Different Types of Corporate Structures in USA
Whenever a new business is started, the entrepreneur is required to take several necessary steps. Some of the initial steps include writing a business plan, choosing a location, deciding the name of the business, and many other steps. However, choosing the correct corporate structure is also one of the most important steps.
Choosing a suitable corporate structure is of vital importance. The corporate structure defines what type of business entity you are in the eyes of the Internal Revenue (IRS) in the USA. The type of business entity has a direct impact on how the business of entrepreneurs will be taxed. The Different Types of Corporate Structures in USA specifically defines which individuals will be the owners, which people have the control of management, which people will be the investors.
The Different Types of Corporate Structures in USA will also specify how losses and income are accounted for, and much more.
What are Corporate Structures?
Corporate Structures in USA refers to the organization of business units or different departments within a company. Depending on the goals of the company and the industry in which the company operates, the corporate structure can diverge expressively between the companies. Each of the departments in an organization usually performs a specialized function; while continuously cooperating with each other to accomplish the set corporate values and goals.
There are many Different Types of Corporate Structures in USA. For any Foreign resident in USA who is establishing a new company, it is very important for him/her to understand the basic differences in Different Types of Corporate Structures in USA. The law of the state is incorporated while forming a new business instead of federal law.
Each state has its own specific rules, regulations, laws, and requirements for Different Types of Corporate Structures in USA. A business that is established by a person should work at the place where it is incorporated. In the case where the business has to operate in another state, the owners of such businesses should register their businesses once again in that other state. Thus, every registered business is only limited to a particular state, and it comes under the State authority of that state rather than a common entity.
Each state has its own register of Companies for Different Types of Corporate Structures in USA. The company that needs to be registered or creating a new company, the name proposed by the company, is checked in that particular state’s register. Therefore, the name of a company is only protected in the office of incorporation of the state and in any other state in which the company is registered to do business in the future.
What are the Different Types of Corporate Structures in USA?
The Different Types of Corporate Structures in USA are as follows:
A sole proprietorship is the simplest form of organizational structure available for doing businesses out of the Different Types of Corporate Structures in USA. According to the Internal Revenue Service (IRS), a Sole Proprietorship is the most common form of business in the USA.
Out of the Different Types of Corporate Structures in USA, when an entity is incorporated as a sole proprietorship, it allows the owners to have total control over company operations. The types of businesses that typically form Sole Proprietorships in the USA are a shops or retail businesses, home-based businesses, and one-person consulting firms.
The owners of the Sole Proprietorship in the USA are responsible for maintaining their own records. The owners are required to make the payment to the Internal Revenue Services in the USA in the form of self-employment taxes. However, no protection is provided to the owners of Sole Proprietorships, and they can be held personally liable for their company's financial obligations and debts.
Out of the Different Types of Corporate Structures in USA, Partnership is one of the most basic types of business entities.
There are three kinds of partnerships:
The most basic type of Partnership in the USA is the General Partnership. The General Partnership assumes equal Partnership, and therefore equal ownership. All the liability and management of Partnership is shared between the partners or members unless otherwise specified.
Limited Partnership (a Partnership with Limited Liability Company):
In a Limited Partnership, one or more general partners manage the business of the company. The general partners are personally liable for the partnership debts. There are also one or more other limited partners who contribute to the capital of the company and share in profits. Limited partners do not run the business and are also not liable for the obligations of Partnership beyond contribution.
A General Partnership can also elect to have a limited personal liability of its general partners. However, such an election of limited liability is required to be registered with the Secretary of State in the USA. In such a case, the partners of Partnerships are responsible to the extent of their investment.
This is a type of Partnership that is time-based. Two or more individuals can work together for a specific project or for an extension of the time period. Upon the completion of the specific project, the Partnership is dissolved. After the completion of the specific work, if the individuals like to continue the same work, individuals are required to then register as general partners.
There are three Types of Corporations in USA:
Incorporation of this type of business entity, the prospective shareholders are allowed to exchange property, money, or both, for the capital stock of the Corporation. The main feature of a Corporation is that, for the federal income tax purposes, a C Corporation is known and recognized as a separate taxpaying entity. A C Corporation conducts business, pays taxes, realizes net income or loss, and distributes the profits among shareholders.
Another critical feature of the C Corporations is how these Corporations are taxed. The profit of a C Corporation is taxed to the Corporation when such a profit is earned. Such profit is then taxed when it is distributed as dividends to the shareholders, hence, creating a double tax. The C Corporations do not get any tax deduction when such profits are distributed as dividends among the shareholders. Shareholders are allowed to deduct any loss of the Corporations.
The main difference between S Corporations and C Corporations is the way they are taxed. S Corporations pass corporate income, deductions, losses, and credits to their shareholders for the purpose of federal tax. The shareholders of S Corporations are required to report the flow-through of income and losses on their personal tax returns and are evaluated according to their individual income tax rates.
This allows S Corporations to avoid double taxation on corporate income. S Corporations are also responsible for tax on certain built-in advances and passive income at the entity level.
Other unique qualities of S Corporations include some features such as- limitations on who can be appointed as shareholders of the Corporations. The allowable shareholders include individuals, certain estates, and trusts. Shareholders not allowed include partnerships, non-resident alien shareholders, or Corporations.
There can also be no more than 100 shareholders in S Corporations in the USA. Only one class of stock and some Corporations are disqualified from being S Corporations, such as certain insurance companies, financial institutions, and domestic, international sales Corporations.
A Closed Corporation is similar or identical to C Corporations, except for certain aspects.
These aspects which are not similar are as follows:
1) The total number of shareholders is limited to 30;
2) The transfer of shares isConditional to the prior approval of the Director;
3) There is a prohibition to trade shares on the Stock Exchange.
