How to Choose a Business Structure in the USA

Are you a business owner or an entrepreneur eager to launch a new venture? Are you uncertain about which type of business structure is most suitable for your needs?

There’s no need to worry. This discussion is tailored specifically for you.

Selecting the right business structure is crucial as it safeguards the future and success of your business. Indeed, the decision on business structure is among the first and most significant choices you will face when setting up your company.

In this blog, we will explore the significance of business structure, its various forms, the distinctions among these forms, and how to select the appropriate business structure for your enterprise. Before making your decision, please review the comprehensive information provided below to ensure your business’s success.

What Is a Business Structure? #

A business structure defines the legal and functional framework of a business entity. It shapes the ownership, management, organization, operations, and taxation of a business. A business structure provides specific directions on how your business will operate under legal frameworks.

The business structure essentially forms your company’s identity in the marketplace. The choice of structure will influence how your company is perceived, how it functions, who will manage and operate it, how it will be taxed once established, and how investments and liabilities will be handled.

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

The term “legal structure” pertains to a corporate framework that complies with legal statutes. It delineates a business’s rights, responsibilities, and obligations. The legal structure of a business determines how it is recognized by the government.

When you opt for a business structure like an LLC, you are choosing a legal structure that aligns with governmental regulations. The business structure encompasses not just the legal framework but also includes the operational and managerial aspects of the business.

Business Structure Can Be Determined by Some Facts #

Did you know that selecting a structure for your business will influence whether your company thrives or fails? Therefore, it’s important to choose a structure that aligns with your business needs.

The legal structure of your business will affect various aspects such as your tax rates, management and paperwork requirements, fundraising capabilities, and more. Below are some factors that a business structure will 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 aim to scale your business rapidly? For many, their company is akin to a child. They devote time, capital, and effort to nurturing and developing their business. Thus, selecting the right business structure is essential to invest extra effort into your company’s growth. Let’s consider some reasons why choosing the right business structure is crucial.

Tax Implications

Selecting a business structure allows you to determine the taxation method that best suits your business. Understanding the tax benefits and drawbacks of each structure can optimize your business’s tax efficiency. Different structures are subject to various tax regulations and rates.

For example, sole proprietorships, S Corps, and partnerships generally utilize pass-through taxation, where business profits and losses are transferred to the owners’ income tax. Conversely, C Corps and single-member LLCs are taxed separately from the owner’s income. Multi-member LLCs also utilize pass-through taxation.

Liability Protection

Various business structures offer different levels of liability protection. For instance, LLCs can safeguard your assets in case of legal action. Conversely, in a sole proprietorship or partnership, the business owners face unlimited personal liability, meaning their assets could be jeopardized if the business faces legal challenges. Thus, choosing a business structure can provide either security or risk regarding your assets.

Ownership and Management

Selecting a business structure can define how ownership is distributed among shareholders and how the business is managed. For example, multi-member LLCs allow multiple individuals to share ownership and management responsibilities. Choosing the appropriate structure ensures that the arrangements for ownership and control are aligned with your business objectives.

Fundraising

The business structure you choose can also facilitate raising capital for your venture. If you establish a corporation, for instance, you can issue stock shares to investors in exchange for capital contributions, an option not available with a sole proprietorship.

Hierarchy

Choosing a certain business structure can help prevent your company from closing. For instance, if you form a corporation, and an owner transfers shares, exits the company, or if a founder passes away, the company can take appropriate measures to maintain the corporation.

Planning for the Future

The selection of a business structure can also influence your company’s future. Depending on the country, selecting the preferred business structure can provide numerous benefits for your enterprise. If you choose an LLC in the US, you can ensure business security here.

After analyzing the above information, you should now understand that selecting the ideal business structure can critically affect your company’s success or failure. Consider regional and market diversities before choosing your business structure.

What Are the 4 Types of Business Structures? #

Do you wish to structure your business effectively to maximize benefits? If so, you should establish your company according to a specific business structure. Although various business structures are available, the four main types are commonly chosen for their advantages.

