The US offers multiple entity types to support your business formation
If your looking to setup a company in the US and your unsure what options you have in terms of company structure, you will be pleased to know the US has quite a few entity types to support your business model.
Let’s assume you already have a business in your home country and your looking to expand into the US market to replicate and expand upon your existing business. The US offers excellent flexible company ownership options and its likely that you can find a structure that replicates any setup you have in your home country.
Why your entity type matters
Different entity types provide different options for owners in terms of protection of assets and the ability to attract and incorporate outside investors. If ease of management is your primary objective the basic option would be a sole proprietorship structure, yet this offers little in the way or protections or the ability to incorporate venture capital investment.
To explain the US entity types that are available, we have listed them below, as they relate to foreign ownership options in the ‘for-profit’ space.
LLC as an Option
An LLC provides a more formalized legal structure than a sole proprietorship that offers further protection from liability to the owner in the case of litigation. An LLC is a structure that separates your personal assets from your company’s debts.
In an LLC, there is no limit to the number of members (as opposed to “partners”) and ownership can be broken down into different classes, which gives entrepreneurs and investors some flexibility when it comes to raising equity financing. An LLC does not have a board, hold annual meetings, or record minutes which means less administration of the entity.
In terms of operation versus investment, an LLC makes sense if your company is only at the stage in your development process where you will have the ability to attract angel investors, but not VCs (i.e. you are expecting that your business will generate losses). Angels will be motivated by the potential tax losses; VCs will not. VCs still prefer purchasing stock in a corporation over purchasing membership interests.
What is an LLC? A limited liability company is a legal entity that combines the limited liability protection of a corporation with the tax benefits of a partnership and is commonly favored by small businesses. An LLC can have one or more owners – referred to as members – that include corporations, individuals, foreign entities and other LLCs.
Keep in mind not every business can operate as an LLC so check your state statutes. The banking and insurance industries, for example, are typically prohibited from forming an LLC, while some states like California and Nevada prohibit licensed professionals – accountants, architects, attorneys, physicians – from forming an LLC. However, licensed professionals who want the same benefits as an LLC can form a professional limited liability company (PLLC) in most states, except California.
Partnerships and Limited Liability Partnerships
If you decide to bring in partners, you will need to set up a general partnership, which usually includes some sort of formal partnership agreement signed by all partners (usually not requiring a state filing). This kind of business structure is also simple and easy to operate. Forming a partnership will enable you to raise money by selling partnership interests.
But with a general partnership, there is still a fuzzy line between personal and business finances, so all partners could find themselves in financial trouble as a result of a business issue. There’s also some potential confusion around partner roles, responsibilities, and liabilities.
What is an LLP? An LLP is a general partnership formed by two or more owners – referred to as partners – and the LLP definition is similar to that of an LLC. It is a cross between a corporation and a partnership, and the partners enjoy some limited personal liability. Professional businesses are commonly organized as an LLP.
There is one significant difference between LLP and LLC. An LLP must have a managing partner that is liable for the actions of the partnership. As long as silent partners and investors don’t assume a managerial role, they receive liability protection.
About 40 states allow the formation of an LLP, and the laws vary by state. Some states limit what professions can form an LLP, so check your state statutes.
Note: If your business plans to operate in multiple states, check the state’s statutes to ensure the state recognizes a foreign LLP – a LLP formed in another state. For example, a state that limits what professions can form an LLP may not recognize an LLP from a state that doesn’t and this can have personal liability repercussions.
Both limited liability companies (LLCs) and limited liability partnerships (LLPs) combine aspects of corporations and partnerships. Differences between the two business structures include management requirements, liability protections, liability insurance obligations, and tax benefits. Different states often have significantly different requirements. Which of the two structures you choose for your company can have important long-term repercussions.
There are two common management structures for an LLC. LLC members can manage the business themselves – commonly referred to as member management -- or hire or appoint one or more members and/or non-members to manage the business – commonly referred to as manager management. Unlike a member management structure where each member shares responsibility for running the business, the management team runs the business under a manager management structure and the remaining members aren’t involved in business decisions.
