US BUSINESS STRUCTURES

Sole proprietorship is the simplest business structure. A single owner controls the entire business, is responsible for all financial obligations, keeps all of the profits and pays all of the taxes. The owner is basically taxed on business earnings the same as he or she is taxed on wages or salaries earned as an ordinary employee. There are, however, many lenient provisions in the federal tax code that allow a business owner to offset legitimate business expenses against income before calculating profits and taxes owed.

The advantages of a sole proprietorship are its simplicity and its minimum of restrictions. It is very easy to establish a new sole proprietorship and easy to terminate one. The chief disadvantages are the unlimited liability faced by the owner and the possible difficulty in raising capital.

Partnership is a business structure for a relationship between two or more persons who join together to conduct a business. Each member of the partnership contributes money, property, labor or skills and each member expects to share in the profits or losses of the business. The partnership agreement should define the responsibilities and liabilities of the individual members. Unfortunately, the IRS can hold each partner accountable for all tax liabilities regardless of the partnership agreement.

A partnership is easy to organize, combines the skills and financial strengths of more than one person, and legally defines the business relationship between its members. The chief disadvantage is the unlimited liability faced by each partner who could be held responsible for all of the business debts.

Limited Liability Company (LLC) or Limited Liability Partnership (LLP) is a business structure recognized in many, but not all US states. It combines certain features of a partnership with certain features of a corporation, most notably, limited liability. This is a state-defined structure not a federal tax entity. The Internal Revenue Service generally treats any LLC as a partnership.

The chief advantage of an LLC is its limitation on owner's liability. It is a bit more complicated to set up and maintain than a partnership.

S-corporation is a small business structure that elects to have its federal income tax treated in a manner similar to a partnership or a sole proprietorship. In general, the S-corporation does not pay federal income tax. Instead, the income and expenses of the corporation are divided among its shareholders who must pay individual income taxes on those transactions.

The advantages of an S-corporation are the limited liabilities of the owners as in a corporation with the simpler taxation structure of a partnership. S-corporations avoid some of the double taxation issues facing a C-corporation, but may find it more difficult to retain earnings within the business. It is more complicated to set up and maintain than a partnership.

Corporation, also known as a C-corporation, is treated as a separate legal entity with a business life separate from its owners. A corporation has rights and duties of its own. The owners of the corporation are stockholders. The managers and employees of the corporation are not required to be stockholders.

This is the most common business structure used for larger enterprises in the USA. It offers many advantages including limited liability for its shareholders. The life of the corporation can go on forever regardless of the ownership. It is relatively easy to transfer ownership through the sale of stock and it tends to be easier to raise capital for expansion. Shares of ownership in a corporation are generally bought and sold on one of the stock exchanges.

It can be more difficult and more expensive to set up a corporation than any other type of business structure. A C-corporation is usually subject to more federal and state controls and restrictions than a partnership or sole proprietorship. The corporation will be subject to tax on its income. That income can be taxed again when it is distributed to its shareholders, thus creating double taxation of the same income.

Choices:

If you are starting a small business in the USA, it is generally simplest to set up a sole proprietorship or partnership. If you are forming a more complex business with numerous owners, or with the potential for significant expansion, you should consider forming an LLC or corporation. It is best to first discuss the benefits and liabilities of the various structures with a tax specialist.

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