakes. A partnership is also easy to form, and the registration process is minimal. You just have to sign an operating agreement with your partners. For entrepreneurs and small business owners, a partnership would be profitable.

How Do You Form a Partnership? 

You have to complete fewer steps to start a partnership. Here is a simple guide for you.

• Choose your partners.
• Determine your partnership type.
• Select a business name.
• Make a partnership agreement.
• Register your partnership business with the government office.
• Obtain required permits and licenses.
• Obtain EIN.
• Comply with Tax Obligations.

Advantages of the Partnership

• Easy Startup: Starting a partnership doesn’t have to involve a lot of paperwork. You can easily form a partnership with fewer rules with your state government. 
• Raising Capital: If you have multiple partners, it would be easy to collect the capital in the early stages. Also, if you face business losses, you can easily cope with them because partners can cover them. 
• Responsibility Sharing: Because of the agreement signing, you can share the business responsibility with your partners.
• Finance Sharing: It’s a benefit that you can share both business profits and losses with your partners. Also, having a business partner can reduce your tax burden.
• Get a Loan:  When you get a partner in your business, it gives you more potential to get a loan from the bank or investors. Bankers consider two credit holders rather than one. Also, investors feel more confident in your business when they see more potential partners with you. 
• Ease of Management: Partners can share day-to-day tasks and significant business decisions (except for limited partnerships). It helps boost business efficiency and productivity and lowers the stress of managing a business.

Some Considerations of Partnership

• Liability Risks: Because of the pass-through taxation system, business losses pass through the partners in the partnership. And it has the risk of losing personal assets. Also, you and your partners can risk liability when your company gets sued. 
• Decision-making Confusion: While you and your partners signed an agreement in partnership, it is clear that all the partners are equally responsible for every decision-making. For that reason, sometimes disagreements and conflicts occur among partners. 
• Chance of Partner Betrayal: In partnership, there might be a possibility of betrayal by your partners. For years, people have faced this kind of situation in partnership. That’s why a partnership agreement is strongly recommended to avoid conflicts.

Corporation

A corporation business structure is a complicated business structure with several types, including S Corp, C Corp, B Corp, non-profit corporations, closed corporations, etc. If you want to form a large company, then a corporation would be a better choice for you. A corporation is more established, has many employees, plans to sell company stock, will expand rapidly, and has many investors.

A corporation is a separate and distinct legal entity from its owners. The majority of shareholders, also known as stockholders, contribute capital to the corporation in exchange for ownership shares, or stock. In this business structure, you must follow more rules and regulations, providing several benefits to the shareholders.

Business Structure Types of Corporations 

The corporation has various types of structures. Mostly, people prefer S Corp, C Corp, and B Corp. So we listed that below-

1. C Corp: C Corp is a separate entity from its shareholders, and it provides them liability protection.

Also, in a C Corp, you have to follow double taxation. 

2. S Corp: S Corp is kind of similar to C Corp, but it offers pass-through taxation.
3. B Corp: B Corporation is a for-profit business entity, commonly known as a Benefit Corporation.

Does your company have a social mission? Then it would be best if you formed a B corp.

Who Is a Corporation for? 

We know that a corporation is a complicated thing with different kinds for different business needs. A corporation suits small business owners (S-corps), entrepreneurs, investors, and non-profit organizations. For a larger company, a corporation would be a great choice. Also, if you, as an investor, just want to invest in the exchange of stocks, then a corporation would be profitable for you. 

How Do You Form a Corporation? 

To form a corporation or to be a shareholder in a corporation, you can check out the below list about how a corporation is assembled.

• Pick a business name.
• File articles (information and regulations about the corporation) of incorporation with your state authority.
• Develop corporate bylaws (operating process) about your corporation.
• Collect necessary permits and licenses.
• EIN.
• Comply with other regulations like taxation, annual reports, etc.

Advantages of the Corporation

The advantages depend on which corporation you choose. Because S Corp and S Corp provide different types of facilities. To get an idea of those benefits, you can go through the below list once.

• Liability Protection: The most important benefit of a corporation is that it provides the shareholders with the ultimate liability protection for their personal assets. Shareholders get this privilege because business finances are separate from company finances. A corporation can get sued as a company, but you are safe from losing your assets. 
• Capital: Raising capital is much easier in a corporation. Because it has multiple investors and shareholders to invest in the business.  
• Secured Finance: As a formal business entity, a corporation has more potential to achieve success. Because a corporation can raise capital by issuing new shares.
• Tax Flexibility: Although double taxation is applicable in a corporation, the owner gets several benefits like tax deductions, retirement plans, health insurance, and life insurance. 
• Continuity: We know that a corporation is a separate entity from its owner. As a result, the passing or transfer of another shareholder has no impact on corporations. 

