July 26, 2019
While there are several types of companies in the USA, it is crucial to understand the standard difference between each type of ownership. The state laws play a significant role in establishing business entities in the different states in the USA. Once you understand the difference between different ownerships, you will be able to select the most appropriate one easily. Selecting the right type of ownership will have a major impact on taxation.
A Sole Proprietorship entails the simplest form of business that is owned and controlled by one person. It does not function as a legal entity and can operate under a false name, i.e., a trading name at a minimal cost. The owner is responsible for all liabilities, profits, and losses. This kind of ownership usually paves the way for more complex business collaborations. Since a Sole Proprietorship is the most comfortable means of initiating a business, let us now understand Partnership, Corporation, and LLC in detail.
A Partnership in the US is created amongst two or more individuals in the pursuit of profit. All the partners are responsible for the joint liabilities in the agreement. Although Partnerships are inexpensive to form in comparison to Trusts and LLCs, the taxation procedure might be a little complex. As such, the Partnership pays no tax, and the Individual Partners bear the liability. There are three different types of partnerships:
Corporations operate on firm regulations in comparison to Sole Proprietorship and Partnerships. There is limited liability since Corporations have their own legal status separate from its owners. This constitutes Shareholders who appoint a Board of Directors to oversee day-to-day functions. The directors elect officers for critical aspects of the company. A Corporation is either a Business Corporation or a Not-for-Profit Corporation. The generic tax status of a Business Corporation is “C-Corporation” however it can elect to become “S-Corporation” for tax purposes. Non-US residents cannot choose to incorporate as an S-Corp. Unlike the C-Corporation, the S-Corporation is not subject to Corporate Income Tax. The Shareholders of an S-Corporation are taxed on their pro-rata share of income, which works just like a Partnership. The selling of stocks of a Corporation to raise capital quickly and efficiently makes Corporations highly feasible for businesses.
Limited Liability Companies operate as a conglomeration of both Corporation and Partnership/Sole Proprietor, reaping the benefits of these types of ownerships in the sense that it has the limited liability feature of a Corporation and the pass-through taxation feature of a Partnership/Sole Proprietor. LLC is an unincorporated association enjoying the limited benefits of a Corporation. They have a versatile style of management, allowing the members to attune the agreement as per their convenience. In many of the states, if a member of the LLC dies or goes bankrupt, the LLC is dissolved, unless the other members vote to continue the LLC. The LLC is run by the directors/officers themselves who do not have to pay a business income tax. Personal tax benefits are levied as individual responses recorded by the members according to the profits and losses incurred. In an LLC, members do not even hold stocks but instead hold a membership interest represented by way of percentages.
So these are the different types of companies in the USA. Deciding what form of entity to choose requires due consideration of various benefits that each entity offers, along with the nature of business the applicant wishes to carry.
