Different Corporate Structures in the USA: A Complete Overview

Sakshi Sharda

10 Sep, 2022

The Registration of Different Corporate Structures in the USA is a very easy process. Registration can be done through an online or offline process. The person who is applying for Registration of Corporate Structures in the USA is required to follow the prescribed guidelines by each state.

Any individual, whether foreign national or not, can go for Registration of Different Corporate Structures in the USA. Whenever any individual starts a new business, there are necessary steps that are to be taken. The necessary steps includes choosing the correct Corporate Structure as one of the important steps.

The kind of Corporate Structure has a direct impact on the way how the Different Corporate Structures in the USA will be taxed. In the article, we will discuss in detail the complete overview of the Different Corporate Structures in the USA.

What are Corporate Structures in the USA?

Corporate Structures refers to how the organization of a business is done to accomplish its aimed objectives. The Corporate Structure of business is fundamental as it determines the control, ownership, and authority of the new organization set up by an individual. In a Corporation, the characteristics mentioned earlier are represented by three groups, the directors, shareholders, and officers.

The ownership of the organization belongs to the shareholders. The control of the organization is exercised by the Board of Directors on behalf of all the shareholders. The authority of the day-to-day operations of the organization is vested in the officers.

Each state has its own laws, rules, regulations, and requirements for Different Corporate Structures in the USA. All the officers have to work in the place where the company is incorporated. In the case where the business is open in another state, the owners of businesses are required to register their businesses once again in that state.

Thus, each business that is registered is only limited to a particular state, and such a business comes under the State authority of that state only.

What are the Different Corporate Structures in the USA?

The Different Corporate Structures in the USA are as follows:

Sole Proprietorship

The owner can run any form of formal Corporate Structures in the USA after getting it registering with the authority. A single-owner simply runs Corporate Structures in the USA as a Sole Proprietorship. The owner of Sole Proprietorship is required to simply report their losses and profits. These profits and losses are to be reported on the personal tax return of the owners of Sole Proprietorship.

Out of the Different Corporate Structures in the USA, when a business is incorporated as a sole proprietorship, it allows the owners of such business to have total control over company operations and management. The types of companies that typically form Sole Proprietorships in the USA are a shop or retail businesses, and one-person consulting firms, and home-based businesses.

Corporation

There are three types of Corporations in the USA:

General Corporation or C Corporation

A C Corporation is the most commonly chosen corporate structure for the medium and large companies.

The primary characteristics of General Corporation are as follows:

• No limit on the number of shareholders;
• A separate legal entity;
• Taxation of losses and profits at the corporate level;
• With the sale of shares there is the possibility to raise capital;
• Certain tax benefits are also there;
• Transfer of shares is easy; and
• There is no obligation for the directors or shareholders to be USA residents or citizens.

Closed Corporation

A Close Corporation in the USA is similar to a C Corporation or General Corporation.

There are some of the exceptions for the following aspects in case of Closed Corporations:

• The total number of shareholders is limited to 30;
• The transfer of shares in Closed Corporations are dependent on the prior approval of the Director of the Corporation; and
• On the Stock Exchange, there is a prohibition to trade shares.

S Corporation

An S Corporation is actually a form of C Corporation which obtains special tax status from the IRS or Internal Revenue Service in the USA. The S Corporation must apply to get the special tax status within a specific time period after the incorporation of such S corporation.

When S corporation is being taxed at a corporate level, the losses and profits are transferred, for the purpose of tax, to the Shareholders as they were partners of the Corporation. At the Corporate level and the personal level, double taxation is avoided, and there is no alteration in any of the legal protection offered by a Company.

The characteristics of S Corporations are as follows:

• Assets of the shareholders are given protection;
• The Corporation allows profit and losses directly to the shareholders;
• The number of shareholders is limited to 100;
• The shareholders require USA residency or citizenship;
• There is only one class of shareholders; and
• Certain other restrictions are also applicable.

Limited Liability Company (LLC)

Limited Liability Company was introduced in the USA by the State of Wyoming in the year 1977. Now, Limited Liability Company is recognized by all the states in the USA. The LLC or Limited Liability Company is a profitable mix of a Partnership and a Corporation.

As a general rule, the losses and revenues of a Limited Liability Company or LLC are allotted to the members of the LLC, which are equivalent to the shareholders in a Corporation. The limited liability of the members avoids double taxation to the Limited Liability Company and the members of the LLC. This type of Limited Liability Company is similar to the S Corporation, but without the restrictions attached to the S Corporation.

There are two types of LLC’s or Limited Liability Companies in the USA:

• Limited Liability Company (LLC)
• Professional Limited Liability Company (PLLC)

Partnership

A Partnership is often operated when two or more owners want to participate or contribute to the daily operation of the business. The Partnership begins as soon as the business activity commences with another individual.