An LLP operates like a general business partnership, where management duties are equally divided between partners. A partnership agreement should set out how business decisions will be made.
What about an S-Corp?
Without getting into too much detail, S corporations are named because of how they take advantage of Subchapter S of the federal Internal Revenue Code that allows them to avoid taxation of corporate income (at the federal and state level).
This is a great option for you if you are fine with limiting the number of shareholders and in need of liability protection. A S corporation separates your personal assets from your company’s debts and offers some tax benefits (which may not be that big of a deal if you’re in the early-stages and not making any money). S corps are not so great if you’re seeking venture capital because you’re limited to one class of stock, which eliminates your ability to do multiple financing's.
It is possible down the road to convert your company into a different entity, so don’t worry too much about being stuck with your decision. That said, it’s worth sitting down and thinking about your financial projections and goals (and possibly meeting with a lawyer or finance professional) to figure out which business structure is going to be most helpful for your business right now.
S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
To qualify for S corporation status, the corporation must meet the following requirements:
• Be a domestic corporation (Founders must be US citizens or permanent residents)
• Have only allowable shareholders
• May be individuals, certain trusts, and estates and
• May not be partnerships, corporations or non-resident alien shareholders
• Have no more than 100 shareholders
• Have only one class of stock
• Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
If you’re in your early stages (particularly pre-revenue) and have your sights set on venture capital, opting for a C-corp makes sense. VCs are comfortable investing in this type of company. And there are other advantages to this kind of entity outside of funding including a separation between debts, tax, and legal structure from your personal assets.
There is an added level of structure that goes along with a C corp such as the need to start holding annual meetings and record minutes. The potential downside is that the C corp is taxed on its corporate profits, but when you’re just starting out, you likely don’t have any profits to be taxed on so this isn’t really a problem.
A C Corporation is one of several ways to legally recognize a business for tax, regulatory and official reasons. A C Corp is simply a way to structure ownership of a business, and contrasts with other popular business structures including Limited Liability Companies (LLCs), S Corporations, Sole Proprietorships and others.
Generally, a C Corporation structure is better for larger businesses. This is particularly true if they intend to publicly trade shares, through having an Initial Public Offering, or IPO. A C Corporation is much more attractive to potential investors, including venture capitalists and shareholders because it allows wider ownership of the corporation.
The majority of larger businesses in the United States are structured as C Corporations, although a C Corp could, theoretically, consist of just one person. The information below will help you decide if a C Corporation structure is right for your business.
What Are the Differences Between an S Corp, C Corp and LLC?
Two other popular business entity structures in the US are the S Corp and the LLC. They provide many of the same protections offered by a C Corp but have less formal rules on taxation, governance and compliance. This can mean more flexibility in how an LLC or S Corp is owned and funded.
One of the main differences between C Corps and S Corps / LLCs are how income from the different types of businesses are taxed.
• For LLCs and S Corps, any income earned by the business “flows through” to the business owners’ / shareholders’ / members’ tax returns, where it is taxed as part of1 their overall income. The company does not have to file a separate tax return.
• S Corps and C Corps can pass on some of their profits to shareholders as dividends.
• S Corps are limited to having a maximum of 100 shareholders.
• A C Corp is taxed at the corporate level — That means it has to file a separate tax return as a business entity and will need to pay corporation tax on any profits earned.
About Yondaa, Inc.
Yondaa was formed on the premise that it shouldn’t be complicated to start a business. In an age of increasing globalization, we believe that setting up a business in the largest market in the world should be simple and free of red tape. That’s why our core service is removing bureaucratic complexity and packaging company formations into an easily manageable process where clients utilize our online platform to establish a business.
We provide companies, individuals and entrepreneurs with an online, automated platform that provides the ability to setup a company in the US remotely from anywhere in the world. This includes all the necessary periphery services such as obtaining a US business address, filing articles of organization or incorporation with the state where you intend to setup your business, obtaining the necessary EIN Tax ID's from the IRS and ultimately delivery of your fully incorporated business documents to you anywhere in the world.
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