If you’re just beginning your journey into the U.S. business world, choosing the right business structure can feel overwhelming. Your decision affects everything from the amount of tax you pay to the amount of paperwork you must handle-and nobody likes dealing with paperwork!
Here’s a rundown to help you understand your options.
a) Sole Proprietorship:
A Sole Proprietorship is the simplest form of business. If you decide to go this route, you’ll be the sole owner of the business, giving you full control over every decision. There’s no legal separation between you and the business, meaning business income is reported on your personal tax return, simplifying tax filing. However, as the owner, you are personally responsible for any business debts and obligations.
Suitable For: Freelancers, consultants, and small business owners with minimal risk.
Pros:
- Easy and inexpensive to establish.
Cons:
- No legal separation between the owner and the business, meaning the owner is personally liable for business debts and obligations.
- Not available to Non-Residents Entrepreneurs.
b) Partnership:
These types of businesses are owned by two or more people. In this arrangement, all partners share responsibilities, profits, and losses. Setting up is relatively easy, and you benefit from pooled resources and combined expertise. Partnerships are treated as a pass-through entity for tax purposes, meaning profits/losses are reported on partners’ individual tax returns. Like in a sole proprietorship, general partners have unlimited liability for business debts. There’s also the risk of potential conflicts between partners over management and profit distribution.
Suitable For: Professional service firms (e.g., law firms, accounting firms) or businesses with multiple founders.
Pros:
- Relatively easy to set up, with combined resources and shared expertise.
Cons:
- General partners have unlimited liability for business debts.
- Potential conflicts between partners over management and profit distribution.
c) Corporation:
A corporation is a legal entity that is distinct from its owners, providing strong liability protection to their shareholders. It has its own rights, privileges, and responsibilities. They are more complex and have more compliance requirements.
There are two types of corporation business structure in the US.
- C Corporation:
C Corporation is the default corporate structure, where the corporation itself is taxed and is responsible for its debts and obligations, not the individual shareholders. When profits are distributed as dividends, they’re taxed again at the shareholder level, which is referred as “double taxation”. Corporations can raise capital by issuing stock, and they enjoy perpetual existence, meaning they continue to exist independently of changes in ownership. This can be a huge advantage for long-term business stability.
Suitable For: Larger businesses, especially those planning to go public or raise significant venture capital.
Pros:
- Limited Liability: Shareholders are not personally liable for the company’s debts or legal issues, protecting personal assets.
- Raise Capital: C Corps can have an unlimited number of shareholders and can issue multiple classes of stock, making it easier to raise capital by attracting investors or going public.
- Perpetual Existence: The corporation continues to exist regardless of changes in ownership, giving it a stable structure for long-term growth.
Cons:
- Double Taxation: Corporate income is taxed, and dividends are taxed again on the shareholder’s personal income.
- Complex Compliance: Forming and maintaining a C Corp involves more paperwork, higher fees, and more legal and accounting services than simpler structures like LLCs.
- S Corporation:
S-Corp is similar to a C-Corp but with a twist. It provides the same limited liability protection, but it avoids double taxation by passing income and losses through to shareholders’ personal tax returns. However, it is limited to 100 shareholders who must be U.S. citizens or residents.
Suitable For: Small to medium-sized businesses that qualify and want the tax benefits of pass-through income.
Pros:
- Pass-Through Taxation: Avoids double taxation since income is passed through to shareholders’ personal tax returns.
- Limited liability protection: S Corp shareholders are protected from personal liability for the company’s debts and legal obligations.
- Transferability of Ownership: S Corp ownership can be easily transferred through the sale of stock without disrupting the business’s operations.
Cons:
- Strict eligibility requirements: They are restricted to no more than 100 shareholders, all of whom must be U.S. citizens or residents, and cannot be partnerships or corporations.
- More Formalities: S Corps must follow formal corporate procedures, such as holding regular board meetings and maintaining records which are more complex than LLCs.
d) Limited Liability Company (LLC):
An LLC is a flexible business structure that blends features of both corporations and partnerships. It offers limited liability to its owners (members), while allowing pass-through taxation. LLC protects their personal assets from business debts and liabilities, so owners aren’t personally responsible for repaying the company’s debts. LLCs benefits from a flexible management structure and generally have fewer compliance requirements than corporations. However, members are subject to self-employment taxes and state-specific rules, may increase complexity or costs on where the LLC is registered.
Suitable For: Small to medium-sized businesses looking for liability protection with a simpler operational structure.
Pros:
- Limited Liability: Owners are protected from personal liability for business debts and obligations.
- Pass-Through Taxation: Income is passed through to the owners’ personal tax returns, avoiding corporate income tax.
- Flexible Management Structure: LLCs can choose member-managed or manager-managed structures.
- Few Ownership Restrictions: LLCs can have an unlimited number of members, including other corporations and foreign individuals.
Cons:
- Self-Employment Taxes: Owners are subject to self-employment taxes on their income, earned as an employee of their own LLC.
- State-Specific Rules: LLC laws vary by state, affecting compliance requirements and fees.
Which one is right for you?
Choosing the right business structure depends on your goals, how you want to manage your business, and how much liability protection you need. Each structure has its own advantages and drawbacks, so it’s important to consider what works best for you.
You can also consult Bizfyle’s advisors to know more about the structure and the process of formation.
| Structure | Liability Protection | Taxation | Management Complexity | Best For |
|---|---|---|---|---|
| Sole Proprietorship | None | Pass-through | Low | Individuals, freelancers, small-scale operations |
| Partnership | Limited (LP only) | Pass-through | Moderate | Professional services, businesses with multiple owners |
| LLC | Yes | Pass-through (or elect corporate) | Moderate | Small to medium businesses, entrepreneurs |
| C Corporation | Yes | Corporate + potential double tax | High | Large businesses, companies seeking investment |
| S Corporation | Yes | Pass-through | High | Small businesses meeting IRS eligibility |
Non- Resident Founders
If you are a non-resident business owner looking to start your business in the states, we recommend gaining a solid understanding of LLC formation and structure. One of the key features of an LLC is the limited liability protection it offers its members. Additionally, an LLC can be formed by a single member, with no limit on the maximum number of members.
From a tax perspective, an LLC is typically treated as a pass-through entity unless it chooses to be taxed as a C Corporation. A single-member LLC is considered a sole proprietorship, while a multi-member LLC is treated as a partnership, meaning income and losses pass through to the owners’ individual tax returns. An LLC may also elect to be taxed as an S Corporation, though this option is only available to owners who are U.S. residents.
Now that you’ve learned about business structures, and (hopefully) selected the best option; Let’s get your business started!
Start your US LLC in 3 easy steps
Forming Your Company
We begin with selecting a suitable name, draft an Operating Agreement, and serve as your registered agent.
Estimated Time: 1 weeks
Obtain Your EIN
Obtaining an EIN is a crucial step in establishing your LLC and ensuring compliance with US regulation.
Estimated Time: 4-6 weeks
Set Up Your US Bank Account
After securing your EIN, apply for a US bank account through our partner portal, requiring a passport.
Estimated Time: 1 weeks