They are:

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

We will now describe these four primary business structures for your understanding.

1. Sole Proprietorship

A sole proprietorship, also known as a sole trader, is when a single individual owns and operates a business. This is the simplest and least expensive type of business structure. As a sole proprietor, you are responsible for all the company’s profits and debts. You have the flexibility to run your business from your home and maintain complete authority as the sole manager and decision-maker.

For Whom Is a Sole Proprietorship?

If you are planning to be self-employed and operate a small business, a sole proprietorship might be suitable for you. Many freelancers opt for this structure due to its minimal formalities and complete control over business operations. Additionally, small businesses such as retail stores, online businesses, and home-based businesses often choose sole proprietorship due to limited resources and operations.

How Do You Form a Sole Proprietorship?

Forming a sole proprietorship is straightforward with minimal formalities, and no formal registration is necessary. However, depending on your industry and location, certain licenses and permits may be required. These can be obtained from the local secretary of state’s office website. To establish a sole proprietorship, you will need to complete several requirements:

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

Advantages of the Sole Proprietorship

• Easy Setup: Initiating a sole proprietorship is simpler than other business structures. Only a few forms and minimal fees are necessary to start a sole proprietorship business.
  
  
• Low Cost: Although costs can vary by country or state, starting a sole proprietorship typically requires minimal investment. The ongoing costs of maintaining a sole proprietorship, including license fees and business taxes, are also low.
  
  
• Complete Control: As a sole proprietor, you have full control over your business. You are free to make all decisions independently without needing to consult others.
  
  
• Flexibility: Being the sole owner of your business, you have the liberty to adapt and modify your business as you see fit. For example, you can change the business name, hire employees, or even alter the business structure.
  
  
• Tax Facility: A sole proprietorship benefits from pass-through taxation, meaning all business profits and losses are transferred to the business owner’s personal income tax. This allows you to offset business losses against other income you have earned. Additionally, you face fewer tax filings in a sole proprietorship.
  
  
• Hire Employees: Forming a sole proprietorship does not preclude you from hiring employees. While this may complicate taxation, it remains a viable option.
  
  
  
• Privacy: Sole proprietorships are not required to file annual reports with the government, which means your company’s details are not publicly disclosed. This enhances privacy for your business.
  
  
• Easy Exit: Starting and ending a sole proprietorship is straightforward. As the sole owner, you can close your business whenever you choose.

Some Considerations of a Sole Proprietorship

• Liability Risks: This represents a significant risk for sole proprietorship owners. As the sole owner, you bear full responsibility for all your business debts. Since you and your business are considered a single entity, your personal assets may be at risk if your company faces legal issues.
  
  
• Financing Difficulty: As a sole proprietor, you cannot issue stock or sell shares, making it challenging to enhance your business’s credibility.
  
  
• Limited Expertise: As the sole member of your company, you must manage various responsibilities, including operations, marketing, finance, etc. This can reduce your business’s efficiency.
  
  
• Difficulty Obtaining a Loan: Sole proprietorship owners often face challenges when seeking loans. Investors and banks are less likely to support sole proprietors due to reduced credibility and the burden of responsibility.

2. Partnership

A partnership business structure is similar to a sole proprietorship but involves two or more individuals co-owning and operating the business. The partners equally share responsibility for tax returns, profits, and losses. Each partner signs a contract to confirm their contribution to the partnership.

Types of Partnerships

Four common types of partnerships can be formed.

• General Partnership: In a general partnership, each partner has an equal say in how the company is managed.
  
  
• Limited Partnership: A limited partnership includes at least one general partner and one or more limited partners. General partners bear unlimited personal liability and are responsible for the business. Conversely, limited partners contribute capital but have limited liability and do not partake in daily operations.
  
  
• Limited Liability Partnership (LLP): A limited liability partnership blends elements of a partnership and a corporation, offering limited personal liability protection to all partners involved in the business.
  
  
• Joint Venture: A joint venture is established to achieve a specific goal. In a joint venture, two or more business partners pool their resources and expertise to accomplish a business objective.

For Whom Is a Partnership?