Some Considerations of Corporation

• Double Taxation: Not all types of corporations have to pay double taxation; only C corporations face double taxation. However, it won’t have a big effect on the business. 
• Costly to Start: To set up and maintain a corporation, you have to spend a large amount. 
• More Formalities and Regulations: To maintain a corporation, you have to complete many formalities, like maintaining detailed corporate records, holding annual meetings of directors and shareholders, etc. Also, you have to obey more state laws. 

Limited Liability Company (LLC)

A limited liability company, better known as an LLC, is a combination of both a partnership and a corporation. This means it allows for the flexibility of a partnership with liability protection like a corporation. Even profit and taxes are divided among its owners if you have more than one member in your LLC business. To run a less risky business, you can form an LLC as a resident or non-resident. You can also form a single-member LLC.

Types of LLCs

Two common types of LLCs are mostly formed.

1. Single-Member LLC: In a single-member LLC, there will be only one person who single-handedly runs the business. It will be best for you if you are a small business owner, a freelancer, or a solo entrepreneur.
2. Multi-Member LLC: If you have more than one member or owner in your LLC, it would be a multi-member LLC. The responsibility, profits, and taxes would be distributed among the LLC members in a multi-member LLC.

Who Is an LLC for? 

LLC is a medium-scale and medium-risk business. Are you a small business owner or a freelancer? Do you want complete protection of your investments and assets? Then, forming an LLC would be a great option for you. 

On the same note, if you work in a field where a high risk of civil lawsuits is common, like manufacturing, building, or healthcare, an LLC could protect you from any possible loss or liability.

How Do You Form an LLC? 

Forming an LLC is easy for both residents and non-residents; you just need to follow some requirements.

• Select a unique business name( by searching DBA)
• File articles of organization with your state office
• Make an operating agreement if you form a multi-member LLC
• Collect necessary permits and license
• EIN
• Follow the other state requirements like tax returns, etc.

Advantages of the LLC

• Limited Liability Protection: One of the most beneficial advantages of an LLC is that it offers liability protection to its owner, whether you form a single-member LLC or a multi-member LLC. The debts, liabilities, and legal obligations of the LLC will never hamper the owner’s and member’s personal assets.
• Flexibility to Convert Business Structure: An LLC offers the member the flexibility to convert the business structure from LLC to corporation whenever the member wants. Several companies started out as LLCs; later, they moved to corporations for business purposes.
• Flexibility to Add Partners: In an LLC, you can easily add a member to your company. And it protects each member’s liability. You just need to make an agreement while taking on a partner in your LLC company. 
• Minimal Rules and Requirements: Compared to corporations, LLCs generally have fewer formalities and ongoing compliance requirements. There are no more meetings, agreements, rules, or responsibilities with shareholders in an LLC. 
• Tax Flexibility: LLCs follow pass-through taxation, meaning profits pass through to the members. But in an LLC, you’ll only be taxed on your share of the profits. Also, if you are a single-member LLC, you can claim the self-employed tax credit. 
• Business Credibility: In an LLC, you can add multiple partners, which leads to boosting reputation, raising capital, finding investors, etc. 

Some Considerations of LLCs 

• More Formalities for a Startup: We know that LLCs offer several benefits with extra formalities. To start an LLC, you need to comply with several state rules. 
• Costs for Renewal: LLCs require annual renewal in some countries or states. The renewal fees could be a burden for the LLC owner. 
• Maintenance Formalities and Paperwork:  To comply with state laws, you must maintain some formalities like annual reports and other documents. Failure to submit your annual report can result in a further late fee. 

Business Structure Example

Some famous examples of the four business structures.

Sole Proprietorship: 

• The Walt Disney Company
• eBay
• JCPenney
• Walmart
• Marriott Hotels

Partnership: 

• Google
• Warner Bros.
• Hewlett-Packard
• Microsoft
• Ben & Jerry’s
• Twitter

Corporation:

• Apple Inc.
• Amazon
• The Coca-Cola Company
• Domino’s Pizza
• JPMorgan Chase

LLC:

• Pepsi-Cola
• Sony
• Nike
• BuzzFeed, Inc.
• Hertz Rent-a-Car
• IBM

Key Differences Between Business Structures