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  • Country: The U.S
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When you decide to incorporate a company in the US, choosing the right company types is crucial. In specific, you must consider the pros and cons of each business structure in alignment with your business goals. In this guide, we will cover three key aspects to help you make a more informed decision

  • An overview of various US company types;
  • The advantages and disadvantages of each type;
  • Recommendations for the most suitable company structure aligning with your business.

By the end, you should fully know the benefits and drawbacks of each type of business entity in the US and the most fitting structure for your business goals

1. 6 popular types of companies in the US

Important note

In the United States, you have the option to choose up to 8 main types of company structures. In this article, we only focus on 6 popular types with detailed analysis for the majority of domestic and international business owners.

There are two additional types - B-corp and non-profit companies - which are specialized and used for distinct purposes. You can read about these unique structures in the guide of the U.S. Small Business Administration (U.S. SBA): Choosing a business structure.

Each of the six main company types in the US comes with distinct advantages and disadvantages. Below are the fundamental insights into these structures, outlining their benefits and limitations. 

1.1. Sole Proprietorships

The sole proprietorship is the most straightforward business type when forming a company in the US. In this setup, the owner is the sole operator of the business. It's managed by one person and is adaptable to various business models, from restaurants to retail stores.

This type is particularly suitable for low-risk businesses and for entrepreneurs aiming to test their business ideas before registering an official company. It offers simplicity and autonomy for individuals venturing into initial business operations.

Advantages Disadvantages
  • Simple company opening with low incorporation cost
  • No specific amount of capital required
  • Business losses can be deducted from the owner's personal tax payable to the state.
  • The sole responsibility for the company's debts falls entirely on the business owner.
  • You have difficulty raising capital and finding supportive partners due to the structure
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  • The sole responsibility for the company's debts falls entirely on the business owner.
  • You have difficulty raising capital and finding supportive partners due to the structure
  • Company profits are calculated as personal income, potentially resulting in higher tax payments as personal profits increase.

1.2. Partnership

A partnership involves two or more owners (partners) who collectively share the responsibility for managing the company.

There are two prevalent types of partnerships: General Partnership (Traditional Partnership) and Limited Partnership. Although this company type is still popular, it is not as beneficial as the limited partnership.

Advantages Disadvantages
  • Simple company opening with low incorporation cost
  • Clear division of management responsibilities defined in the partnership agreement
  • Business losses can be deducted from the partners' personal tax liabilities (For a company as a partner, it is corporate tax)
  • You have to bear responsibility for other partners 
  • You have a high chance of disagreements, leading to a higher risk of dissolution
  • Profits are taxed as personal income for individuals, potentially resulting in higher taxes as profits increase.

1.3. Limited Partnership (LP)

In a limited partnership in the US, partners fall into two distinct categories:

  • General partners

You have unlimited liability for the company's debts. However, you have a deciding role to oversee and manage the business's operations.

  • Limited partners

Act as investors, you contribute capital with liability limited to the extent of your investment. You don't partake in managing the business and are not liable beyond your contributed capital. General partners bear full responsibility for the company's obligations.

Partnerships are suitable for business owners with specialized professions ( ideally owners in the same industry such as lawyers, doctors, architects), or groups seeking to test a business idea before formal incorporation. Besides, real estate investment companies often opt for this limited partnership structure.

An important variation is the limited liability partnership (LLP). In an LLP, partners are akin to capital contributors, responsible only for the debts to the extent of their capital input. They're not accountable for the actions and debts of other partners.

Advantages Disadvantages
  • Simple company opening with low incorporation cost
  • Business losses can be deducted from personal tax liabilities (For a company as a partner, it is corporate tax)
  • Responsibilities are clearly outlined among the partners.
  • This is more expensive to register compared to general partnerships.
  • The structure involves more intricate management and administrative demands compared to traditional partnerships.
  • General partners in an LP bear complete responsibility for business debts and obligations.
  • Profits are taxed as personal income for individuals, potentially resulting in higher taxes as profits increase.

1.4. C-Corporation

A traditional joint stock company is often referred to as a C corporation (C corp) to differentiate it from other forms of joint stock companies like S-Corp, B-Corp, Close Corp, and non-profit corporations.

A C corporation is a separate legal entity from its owners. This structure is subject to numerous tax regulations that the company must adhere to. The incorporation process and associated costs vary across different states in the US.

C corporations are particularly suitable for companies with medium to high-risk levels and businesses that require significant capital investment.

Advantages Disadvantages
  • You have limited liability, responsible only to the extent of your contributed capital.
  • Some benefits may be deductible against business expenses.
  • Corporate income tax rates remain consistent regardless of the company's profits.
  • You can easily raise capital by issuing shares.
  • The costs of setting up a C-Corporation are higher than a partnership or a sole proprietorship.
  • You have to comply with more intricate legal requirements and documentation that must be filed with the state of incorporation.