Do you intend to start a business with a friend, family member, or a trusted individual as part of a startup? Then, a partnership might be the ideal choice for you, allowing you to share control of your business with your partner.

Imagine you wish to open a bakery, and your friend excels in baking muffins, cupcakes, etc. Now, you are establishing a partnership where you manage the bakery, and your friend supplies the cakes. Partnerships are also straightforward to form, requiring minimal registration. You simply need to sign an operating agreement with your partners. For entrepreneurs and small business owners, partnerships can be quite beneficial.

How Do You Form a Partnership?

Starting a partnership involves a few simple steps. Here is a basic guide for you.

• Choose your partners.
• Determine your partnership type.
• Select a business name.
• Create a partnership agreement.
• Register your partnership with the government office.
• Obtain required permits and licenses.
• Obtain an EIN.
• Comply with tax obligations.

Advantages of the Partnership

• Easy Startup: Initiating a partnership does not require extensive paperwork. You can easily establish a partnership with minimal regulations through your state government.
  
  
• Raising Capital: Having multiple partners makes it easier to gather capital during the early stages. Additionally, if your business incurs losses, these can be more easily managed since the partners can cover them.
  
  
• Responsibility Sharing: Due to the signed agreement, you can distribute business responsibilities among your partners.
  
  
• Finance Sharing: Sharing both business profits and losses with your partners can also reduce your tax burden. Having a business partner can also enhance your ability to secure loans, as banks and investors are more likely to support businesses with multiple credit holders and potential partners.
  
  
• Ease of Management: Partners can divide day-to-day tasks and significant business decisions (except in limited partnerships). This can improve business efficiency and productivity and reduce the stress of managing the business alone.

Some Considerations of Partnership

• Liability Risks: Due to the pass-through taxation system, business losses affect the partners in the partnership. This exposes personal assets to risk, especially if your company faces legal challenges.
  
  
• Decision-making Conflicts: While the partnership agreement clarifies that all partners are equally responsible for decision-making, disagreements and conflicts can sometimes arise among partners.
  
  
• Risk of Partner Betrayal: In a partnership, there is always the potential for betrayal by your partners. This has been a common issue in partnerships over the years, making a partnership agreement essential to prevent conflicts.

3. Corporation

The corporate business model represents a complex framework, incorporating various forms such as S Corp, C Corp, B Corp, non-profit corporations, and closed corporations among others. Should you be considering establishing a large-scale company, opting for a corporate structure may be advantageous for you. Corporations are typically more structured, employ numerous staff, aim to offer shares to the public, anticipate rapid growth, and involve several investors.

Corporations operate as distinct legal entities, separate from their owners. Most shareholders, also known as stockholders, provide funding to the corporation in return for ownership stakes, or stocks. This type of business structure demands adherence to a more stringent set of rules and regulations, which, in turn, offers numerous advantages to its shareholders.

Business Structure Types of Corporations

There are several corporate structures, with S Corp, C Corp, and B Corp being the most popular. Here is a brief overview:

• C Corp: A C Corp is a distinct entity from its shareholders and offers them protection from liability. Moreover, it subjects you to double taxation.
  
  
• S Corp: S Corp is somewhat similar to C Corp but allows for pass-through taxation.
  
  
• B Corp: Also known as a Benefit Corporation, a B Corp is a for-profit entity that may suit your needs if your company pursues a social mission.

Who Is a Corporation for?

The intricacies of a corporation, with its various types tailored for different business requirements, make it suitable for small business owners (S-corps), entrepreneurs, investors, and non-profit organizations. For larger enterprises, a corporate form is ideal. Moreover, if you are an investor looking to merely exchange stocks, then investing in a corporation could be beneficial for you.

How Do You Form a Corporation?

To establish a corporation or become a shareholder in one, you can follow the steps listed below:

• Choose a business name.
• File articles of incorporation with your state authority.
• Create corporate bylaws about your corporation.
• Obtain necessary permits and licenses.
• EIN.
• Adhere to other regulations like taxation, annual reports, etc.