Limited Liability Companies
Limited Liability Companies are a hybrid of a Partnership (with a capability to assess profits and losses to individuals) and a Corporation (with a capability to limit personal liability). This type of Limited Liability Companies provides a flexible structure to achieve the ends, as mentioned earlier of each different entity i.e. Partnership and Corporation.
LLCs or Limited Liability Companies are very flexible and may be used for a very wide range of businesses in the USA. Like Partnerships, LLC's or Limited Liability Companies can be as simple or complex as the members desire. Depending on the law of the state, an LLC or Limited Liability Companies can have the same limited liability for the members as of a Corporation or have no limited liability for any of the members like a General Partnership, or some members with limited liability and some without limited liability like a Limited Partnership.
Some states in the USA require that the LLC's or Limited Liability Companies registered there to designate a date in the future on which the LLC or Limited Liability Company will get automatically dissolve. In the USA, at times in some states when any member of the LLC dies, goes bankrupt or meets some calamity. In such a case, the remaining members of the company are required to either dissolve or vote to continue such an LLC.
An LLC functions as a Limited Liability Corporation in the USA but is operated or taxed in a way that is most reliable with a Partnership. However, a person should ensure that a Limited Liability business does not have more than two qualities that describe a Corporation. If more than two qualities are met, the Limited Liability Company becomes a Corporation and is then taxed accordingly.
There are two types of Limited Liability Companies in USA:
Limited Liability Company(LLC, LC, Ltd. Co.)
Limited Liability Company is a form of business whose owners enjoy limited liability, but it is not a Corporation. The allowable abbreviations for Limited Liability Company vary by state in the USA. It is to be noted that in some states in the USA, “Ltd.” by itself is not a valid abbreviation for a Limited Liability Company, because, in some states like Texas, it isused to denote a corporation instead.
For federal tax purposes in the USA, in general, a Limited Liability Company with two or more members is treated as a Partnership. On the other hand, a Limited Liability Company with one member is treated as a Sole Proprietorship. In the USA, an LLC is similar to an S Corporation tax-wise, with business expenses and income, and reported on the personal tax return of the owners.
Professional Limited Liability Company (PLLC)
In the USA, some states do not allow certain professionals to form an LLC. This limits the liability that results from the services the professionals provide, such as lawyers, doctors, architects, and accountants. Instead, these states allow a PLLC (Professional Limited Liability Company).
The limitation of liability only applies to the business side, such as creditors of the company, the level of medical care provided, legal services, or accounting provided to clients by each different professional.
These PLLC are formed by the professionals to maintain the higher ethical standards that they have themselves committed to by becoming a licensed person in their profession. Such incorporation of PLLC also prevents these professionals from being immune or at least limit their immunity to any malpractice suits against them.
Starting a Non-Profit business in the USA is similar to starting a For-Profit business, with business structures like Corporations and LLCs being common. Non-Profit businesses organize themselves like for-Profit businesses such as in terms of electing theBoard of Directors and making bylaws.
However, the main difference is that, after filing of the Articles of Incorporation, the Non-Profits Organisations are required to apply for the 501(c) (3) status with the IRS in the USA. The 501(c)(3)status recognizes the Non-Profit Organisations as tax-exempt organizations.
Starting a non-profit LLC is possible, but there are reasons why it is less common. State law regulates LLCs, and in many states, a key part of establishing an LLC is providing a lawful purpose or business purpose for the organization. It is providing a business purpose that can raise issues for creating a non-profit LLCs in some states, which is why incorporating is still the traditional route.
What are the Benefits of Different Types of Corporate Structures in USA?
The Benefits of Different Types of Corporate Structures in USA are as follows:
Benefits of Sole Proprietorship
The benefits of Sole Proprietorships are as follows:
- The owners can establish a sole proprietorship easily, instantly, and inexpensively.
- Sole proprietorships carry very little, if any, ongoing formalities.
- A sole proprietor is not required to pay an unemployment tax on himself/herself (although he/she is required to pay unemployment tax on employees).
- The Owners of Sole Proprietorship are allowed freely to mix personal and business assets.
Benefits of Partnership
The benefits of Partnerships are as follows:
- The owners can start partnerships relatively less expensive and easier.
- Partnerships do not require to conduct any annual meetings.
- Partnerships require very few ongoing formalities.
- Partnerships offer favorable taxation maximum to the smaller businesses.
- Partnerships often are not required to pay certain minimum taxes that are required by the Corporations and Limited Liability Companies (LLC’s).
Benefits of Corporation
The benefits of Corporations are as follows:
- The owners of Corporations are protected from any kind of personal liability for company obligations and debts.
- Corporations have a very reliable body of certain legal precedents to guide the managers and owners.
- The Corporations are the best vehicle for eventual public companies.
- Corporations are able to raise capital more easily through the sale of securities.
- Corporations can have an unlimited lifetime.
- Corporations are allowed to create tax benefits under certain circumstances, but it should always be kept in mind that the C corporations may be subject to certain double taxation on the profits.
- Corporations can easily transfer ownership done by the transfer of securities.
Benefits of the Limited Liability Company
The benefits of Limited Liability Companies (LLCs) are as follows:
- Limited Liability Companies do not require annual meetings.
- LLCs also require very few ongoing formalities.
- The owners of Limited Liability Companies are protected from any personal liability for the company's obligations and debts.
- Limited Liability Companies enjoy pass-through taxation, partnership-style, which is favourable to several small businesses.
Benefits of Non-Profit Organisations
The benefits of Non-Profit Organisations are as follows:
- The Non-Profit Organizations provides protection of limited liability to the owners.
- The retirement plans in Non-profit Organizations can be easily set-up.
- The lifetime of Non-Profit Organizations is not dependent upon its members and officers.