Most Common Types of Business Entities In The US
Given the expansive nature of the US economy, there are a variety of business entities that businesses can choose from within their formation period. The most common business entity and type in the US is the Limited Liability Company, or LLC, as of 2022. The other forms of business entities range in popularity such as S-Corporation. However their use is specific to the needs of any business. Business owners need to research the benefits of each entity, and consider seeking guidance and counsel before committing to one business entity.
Most Common Business Entities
Limited Liability Companies
LLCs are legal business entities that provide members with liability protection. This form of business entity is popular because of both the taxation benefits, and the liability protection. LLCs are pass-through entities, which means that income is passed through individual tax returns. LLCs allow members to be protected from any liability. This liability protection extends to debts, lawsuits, and other claims. This means that if the business is subject to any liability, the individual members will not be personally liable. This protects the personal assets of any business members.
A sole proprietorship is often considered the most straightforward business entity. Sole proprietorships are owned and operated by a single person or member. This means that there is no legal separation between the owner and the business itself. This particular business entity is most prevalent amongst small businesses. Like with LLCs, sole proprietorships utilize pass-through taxation. However, unlike LLCs, business owners are subject to liability within sole proprietorships.
A partnership is similar to a sole proprietorship, in that there is no legal separation between owner and business; however, within partnerships, more than one owner can exist. This is common when more than one person seeks profit for a singular business idea. In these cases, all partners would formulate an agreement regarding profit sharing and business operations. Partnerships should report their tax, and must file a yearly return. Each partner or owner needs to report and pay taxes based on their profit portion. Much like sole proprietorships, partnerships have expansive liability.
Whilst corporations are one of the more common business entities, they tend to be more complicated to form. Corporations are separate from their owners. As a result, corporations can enter and agree to legal parameters separately from their owners. However, corporations are generally responsible for tax. The difference between s-corporations and c-corporations is largely due to tax structure. C-corporations are subject to double taxation, whereas s-corporations are not. Whilst s-corporations need to report their tax, profit depends on individual tax returns. Like LLCs, members within s-corporations are generally exemot from liability.
S companies are required to adhere to certain formalities, including the adoption of bylaws, the issuance of stock, the conducting of initial and annual director and shareholder meetings, and the preservation of meeting minutes and corporate records.
Formalities such as the adoption of an operating agreement, the issuance of membership shares, the holding and documentation of annual member meetings (and manager meetings, if the LLC is manager-managed), and the documentation of all major company decisions are all recommended for limited liability companies (LLCs).
The Differences between LLCs and S-Corporations
The main difference between an LLC vs s-corporations is that s-corporations allow owners to be taxed as employees. This is different to LLCs, as owners pay self-employment tax. It is important to note that LLCs are a legal business entity, which allows owners to have liability protection. If a business is without being a legal entity, they would not have the same liability protection. Non-legal business entities are sole proprietorships and general partnerships. Notably, businesses need to be operating as an LLC before they can elect to an s-corporation status.
Variations in property ownership and associated formalities
Ownership. The regulations of the IRS place restrictions on ownership of S corporations but do not apply to limited liability firms. The following are examples of limits by the IRS:
- A limited liability company (LLC) may have an unlimited number of members, but a S corporation may have no more than one hundred stockholders (owners).
- LLCs allow for members who are not citizens or residents of the United States, while S corporations cannot have stockholders who are not citizens or residents of the United States.
- It is not possible for corporations, limited liability companies (LLCs), partnerships, or most trusts to possess S corporations. LLCs do not fall under this category at all.
- There are no limitations on the number of subsidiaries that an LLC may have.
- S businesses should not issue separate classes of stock that come with distinct financial rights. This means that they cannot give certain shareholders a higher priority when it comes to receiving dividends than other shareholders. LLCs are exempt from limitations of a similar kind.
A major step before starting a business is deciding which business entity is best for you among common types of busines entities. Businesses need to devote time to assessing the multiple business entity options available to them. Whilst forming a business as a limited liability company is most common, s-corporations, partnerships, and sole proprietorships are other common and popular business entities.
- Your decision about your company’s legal structure is crucial. The entity you choose has a significant influence on your legal exposure, money, and how others view your company.
- In general, bear the following points in mind when you choose amongst the various corporate entity types:
- The best “starter” entities are sole proprietorships and general partnerships.
- As your company expands and brings in more revenue, you could think about becoming an LLC or corporation.
- Consider the advantages and disadvantages of each kind of business entity in terms of legal protection, taxation, and governmental regulations.
- To get assistance for your company, consult with a business attorney and accountant.
In the end, even if there isn’t a single ideal business entity option for all small enterprises. You may choose the one that’s best for your company by consulting our guide and legal or financial experts.
David is a dynamic, analytical, solutions-focused bilingual Financial Professional, highly regarded for devising and implementing actionable plans resulting in measurable improvements to customer acquisition and retention, revenue generation, forecasting, and new business development.