Advantages of the Corporation

The benefits vary depending on the type of corporation you choose, as S Corp and C Corp offer different facilities. To understand these benefits, consider the following list:

• Liability Protection: The primary benefit of a corporation is the substantial liability protection it offers to shareholders, safeguarding their personal assets since business and personal finances are separate. A corporation may face lawsuits, but your personal assets remain protected.
  
  
• Capital: It is easier to raise capital in a corporation due to the presence of multiple investors and shareholders willing to invest.
  
  
• Secured Finance: Being a formal business entity, a corporation has enhanced capabilities to secure financing, particularly through the issuance of new shares.
  
  
• Tax Flexibility: Although subject to double taxation, the owners receive various benefits such as tax deductions, retirement plans, health insurance, and life insurance.
  
  
• Continuity: Since a corporation exists separately from its owner, the demise or transfer of shares by one shareholder does not impact the corporation’s existence.

Some Considerations of Corporation

• Double Taxation: Double taxation only affects C corporations and generally does not greatly impact the business.
  
  
• Costly to Start: Establishing and maintaining a corporation requires a significant financial investment.
  
  
• More Formalities and Regulations: Operating a corporation necessitates numerous formalities like maintaining detailed records, conducting annual meetings of directors and shareholders, etc., and complying with extensive state laws.

4. Limited Liability Company (LLC)

An LLC, or limited liability company, blends aspects of partnerships and corporations, offering the flexibility of a partnership with the liability protection of a corporation. In an LLC with more than one member, profits and taxes are shared among the owners. This structure is ideal for running a lower-risk business as either a resident or non-resident and is also suitable for single-member LLCs.

Types of LLCs

There are primarily two types of LLCs:

• Single-Member LLC: This is suited for individuals running their business alone, such as small business owners, freelancers, or solo entrepreneurs.
  
  
• Multi-Member LLC: This is appropriate if your LLC includes more than one member or owner, where responsibilities, profits, and taxes are distributed among the members.

Who Is an LLC for?

LLCs are perfect for medium-scale, medium-risk businesses. If you are a small business owner or freelancer seeking comprehensive protection for your investments and assets, forming an LLC is a solid choice.

Additionally, if you operate in industries prone to civil lawsuits, such as manufacturing, construction, or healthcare, an LLC can shield you from potential financial losses or liabilities.

How Do You Form an LLC?

Establishing an LLC is straightforward for both residents and non-residents; simply follow these requirements:

• Choose a unique business name by searching for a DBA.
• File articles of organization with your state office.
• Create an operating agreement if forming a multi-member LLC.
• Secure necessary permits and licenses.
• EIN.
• Comply with other state requirements such as tax returns, etc.

Advantages of the LLC

• Limited Liability Protection: The most significant advantage of an LLC is the liability protection it provides its owners, whether it is a single-member or multi-member LLC. The company’s debts, liabilities, and legal obligations will not affect the personal assets of the owners and members.
  
  
• Flexibility to Convert Business Structure: An LLC allows its members the flexibility to convert the business structure from an LLC to a corporation as needed. Many businesses begin as LLCs and later transition to corporations for various business reasons.
  
  
• Flexibility to Add Partners: Adding a partner to an LLC is straightforward, and each member’s liability remains protected under the agreement.
  
  
• Minimal Rules and Requirements: LLCs typically have fewer formalities and ongoing compliance requirements compared to corporations. There are fewer meetings, agreements, rules, and shareholder responsibilities in an LLC.
  
  
• Tax Flexibility: LLCs benefit from pass-through taxation, where profits are distributed directly to members, and each is taxed only on their share. Additionally, single-member LLC owners can claim the self-employed tax credit.
  
  
• Business Credibility: Adding partners to an LLC can enhance its reputation, facilitate capital raising, and attract investors.

Some Considerations of LLCs

• More Formalities for a Startup: While LLCs offer numerous benefits, starting one requires adherence to various state rules.
  
  
• Costs for Renewal: In some countries or states, LLCs require annual renewal, which can be costly for the owner.
  
