TYPES OF BUSINESS ENTITIES

There are many types of business entities in the US. They fall into two main groups: those that are filed at the office of the local county clerk, while the remaining types of companies are filed with the Secretary of State or similar office of the state government.

MOST COMMON TYPES OF BUSINESS ENTITIES FOR US RESIDENTS

1. CORPORATIONS

BEST USED FOR

• Seeking venture capital or other outside investment
• Ongoing profitable business
• Management looking for traditional structure

NOT GOOD FOR

• Those needing or wanting pass-through taxation
• Those who don’t like holding meetings and dealing with formality

ADVANTAGES

• Limited Liability protection for the owners
• Ability to raise outside investment
• Decades of legal precedents to follow
• Well-understood legal structure

DISADVANTAGES

• Strict formalities to follow
• Must file corporate tax return each year
• Can be complex to maintain
• Annual taxes, fees and reports to file and pay
• Can be complex to close down
• C Corporations face double taxation Subject to tax on worldwide income

FILED WITH

• State government

2. LIMITED LIABILITY COMPANIES (LLC)

BEST USED FOR

• Owners looking for less formal structure
• Investing in real estate and passive investments
• Corporate subsidiaries

NOT GOOD FOR

• Those seeking professional investment (venture capital)
• Non-US residents doing business in the US, particularly Canadian resident

ADVANTAGES

• Limited Liability protection for the owners
• Easy to maintain
• Extremely flexible for legal and tax purposes, so can be tailored to the needs of the owners and the particular deal
• Flexible allocation of profits/losses among the members.

DISADVANTAGES

• Difficult to use for obtaining outside investment
• Setting up properly can be tricky, especially with multiple members
• Can be complicated if new members added or existing members leave
• Members (owners) are subject to self-employment and unincorporated business taxes
• Can be complex to close down
• Members living in other states can create tax complications if they are active in company management

FILED WITH

• State government

3.SOLE PROPRIETORSHIP

BEST USED FOR

• Looking for no long term commitment
• Easy to start and stop
• Simple taxes

NOT GOOD FOR

• Those who want limited liability
• Those who are thinking to build up a real business
• Want to hire employees or otherwise have liability risks

ADVANTAGES

• Fast, easy and cheap to form on your own
• Easy to close/end

DISADVANTAGES

• Provides NO liability protection to the owner
• Extremely difficult to obtain outside funding
• Extremely difficult to obtain outside funding

FILED WITH

• County Clerk