One of the most important decisions entrepreneurs face when settling a new business in the US is what type of business structure works best. This aspect related to taxes and paperwork is a crucial factor that will determine the company’s success.
Therefore, if you are in the process of assembling a business plan, you have to learn more about the four main types of organizational structures. This step will determine the benefits and liability implications for the company.
We'll point out all you need to know about business types to understand their differences and help you choose the right one for your startup.
The Four Main Types Of Business Structures In The US
According to the Internal Revenue Service (IRS), there are four main business entities to establish a company: Limited Liability Company (LLC), sole proprietorship, corporation, and partnership. Each one has its own legal and tax return implications.
Moreover, a great advantage for business owners is that the legal structure may be changed as the startup scales. But, what determines what structure is the perfect fit for a company? There are several elements involved like the business size, scalability, growth goals, liability, and the need for capital investment. Let's have a look at the most common types of business.
Limited Liability Company (LLC)
This business structure is very popular among entrepreneurs because it's a hybrid entity that combines partnership and corporation features. One of the main advantages of this scheme is that personal assets are legally separated from business assets. This serves as a shield for any eventual lawsuit providing liability protection for business owners.
Moreover, unlike other structures, an LLC has no limitations regarding the number of shareholders. And on the other hand, taxation is more flexible than other business entities, but it's attached to the company size.
Sole Proprietorship
This is the simplest type of business structure, and it's ideal for those who want to handle an enterprise alone. Here, there's a single business owner who manages all the operations and is liable for the company. This means that the owner gets the profits but also its debts (not so good, is it?).
On the flip side, a remarkable tax advantage is that the business profits can be included in Form 1040 for personal tax returns. Moreover, even though the registration procedure is quite simple, it places your assets at risk in the eventual case of debts or legal claims.
And last but not least, raising capital under this scheme can be difficult as many financial entities don't feel comfortable partnering with a sole proprietorship.
Corporation
This is the most complex business structure by far and encompasses different types like C, B, and S corporations, among others. However, it's not only about the complexity, but also it's more expensive than other legal schemes.
Simply put, a corporation is a separate entity from the owners and members. Therefore, shareholders are not liable for any legal claims against the company, but of course, they will be responsible for their investments.
What makes this option more advantageous than others is that raising capital from numerous investors is way much easier.
Partnership
A partnership is an organization owned by two or more persons and it’s one of the most utilized business structures. This scheme is split into two variants: general and limited partnerships. The first option is the easiest and less expensive one. Thus the responsibilities are shared in equal parts by all members.
On the other hand, the limited partnership has one unique partner in charge of running the business while the other individuals get a fraction of the profits. This gives partners limited liability in the company.
Due to its complexities, the limited partnership scheme is not the best option when starting a new business. In that case, a general partnership is a less intricate process and companies are more likely to get funded when there is more than one owner.
Which Structure Works Best For A Startup?
The aim of picking the right entity type when entrepreneurs launch a startup is to choose an option that flows organically with the business goals. When you outline a business plan, it's essential to determine which of these four legal schemes suits your company's vision.
To achieve that, you first need to know your business purpose and the expected growth. Without clear-cut projections, you won't be able to make the right choice and skyrocket your company. Yes, it may feel like the weight of the world on your shoulders making such a decision.
But the counterpart is that you can change the business structure at any time, and you won't be stuck forever in the initial choice. So, hands-on, it's time to analyze the options we outlined in this guide and put your startup and ideas in motion.
Ready To Kick-Off Your Startup In The US?
Understanding how the vast US market flows and its legal implications can be complex. Thus regulations may vary according to your business size, among other factors. For that reason, our Market Entry Bootcamp at Base Miami may be the perfect fit for your company's development and expansion in the US.
We not only introduce you to the Miami business environment but also provide key legal resources for a successful launch in South Florida. Don’t know where to start? Contact us today and learn how we can help! LET'S CHAT!
