One of the most critical decisions a business owner needs to make when launching a business is selecting the type of business entity the operation will be.
This decision is nearly as crucial to the entrepreneur as choosing what kind of business to start because it determines the level of personal liability, how taxes are implemented, and how the enterprise will be regulated, among other considerations.
Therefore, business owners and investors need to understand the different types of business entities in the United States to make the best decision for the structure of their operation.
Furthermore, professional advisors can provide valuable advice to entrepreneurs when making decisions about a business’s structure.
Here is a simple guide to the different types of business entities in the U.S. The list is not exhaustive, so make sure you consult with a CPA or tax professional.
A sole proprietorship is the most basic business structure as it encompasses an individual doing any business activity without classifying it as any other type of business. No separate business entity is created, and there is no separation between the business's assets and liabilities and the individual's assets and liabilities.
Partnership (LP & LLP)
A partnership is the simplest business structure that is owned by two or more people and can be a limited partnership (LP) or limited liability partnership (LLP). In an LP, one partner has unlimited liability while the other partners have limited liability and limited control. LLPs offer limited liability to all partners.
Limited Liability Company (LLC)
A limited liability company (LLC)offers the benefits of the corporation and partnership business entities by protecting the owners from personal liability while shielding profits used for payment from corporate tax rates. However, LLCs have a limited life span due to regulations in many states.
There are several different types of corporations as which a business can be classified.
A corporation, also known as a C corp, is a business entity that is entirely separate from its owners and, as such, can make a profit, be taxed, or be held liable. This structure offers the most personal protection for owners but is also the most costly to form. In addition, corporations enjoy separate life spans from their owners and can raise funds by selling stocks.
An S corp is a unique type of corporation that avoids the double taxation drawbacks of C corps by permitting profits to pass into owners’ income without being subjected to corporate taxes. To qualify as an S corp, a corporation must meet standards and get approved by the IRS, which differs from other entities typically governed at the state level.
A B corp, short for benefit corporation, is a for-profit corporation differing from C corps in purpose, accountability, and transparency. Both mission and profit drive these organizations and, as such, must produce some level of public benefit along with financial gain for their shareholders.
A close corporation typically has less corporate structure than other corporations but is most similar to B corps. Most commonly, smaller companies, close corporations generally cannot be publicly traded and can be run by a small group of shareholders rather than a board of directors.
A nonprofit corporation conducts business for public benefits such as charity, education, religion, science, and more, and as such, its profits are not subject to state or federal income taxes. However, nonprofit corporations, which must file with the IRS to receive tax-exempt status, must follow organizational rules similar to a C corp and are restricted in what they can do with their profits.
A cooperative is a business structure in which profits are distributed among the group's members. The cooperative is owned and operated to benefit the people who use its services. Cooperatives are typically run by an elected board of directors, while members who purchase shares also have voting power.
How To Decide What Type of Business Entity to Start
Making the right decision when it comes to the type of business entity you will start is a critical choice that will impact many aspects of your operation and your personal income and risk. Therefore, it is vital to understand your options and how they can affect your abilities to reach your goal. And what works best for someone else may not be the right choice for you.
Here at Visa Business Plans, we advise clients to consult with a CPA and/or a tax professional. We’ll be glad to make introductions to professionals with extensive experience in the field. Also, keep in mind that an efficient tax structure may not meet certain visa requirements. So make sure to consult with your immigration attorney before making any final decision.
If you are looking to start a business in the U.S., give us a call to see how we can help you!
Visa Business Plans is led by Marco Scanu, a certified coach from the University of Miami with a globally-based practice coaching Fortune 1000 company executives, entrepreneurs, as well as professionals in 4 different continents. Mr. Scanu advises clients on turnaround strategies and crisis management.
Mr. Scanu received a bachelor’s degree in Business Administration (Cum Laude) from the University of Florida and an MBA in Management from Bocconi University in Milan, Italy. Mr. Scanu was also a Visiting Scholar at Michigan State University under the prestigious H. Humphrey Fellowship (Fulbright program) with a focus on Entrepreneurship, Venture Capital, and high-growth enterprises.
At present, Mr. Scanu is the managing partner and CEO at Visa Business Plans, a Miami-based boutique consulting firm providing attorneys and investors with business planning services in the areas of U.S. and Canadian immigration, SBA loans, and others.