The Great American Dream often involves starting your own business and becoming your own boss. This dream can turn into an incredible success story or a significant disappointment, and often the decisions made at the beginning of the journey make all the difference. One of the first and perhaps most critical steps is to decide what type of company you will establish. Should you choose a 'C Corporation', 'S Corporation', 'Limited Liability Company (LLC)', 'Sole Proprietorship', or 'Partnership'? Making a decision isn't easy, and each will have various implications, from how your company is taxed to the legal liability of the owners and the potential for growth. We have prepared a guide to help navigate you on this journey and help you find your place in the business world in America. Let's explore the types of companies in America together.

A Limited Liability Company (LLC)

A specific type of private limited company is used in the United States. The LLC provides limited liability to its owners (called members) and is typically considered a "pass-through entity," meaning the company's profit or loss is directly passed on to the members and taxed.

Here are a few key points:

Limited Liability: The owners of an LLC are protected, their personal assets shielded from business-related debts and legal obligations. However, this protection requires business owners to maintain a certain set of legal and ethical standards.

Taxation: An LLC passes tax obligations onto its members. This "pass-through" taxation allows business income to be taxed by adding it to the member's personal income tax returns. Single-member LLCs file tax returns under the owner's name, and if there are multiple members, a Partnership tax return is filed to distribute the company's profit/loss among the members, and the tax is paid by the company's members on their tax returns.

Flexible Management: LLCs can usually be run without a board of directors or formal officers. Members can be involved in the everyday operations of the business or appoint a manager.

State Regulations: LLCs are subject to the laws of the state in which they are formed. These laws regulate the formation, management, and dissolution of the LLC. Therefore, choosing the right home state is crucial.

While LLCs offer owners flexibility and protection of personal assets and can help reduce the tax burden, collaborating with an accountant to fully understand all advantages and disadvantages of an LLC can be the right choice in determining if it's the right fit for a particular business.

C Corporation (C Corp)

One of the most commonly used types of companies in the United States. A C Corporation is a type of company that exists as a separate legal entity and has unique legal responsibilities toward its shareholders, board members, and employees.

Here are some essential points to know about C Corporations:

Limited Liability: The shareholders of a C Corporation are protected from business-related debts and legal obligations. This protection, stemming from the company being a separate legal entity, ensures shareholders' personal assets are not at risk.

Separate Tax Obligation: C Corporations are considered separate tax entities. This means the corporation pays its own income tax. However, this leads to the issue of "double taxation": After the company pays tax on its profits, the distributed part of these profits (dividends) to the shareholders is taxed again. Our IRS Enrolled Agent and Tax Planning services at TAM Accounting can prevent double taxation with various strategies.

Shareholders and Board of Directors: C Corporations are managed by a board of directors elected by shareholders. The board oversees the company's daily affairs and appoints executives.

Public Offering: C Corporations can go public, selling shares to a broad investor base to raise capital. This feature can be attractive, especially for companies aiming for growth and expansion.

Continuity: C Corporations continue to exist even if shareholders die or wish to sell their shares. This is important for business continuity.

While there are some advantages to C Corporations, there can be disadvantages like being a separate tax entity and being subject to double taxation. Therefore, consulting with an expert accountant about what type of company to establish, and how to operate the company, is essential.

S Corporation (S Corp)

An S Corporation is a type of company frequently preferred by small and medium-sized businesses in the United States. Unlike a C Corporation, an S Corporation is a type of "pass-through entity" that offers tax benefits.

Here are some important points to know about S Corporations:

Tax Benefits: Perhaps the biggest advantage of S Corporations is that they prevent double taxation. An S Corporation "transfers" various financial matters such as income, loss, tax deductions, and credits to its shareholders, which allows the shareholders to report these amounts on their personal tax returns. In this way, both corporate and personal tax is not paid on the company profit.

Shareholder Limitations: S Corporations cannot have more than 100 shareholders, and all shareholders must be U.S. citizens or permanent residents. Also, an S Corporation cannot issue many different types of shares like a C Corporation; it can only issue one type of share.

Limited Liability: Just like in C Corporations, S Corporation shareholders have limited liability. This protects the personal assets of the shareholders from the company's debts.

Continuity: An S Corporation continues to exist even when shareholders die or want to sell their shares.

While an S Corporation has specific advantages, it also has some disadvantages such as restrictions on the number and type of shareholders. It's important to consult an accountant when deciding what type of company to establish. These professionals can help determine the type of company that best fits the needs and goals of a particular situation.

Partnership In the United States, a partnership company is typically taxed as a "pass-through entity". What does this mean?

In a pass-through entity type of business, the company usually does not pay any income tax at the company level. Instead, the company's income, losses, tax credits, and other tax liabilities "pass through" directly to the partners, and the partners report these amounts on their personal income tax returns.

For instance, let's assume that there are three equal partners in a partnership and that the company earned a profit of $150,000 in one year. In this case, this $150,000 is divided equally among the three partners, each receiving $50,000. Each partner reports their share of $50,000 on their personal income tax return and pays tax on this amount.

Moreover, a partnership must also complete a tax return called Form 1065 (U.S. Return of Partnership Income) and send it to the Internal Revenue Service (IRS). This form reports the total income, profits, and losses of the partnership and determines each partner's share.

This tax structure prevents "double taxation". That is, both the company and the partners do not have to pay tax on the same income.

Sole Proprietorship

A Sole Proprietorship is a type of business that is owned and managed by a single person. The owner benefits from all the profits of the business but is personally responsible for all the business's debts and obligations. A Sole Proprietorship is typically the least complex and least costly type of business, but it carries the highest personal risk.

When deciding which of these types of businesses is right for you, it is important to consult an accountant. Each type of business has its unique advantages and disadvantages, and it is important to carefully evaluate all options to make the right choice. The success of your business will largely depend on your business type and how it's operated. Working with a professional accountant in the U.S. will help you choose the right type of company in all aspects and eliminate many problems you may face in the future. Contact us today and let us explain how we, as TAM Accounting, can assist you in forming your Company Structure and Legal Entity and Strategy and Growth in the U.S.