There are six types of business structure that are possible in the USA. Let’s discuss them one-by-one.
Sole Proprietorship: This is the simplest business structure and usually involves one person who owns and controls the business.
The advantage of this type of business structure is you will have full control and ownership over your business and will not be answerable to any other outsiders. This not only gives you the advantage of enjoying the entire profits from the business but also puts you in the driver’s seat whereby you can take your own decisions on day-to-day activities of the business.
Partnership: This is the easiest entity to form in case your business is owned by more than one person. Partnerships are broadly classified into: general partnerships and limited partnerships.
In a general partnership, the business is owned jointly and severally by all the partners. They will run the business on behalf of each other and are responsible and liable for actions of each other and that of the business. Similar to sole proprietors, partners of a general partnership are also exposed to the risk of personal liability. In partnership businesses, all partners are liable and accountable for acts of other partners. So this exposes them to great personal liability and financial risk. Partnerships are also more expensive to form than sole proprietorship.
The Corporation is a relatively more complex business structure as compared to sole proprietorship and partnerships. One of the major advantages of a corporation is that the corporation itself is a separate legal entity separate from its owners. This means that the person assets of the owners are protected and are not subject to risk of liquidation in case the corporation fails to pay off business liabilities.
Many businesses choose this business structure because of the protection it gives to their personal assets. The corporation’s liabilities and debts are not that of the owners. Hence the owners’ assets and personal belongings will not be put at a risk if the corporation defaults in repayment of its liabilities.
S Corporation (S-Corp): An S-Corp is a more attractive option to small businesses (since the number of shareholders is restricted to 100) than a regular C-Corp. One major plus point with an S-Corp is that that the tax is passed on to the shareholders. Hence there is no question of double taxation as in the case of a C-Corp.
An S-Corp also gives the flexibility to maintain accounts on a cash basis for certain businesses. This means incomes and expenditures are taxable/deductible as and when they are paid. So, if you have a bad customer who doesn’t pay, you need not pay tax on it until you receive the money.
Limited Liability Company (LLC): An LLC is a hybrid entity that brings the best features of partnerships and corporations. Similar to S-Corps, the profits of an LLC pass on to the shareholders and hence there is only one point of taxation.
Another important feature of an LLC is that it can have unlimited investors and these investors can be allowed to freely participate in the operations and activities of a business.