In a general business sense, you must have heard about the common types of business organisations such as corporate, a partnership firm, sole proprietorship firm, and a few others. But in the US, you can find a whole range of business entities. They have subcategories for each type, and that’s why it becomes evident to study these before you even think of setting up a business.
You can choose to open up a business entity depending upon your business requirements and the options available. In this article, we will discuss why there are several business entities in the USA. In the second part of the article, we will go through each one of these types.
Reasons for the different types of business entities in the USA
The wide segregation of business entities is due to two strong reasons:
- Lack of federal law – Due to the absence of common federal law, each province in the United States has authorization over the legal organizations. The state statute and common law govern these entities.
- Existence of a comprehensive tax code – The tax code has developed a unique layer for the business entities. As each entity takes benefits under the tax code, they have to be segregated in a different way.
Different types of business organisations in the USA
Now, let us get into the crux of this article. We will list out the types and subtypes and explain how they will be suitable for your business needs.
If you believe in joining hands with your buddies and convert this meaningful merger into a profitable business, then a partnership firm is something you can start. However, ensure that you have partners who are willing to contribute financially and actively to the business. Below are the four types of partnerships:
- General Partnership – This kind of partnership is familiar in the USA and does not need public filing. You could be an individual and ask a legal entity to enter into a partnership. You and your partners will be jointly and severally liable for the liabilities. This is a general kind of partnership that can be created easily with an agreement and without any fuss.
- Limited Partnership (abbreviated as LP) – In this partnership, there are two kinds of partners – general partner and limited partner. The general one is responsible for all the firms’ debts, while the limited partner has limited liability. General partners have complete control over the business operations, while limited partners do not contribute to the business management tasks. You can choose in the initial stages about the general and limited liabilities.
- Limited Liability Partnership – This partnership is permitted in certain states, exclusively for law firms, advocates, accountants, and architect firms. This is because the partner’s liability is limited. However, if the partner is involved in any malpractice or professional misconduct, his liability is unlimited. If you are starting a business as an architect or an accountant, or a legal advisor, then this partnership type is allowed and is certainly ideal.
- Limited Liability Limited Partnership (LLLP) – Yes, the industry and legal structure are aware that some partners would like to blend the features of the two partnerships, and that’s how LLLP came into existence. It is available in some states and is a perfect combination of LP and LLP.
2. Limited Liability Companies
As we have gone through the concept of limited liability in the above section, let us move to the next business entity prevalent in the United States – limited liability companies. Now, note that this is not about a partnership firm but a company made of owners. So, let us move ahead.
The business entity type, limited liability companies, offer flexibility in operations. Generally, two types of LLCs exist – Member-Managed and Manager-Managed. In the former, the members of the company operate as business managers. Whereas in the second type, the owners and managers are distinct identities.
In some states, the abbreviation Ltd. cannot be used, but in states like Texas, it is denoted a sole proprietorship. If your LLC has more than two partners, you can call it as a partnership under the federal tax code. LLC with one owner/member is a sole proprietorship concern. But when it comes to tax code, LLC is referred to as an S corporation, and a single-ownership LLC is required to fill the form as a sole proprietorship.
So, when you choose to start a limited liability company, you have to be conscious of the number of members or partners you have. This is because each aspect changes under the tax code and the federal regulations. In one state, your business entity is termed as a corporation, while in another, it falls under a partnership.
Professional Limited Liability Corporation – It is observed that the services offered by licensed professionals such as doctors, lawyers, legal counsels, architects, persons in accounting and architectural fields need to maintain higher ethical standards. Also, the regulations should be such that they do not indulge in malpractices. And so, the business entity of Professional Limited Liability Corporation came into existence. This is because in certain states, these professionals are not permitted to create an LLC, and they face several issues. In PLLC, the liability of the professional is limited only to the business side.
The corporations are popular, flexible, and most desirable by a budding entrepreneur. But with regards to the tax code, it is divided into five main categories as follows:
- C Corporation – When you register your business entity, it automatically becomes a C Corporation. There is a distinction between the corporation and the owners. The owner is offered substantial protection against the liabilities. But if profits are generated out of business, the owner has to pay personal income tax for the disbursement. This type of business organization is not suitable for new and small business types as the tax element is too stringent.
- S Corporation – After the company incorporation, you need to fill up a form with the IRS and your state of business operation and become an S Corporation. The revenue, losses, and tax items are passed through the corporation, not letting it pay tax.
- Non-Profit Corporation – As the name suggests, these are not established for profit purposes. These are governed by the 501 (c)(3) of the Internal Revenue Code, and there are several types in this subcategory.
- Professional Corporation – These corporations are suitable for the professionals offering medical, accountancy, legal services to the clients. The corporation laws have made special provisions for this kind of business entity to secure the licensed professionals.
- Doing business as – This type of business entity is permitted only for certain professionals and is more prominent in certain states. The person or the organization cannot use his name for running the business. Also, the person or entity conducting this business is not protected against debts and liabilities. Hence, if you are willing to take complete responsibility for your business but would like to name it separately and not your first name or entity name, then go for this business type.
In a nutshell, you have to deeply understand the above business entities before you launch your business. Moreover, you are required to study the tax code, regulations governing each state, and federal law to set up an organization as per business needs.