The U.S. continues to be one of the most pro-business environments in the world. If you’re a Canadian or citizen of another foreign nation, there are clear benefits to launching or expanding your firm in the states.
But before doing so, you’ll need to understand a little more about the various structures and legal guises that are available in this business environment.
Four Types of Business Structures
A business structure may seem like it involves nothing more than a piece of paperwork or administrative box to be checked off. But it’s actually a significant facet of how one establishes a company’s financial and legal foundation.
In the U.S., there are five common structures. Here they are and what each one entails:
1. Sole Proprietorship
This is the simplest set-up. Technically, you don’t have to do anything to form one, but there’s no liability protection or separate tax status. The owner simply files revenue on his or her personal income tax return as a Schedule C.
Perhaps the biggest perk in a sole proprietorship is the fact that your business earnings are taxed only once — unlike most other structures. You simply pay estimated taxes in four equal amounts throughout the year.
A disadvantage is that you’re personally responsible for any debts the business incurs. If your firm is unable to pay off its debt, creditors can come after your personal assets (such as your house).
Although limited liability companies (LLCs) have been around since the 1970s, they’ve grown substantially in popularity over the past two or three decades. Apart from sole proprietorships, the LLC is the most popular business entity.
LLCs are essentially a hybrid that combines some of the most attractive benefits of both partnerships and corporations. They’re extremely easy to establish — even for foreign citizens.
You don’t have to be a US citizen or company to create one. The barriers to entry are low and the ongoing upkeep minimal.
If you’re going into business with other people, a partnership may be the best option. There are two common types: limited partnerships and limited liability partnerships.
In a limited partnership, one general partner has unlimited liability, and the others have only limited liability. The general partner gets more control over the company, but all the players have some leadership and management capabilities.
In a limited liability partnership, all partners incur limited liability. This offers protection of personal assets and ensures one partner cannot be held responsible for the actions of the others.
A corporation — also commonly referred to as a C corp — is a legal entity that’s distinct and separate from its owners. Corporations are taxed on profits and can be held legally liable.
A corporation is the strongest protection against liability (from an owner’s perspective), but it’s also the costliest. Owners get taxed twice: first when the company makes a profit and second when the owner is paid.
Choosing the Right Business Structure
As we’ve explained, every business structure offers a unique set of benefits. But there are also risks and negatives that come with each option.
As you consider which one might be the best for you and your operation, you’ll want to think about the following five factors:
- Control. How much control do you want and need over the company? Are you planning to do it alone, or have partners? The type of entity you select will determine how the business operates.
- Liability. This is obviously a huge element in the equation. Most people prefer to limit the amount of personal liability they have in the business. The more complex the structure, the more you can keep your personal assets out of harm’s way.
- Taxes. The business structure you select has a significant impact on the amount of taxes you and your business will be expected to pay. Do you want to keep things simple, and file your taxes as part of your personal return? Or are you interested in separating everything for other potential tax advantages?
- Cost. Every legal structure involves different costs. Some are cheap to set up, others require a hefty initial investment. Some can be done on a DIY basis, while others will call for assistance from lawyers and accountants.
- Administration. The ongoing administration of a legal entity can also vary dramatically. If you want something that requires little to no maintenance, you can find it. But if you want a more complex structure, it may require precise record-keeping and filing.
If you’re thorough and accurate in your evaluation of each of these elements, you’ll find it easier to narrow down the options and select the right business structure. It should be noted that there is no perfect legal entity, though.
Any time you choose one option over another, you’ll have to make sacrifices. The essential thing is to arrive at an educated decision that puts your best interests first.