Which Type of Business Entity is Right for You?

In 2020, the number of small businesses in the US reached 31.7 million. That means that small businesses make up 99.9% of American business. If you’re thinking of starting your own, it’s important to know how to register it. In this article we take a look at the different types of business entities in the USA, and what they entail.

There are four main types of business in the United States, available under law. Each has its own advantages.

Why is this important?

Before we look at the different types of business, let’s explore why it’s important.

Firstly, it’s necessary for tax purposes. Secondly, it’ll help you to plan for your business’s expansion. Think about this when deciding the kind of business you want to create. It’s also a good idea to speak to a lawyer so that you have all the information you need to make the right decision for you.

Types of business

There are four main types of business in the United States.

1. Sole Proprietorship

This is the most basic form of business, controlled by one person who is responsible for all profits and losses. It means that you can make all decisions for the business, and if you do ever hire an employee, they will not be able to have their own stocks.

It seems like the simplest option, but remember that there will be no distinction between your business life and your personal life, as far as taxes and finances go. The government considers you and your business to be one and the same.

This kind of business is inexpensive to form, easy to dissolve, has virtually no tax aspects, and the business’s liabilities are the owner’s liabilities.

2. Partnership

This is when two or more people, corporations, trusts, or LLCs come together to form an entity that they will run for profit. Every single partner is responsible for the profit and loss.

They have to file an informational return to the government, reporting the profits and losses, and how each has been allocated to the partners.

Liability is joint, which means that any specific partner can be made to pay all the debts of the partnership, even if they didn’t incur them.

A partnership is relatively inexpensive to form, and tax can be complicated but the partnership itself pays no taxes.

There are three types of partnerships:

· General partnership: This is the simplest kind. There is joint liability and equal ownership.

· Limited partnership (with limited liability): One or more general partners manage the business and are personally liable for the debts; and there are other limited partners who contribute money and share in the profits, but they do not run the business and are not responsible for anything other than the contributions they make.

· Joint venture: This is partnership based on time. Two or more people work together to contribute to a project. Once the project is completed, the partnership is dissolved. If the partners want to continue to work together, they would then register themselves as general partners.

3. Limited Liability Company (LLC)

LLCs are very flexible because they’re combinations of corporations and partnerships. They can also be used for a wide variety of businesses.

When it comes to LLCs, the owners are not personally responsible for the company’s debts or liabilities. Regulations are different depending on which state you’re in. They also don’t pay taxes – rather the profits and losses are passed through the members, who can claim them on their tax returns.

The main reason you’d want to choose this option is to limit the liability of you and/or your partners. There are disadvantages, though. These companies can be dissolved if one of the members passes away or goes bankrupt.

An LLC must also no exhibit more than two qualities of a corporation: limited liability with regard to assets; continuity of life; centralization of management; the ability to transfer ownership interests

4. Corporation

This is a legal entity that is established by one or more parties so that business can be conducted. There are two types of business corporation:

· Business corporation

Established so that business can be conducted, and a profit can be made.

· Not-for-profit corporation

This is established so that a company can advance a specific goal that is not related to profit. This could include a charity, education or a benevolent organization.

Both of them can be established as either foreign or domestic corporations. Domestic corporations will be formed under the laws of one of the states of the USA.

Foreign entities are established under the laws of another state or country. When it registers in a different state in the USA, it may be authorized to do business in that state.

Business corporations are the most complex kind of business.

· It exists as a separate entity from owners, shareholders and employees so it can’t be dissolved unless this is done in a legal manner

· It’s treated as a person would be treated. It must have contracts, it can sue and be sued

· Tax is more complicated too. It can choose to be treated as a partnership (not pay tax itself), or as a taxable entity.

Corporations have to follow more formalities than any other kind of business. They have to elect directors who will decide on policies and make decisions. Officers are appointed to deal with day-to-day activities. Approval is needed from board members in order for activities to be undertaken and decisions to be made.

Which is best for you?

Here are some things to think about when trying to decide which option is most suitable for you:

If you are an entrepreneur and you are the only person in your business, a sole proprietorship is probably best. You get to make all decisions and all financial benefits belong to you. Remember, though, that there’s no distinction between your professional and personal life when it comes to taxes and financial obligations.

If you’re starting a business with another person, a partnership is an option. Again, there is no distinction between your person and business finances. There’s also a risk when it comes to partnerships so be sure to have an agreement drawn up detailing what happens in the event of a disagreement or death.

If you want to limit the liability of you and/or your partners, your best bet is an LLC.

If you want your business to be a separate entity from you, then become ‘incorporated.’ It can form contracts, it pays its own taxes, and it can be sued. If the business doesn’t work out, you can sell it. It is more complicated to set up and takes more time, and it is also subject to more compliance. Good luck on your business journey! If you’d like some more business advice, take a look at the 7 questions to ask when starting a business.

If you’d like to find out more about the support we give to business in and around Washington DC, visit our website.