  
• Maintenance Formalities and Paperwork: Compliance with state laws demands maintaining certain formalities like annual reports and other documents. Failure to submit your annual report on time can lead to additional late fees.

Business Structure Example

Here are some renowned 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

Factors to Consider When Selecting a Business Structure #

Are you looking to establish a thriving business in the US? Before initiating a business in the US or elsewhere, selecting an appropriate business structure tailored to your specific needs is essential. Below, we have outlined several key considerations for choosing your business structure. Have a look.

• Control and Responsibility: Are you inclined to retain complete control of your business, or are you open to sharing the responsibilities of your business by incorporating partners? Depending on your needs, various business structures are available. Opting for a sole proprietorship allows you to maintain full control over your business operations. However, other business structures, while reducing your burden of responsibility, do not offer the same level of control.
  
  
• Liability Protection: Not all types of business structures provide liability protection. Thus, if protecting your assets is a priority, selecting an LLC or a corporation might be the right choice for you.
  
  
• Complexity: While LLCs and corporations do provide liability protection, setting up these types of organizations can be more complex. Conversely, establishing sole proprietorships and partnerships is generally simpler.
  
  
• Taxation: The taxation approach of your company will be influenced by the business structure you choose. Therefore, it is advisable to select your business structure carefully to minimize complexities associated with taxation.
  
  
• Capital and Investors: The ability to raise capital and attract investors is crucial for any business. Corporations and LLCs are particularly conducive to these ends.
  
  
• Business Goals and Future Growth: Your long-term plans and business objectives should guide your choice of business structure. Certain structures, like multi-member LLCs and corporations, are more adaptable for scaling, enticing investors, or eventually going public.

Which Business Structure Is Most Suitable in the US, and Why? #

The most suitable business structure in the US varies based on several factors, such as the size of the business, the need for liability protection, tax considerations, operational methods, and expansion ambitions. Here, we provide an overview of several fitting business structures derived from our research.

• Limited Liability Company (LLC): It is often the preferred choice for many small to medium-sized enterprises in the US, particularly among non-residents. Business owners and entrepreneurs favor LLCs due to the tax flexibility, liability protection, and enhanced business credibility they offer. Additionally, LLCs are relatively straightforward to establish and maintain.
  
  
• S Corporation: This structure is popular among medium-sized business owners in the US, known for its liability protection and pass-through taxation benefits, which are advantageous for small businesses.
  
  
• C Corporation: Offering the traditional benefits, including robust shareholder liability protection and potential for growth, the C Corporation allows for the issuance of unlimited stocks, which can be highly profitable. Numerous large companies in the US choose to organize as C Corps and achieve success.
  
  
• Sole Proprietorship: Chosen by many freelancers for its simplicity and complete control over business operations, this structure also helps in avoiding taxation complexities. It is predominantly used by domestic businesses to reduce operational complexities.
  
  
• Partnership: This is an attractive option for freelancers who wish to retain control of their business while simplifying processes.

While we have discussed some prevalent business structures, your choice should align with your personal preferences and requirements. If you are uncertain about the best option for you, consider seeking our guidance.

How Will Steady Formation Assist You in Selecting a Business Structure? #

Steady Formation, recognized for its commendable services in business formation across the US, offers expert advice tailored to the potential of your business and your specific requirements in the US. They also assist with the various formalities involved in establishing your business at a competitive price.

FAQs #

Q1: What is the most favored structure for small businesses?

Answer: The choice of structure for a small business may vary depending on several factors. For residents of a country, forming a sole proprietorship might be simpler, whereas most non-residents in the US opt for LLCs or S corporations.

Q2: Is it possible to change my business structure?

Answer: Yes, you can modify your business structure in compliance with governmental regulations, which include completing necessary documentation and fulfilling fee requirements.

Bottom Line #

At this juncture, we hope you have acquired a clearer understanding of the significance of business structures and how they can contribute to successful business ownership. Therefore, rather than further deliberation, prepare to take the necessary steps towards starting your business and achieving success swiftly.

For additional information, feel free to reach out to Steady Formation.