Even though the law does not require documentation, most partners draw up a written agreement of the Partnership to outline the responsibility of partners.

The agreement of Partnership is required to state in detail how the profits and losses are to be distributed among partners. If any written agreement is not created by the partners, then the law of Partnership laws of the state will govern the operations of the Partnership. Making the Partnership agreement will allow the partners of the Partnership an opportunity to clearly spell out the expectations that they have from each other while working.

There are three kinds of Different Partnership Corporate Structures in the USA, which are as follows:

• General Partnership
• Limited Partnership
• Joint Venture

Non-Profit Organisations

In simple terms, a Non-Profit Organization takes any profits it receives from the services, goods, donations, or sponsorships. The Non-Profit Organisations then cycles all the profits back into the organization to further achieve its goals and mission set while incorporation of the organization.

Non-Profits Organisations commonly serve communities like clubs, associations, churches, chambers of commerce, etc., or are organized around the social causes like disease research, humanitarian aid, education funding, etc. In contrast, the for-profit businesses distribute their profits to the investors and shareholders.

What are the advantages of Different Corporate Structures in the USA?

The advantages of Different Corporate Structures in the USA are as follows:

Sole Proprietorship

The advantages of Sole Proprietorship Corporate Structure in the USA: 

• A sole proprietorship is the simplest Corporate Structure to set up.
• The cost of setting up is very low, and it depends on the state in which the Sole Proprietorship is incorporated.
• Sole Proprietorship is a single entity; the ownerwill be eligible for certain business tax deductions, such as a deduction as health insurance.

Corporation

The advantages of Corporation in the USA are as follows:

• The shareholders of a Corporation in the USA are only liable up to the amount of their investments in it.
• A Corporation that is publicly held can raise substantial amounts of capital by issuing bonds or selling shares.
• The ownership can be easily transferred to a Corporation in the USA.
• There is no limit to the life of a Corporation in the USA. The ownership of Corporations can pass through many generations of investors or members.
• In the case a Corporation is structured as an S Corporation, losses and profits are passed through to the members or shareholders. Hence, the Corporation is not required to pay the income tax.

Partnership

The advantages of Partnership in the USA are as follows:

• Partnerships are easy to establish;
• There is an increased capability to raise capital funds when there is more than one owner;
• A wider pool of skills, knowledge, and contacts;
• There will be improved management with more than one owner;
• It is easier to attract investors because partners have limited liability;
• Profits and losses pass through the business to the partners in case of Limited Partnership;
• The limited partners get a share in the losses and profits without having to participate in the business.

Limited Liability Company

The advantages of Limited Liability Company in the USA: 

• There is an absence of taxation at the Corporative level;
• There is a limited personal liability of the members;
• The members are given the protection of the Assets;
• The number of members is unlimited;
• There is the flexibility given to establish the Limited Liability Company;
• No Obligation for the Managers or Members to be USA Residents or Citizens.

Non-Profit Organisations

The advantages of Non-Profit Organisations in the USA are as follows:

• Non-Profit Organisations have their own separate existence and have a status of a separate legal entity.
• A Non-Profit Organisation has a statutory right to exist in perpetuity. Any other informal organization does not have such a statutory right.
• A Non-Profit Organisation protects officers, directors, and members against being held personally responsible for the debts and liabilities of the Company. The limited liability protection is provided by the statute to the officers, directors, and members of the organization.
• A Non-Profit Organisation can apply for both the federal and state tax-exempt status. On the other hand, any group or association that has not been formed under the state law can apply for tax-exempt status. This is usually easier for a statutory business entity to get approval of the IRS in the USA^[1].
• Some Non-Profits Organisations are eligible to receive private and public grants. These grants make it easier to get an operating capital for the organization.
• Tax-exempted Non-Profits Organisations generally receive discounts on bulk mail rates from the authorities in the USA.
• There may be more established credibility for a Non-Profit Organisation than for the person or persons informally trying to achieve their Non-Profit purpose. The donors mostly prefer to donate to such Non-Profit Organisations because of their credibility.
• The statutory Non-Profits Organisations like LLC’s and corporations are required to appoint a registered agent.

Conclusion

The most common forms of Corporate Structures in the USA are Sole Proprietorship, Corporation,and Partnership. A recent development to these forms of Corporate Structuresin the USA is the Limited Liability Company or LLC. Each Corporate Structure in the USA comes with different tax consequences.

So, the person going for the incorporation of the entity is required to make the selection of Corporate Structures in the USA very wisely. One should choose that Corporate Structure, which most closely matches the business needs of the person.

Also, read: Professional Corporations in USA: A Complete Overview