1.5. S-Corporation

An S-Corporation, known as an S-Corp, serves as an alternative to removing some drawbacks of operating a standard C corporation. In an S-Corp, the company's profits or losses directly influence the dividends distributed to shareholders.

This structure allows for a more direct pass-through of profits and losses to shareholders' personal income, contrasting the traditional C corporation where profits are subject to double taxation (Company profit is taxed at the corporate level, and dividend is taxed at the personal level). This pass-through feature is a significant advantage of the S-Corp structure.

Advantages Disadvantages
  • You have limited liability
  • The company's profits are considered the personal income of the owners.
  •  The costs of setting up an S-Corporation are higher than normal C-Corporation due to the specific formation process with the IRS
  • Company profits are taxed based on personal income tax. As personal profits increase, the amount of tax payable also increases.
  • S-Corporation is only for full American-control corporation

1.6. Limited liability company (LLC) 

A Limited Liability Company (LLC) combines the best features of a C-Corporation and a limited partnership. It offers the advantage of avoiding double taxation, common in C Corporations, and limited liability. In this way, LLC is a popular choice among various business types.

An LLC structure is suitable for companies with medium to high-risk levels and those that require capital raising while seeking asset protection. Its flexible management and tax benefits make it an appealing option for a diverse range of businesses.

Advantages Disadvantages
  • You have limited liability
  • You have the flexibility to allocate profits and losses not strictly based on the percentage of ownership.
  • You can choose your tax treatment as a C Corporation or a partnership, optimizing tax efficiency
  • You can attract partners and raise capital
  • Setting up an LLC typically involves higher costs compared to forming a partnership or sole proprietorship

2. What types of company should you choose when incorporating a company in the US?

For investors, three primary types stand out when forming a company in the US:

  • C - Corporation: You enjoy various advantages but might involve more complex procedures and requirements.
  • S - Corporation: You get access to unique benefits but this type is only for American control companies.
  • Limited Liability Company (LLC): You enjoy the advantage of limited liability and flexible tax treatment 
  Corporation (C-Corp) Small Corporation (S-Corp) Limited Liability Company (LLC)
Similarity
  • All are legal entities and have legal liabilities.
  • The assets of the company will be completely independent of the assets of the business owner, or other members or shareholders of the company.
Shareholder
  • No limit on the number of shareholders.
  • Foreign ownership is allowed.
  • Up to 100 shareholders
  • All shareholders must be US citizens
  • No limit on the number of shareholders.
  • Foreign ownership is allowed.
Annual compliance
  • Every year, the company must hold the Annual General Meeting of Shareholders and submit annual state reports, etc.
  • Every year, the company must hold the Annual General Meeting of Shareholders, submit annual state reports, etc.
  • Every year, there is no need to hold a Members' Council Meeting.
  • Your company is required to submit annual state reports
Tax policy
  • The company's income will be subject to corporate income tax.
  • Withdrawn dividends may be subject to additional personal income tax.
  • Pass-through taxation: The company's income will be subject to personal income tax.
  • Flexible tax regime. Businesses can choose to pay tax as a C-Corp, S-Corp, or as an individual.
Suitable for who
  • Suitable for individuals who want to have maximum protection and strict governance
  • Suitable for individuals who want to have maximum protection with simpler procedures
  • Suitable for individuals who want to have maximum protection, flexible and simple corporate governance, and tax optimization

3. How can we help you incorporate and manage your company in the US?

Global Link Asia Consulting, as your trusted one-stop corporate service provider helping hundreds of business owners start their businesses overseas and manage their companies with success, can help you

4. FAQs about business entities in the US

Here are 5 criteria to evaluate when selecting a suitable business type:

  • Company management rights: Determine how management responsibilities are distributed among business partners or owners.
  • Amount of investment capital: Assess the need for current and future capital raising or investment.
  • Business flexibility: Consider if the chosen company type allows for ease of operation and flexibility in testing business models.
  • Company maintenance requirements: Evaluate the complexity of managing the business and reporting to US government agencies, including any annual maintenance requirements.
  • Liability and taxation: Assess the level of protection against operational risks for owners and the complexity

The key difference lies in tax regulations. C Corporations are subject to corporate income tax and potential double taxation (company profits and dividends). S Corporations bypass double taxation, with profits taxed according to personal income tax.

For the purposes of corporate management and tax reporting between types of companies, the IRS has separate classification rules regarding unincorporated businesses and unincorporated businesses. 

A company with legal status (a separate legal entity from its owners) is registered for incorporation is named “Incorporated”
A company without legal status (The owner and the company are considered “one whole”) such as a Private company or a partnership. The government does not grant official legal status because the business owner will take full responsibility for the company's operations.

Foreign owners often consider C-Corporations, LLCs, and Partnerships. These structures provide varying levels of liability protection, tax advantages, and operational flexibility.

With over a decade of experience serving as a trusted partner to more than 750 business owners seeking professional development and breakthroughs in the international market, we are an  expert strategic corporate service provider helping you incorporate and operate successfully in 10 different countries

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