US Market
Types of Business Entities & Corporation in the USA
How to Decide What Type of Business Entity is good for you before you form or incorporate a Company
in USA.
When a person plans to set up a business, one of the first questions that crosses one's mind is to determine
what business structure is suitable for the intended business. That is to say what business identity one wants to
adopt for one's business out of the various options available under law. Taking this decision is necessary for tax
purposes and also helps an entrepreneur to plan for the future business expansion. It is here that the present
article would come handy as far as basic information about available forms of business organizations are
concerned. Try to learn as much as you can before making a decision. In addition, be sure to consult a lawyer
to assist you and to answer any questions that you may have.
Now about options for business structuring under law.
FORMS OF BUSINESS ENTITIES
While there are many different forms of business entities, there are four main types in the United States:
1.Sole Proprietorship
2.Partnership
3.Limited Liability Company
4.Business Corporation
1. Sole Proprietorship
Sole proprietorship is the simplest form of business type. It is a business owned and controlled exclusively by
one person. This person is responsible for the business, including all liability and any profit or loss.
Features:
- Inexpensive to form
- Easy to dissolve
- Generally have no tax aspects
- Virtually no formalities to be observed except basic bookkeeping
- Firm's liabilities are treated as personal liabilities of the owner
- On death of the owner sole proprietorship immediately ceases to exist
Profits and losses of the business are of the owner's personal income and the proprietorship firm is disregarded
for tax purposes. However, since legally the firm is nothing more than an individual using a trade name, there is
no limit to the owner's liability for the firm's obligations.
2. Partnership
It is an association of two or more persons (persons being people, corporations, other partnerships, LLC's,
trusts or others) to carry on, as co-owners, a business for profit. These individuals are responsible for the
business, including all liability and any profit or loss.
The persons intending to enter into a partnership make an agreement to share profits and losses. The
partnership is required to file an informational return to the government to report what the profits and losses of
the partnership were and how these were allocated to the partners. Since the liability of partners is joint and several, any particular partner can be made
to pay the entire debts of the partnership, regardless of the
allocation of profits and losses, or capital contributions made into the partnership.
Features:
-Relatively inexpensive to form
- Each partner has joint and several liability to the partnership
- Taxation is a bit complex, but the partnership itself pays no taxes
Partnership can be as simple or complex in structure and administration as the partners want it to be. A
partnership ceases to exist when certain criteria are met, such as the death or bankruptcy of a partner; or if the
partners decide to end the partnership.
There are three kinds of partnerships:
General Partnership:
This is the most basic type. It assumes equal partnership, and therefore equal ownership. All management and
liability is shared between the partners, unless otherwise specified.
Limited Partnership (a Partnership with Limited Liability):
In limited partnership, one or more general partners manage the business and are personally liable for
partnership debts; and there are one or more other limited partners who contribute capital and share in profits
but who do not run the business and are not liable for the partnership obligations beyond contribution.
A general partnership may elect to have limited personal liability for its general partners by registering this
election with the Secretary of State. In such a case, the partners are responsible to the extent of their
investment.
Joint Venture:
This type of partnership is time-based. Two or more individuals may work together for a particular project or for
an extension of time. Upon completion, the partnership is dissolved. If the individuals would like to continue to
work together after that, they would then register as general partners.
