When you start a business, choosing a business entity is an important decision you need to make. In this article, we will go through some of the most common business entities in USA.
What is a business entity?
A business entity is a separate identity for your business. You may want to separate your business assets from your personal assets. Therefore, you have separate financial statements for your business and separate financial statements for your personal accounts.
Some of the most common business entities in the USA are:
Sole proprietorship is not a business entity by itself. There is no separation between the owner and the business. This is probably the easiest and the cheapest to start.
This is similar to a sole proprietorship but there are partners instead. The partnership is governed by a partnership agreement.
A C-Corporation is a business entity where the owners are the shareholders and there is separation between the shareholders and the management.
Formal meetings and a lot of paperwork need to be done on a regular basis. It is recommended that you use a lawyer who is well-versed in company law.
The big advantage with a Corporation is that there is limited liability.
If the corporation is sued for some reason, the suers cannot come after the personal assets of the owners (shareholders). The owners (shareholders) liability is only limited to the investment that they have made in the corporation. A C-Corporation can have any number of shareholders.
The biggest disadvantage with a C-corporation is double taxation. The corporation is taxed first at the corporate level and when dividends are paid, the shareholders are taxed again on the dividends.
The S-Corporation is similar to a C-Corporation but they have a tax advantage where the corporate income and deductions pass on to the shareholders.
S-Corporations however, cannot have more than 100 shareholders and they cannot be foreign bodies. They also have several other requirements to be fulfilled if they have to be given the S-corporation status.
Limited Liability Company (LLC)
Limited Liability Company is a hybrid between a corporation and a partnership. It has limited liability of a corporation and the tax advantages of a partnership.
These are just some of the business entities available in the USA for for-profit organizations.
This article should not be construed as legal advice. It is advisable that you use a company lawyer who is well-versed in company law to help you with legal aspects of incorporating your business.