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Types of Business Entities in USA in 2021

business entity

Written by Hasham Usman

November 9, 2021

When a person is willing to start a business, The first question in his mind is which business entity is best for his business. Selecting a business structure is very important for Tax purposes. 

This small guide would come handy as far as basic information about available forms of Companies in the USA.

Types of business entities

In the United States, there are three business entities.

1. Sole Proprietorship

2. Partnership

3. Limited Liability Company

4. Business Corporation

business entities

Sole Proprietorship

A sole proprietorship (also known as a sole proprietorship, sole proprietorship, or simply owned) is a type of unincorporated entity owned by one person. It is the simplest legal form of a business entity.

Unlike partnerships or corporations, a sole proprietorship does not create a separate legal entity from the owner. In other words, the identity of the owner or sole proprietor is the business entity. Therefore, the entity owner is fully responsible for each of the liabilities incurred by the business.

Advantages of a Sole Proprietorship

  • Setting up a sole proprietorship is generally an easy and inexpensive process.
  • Sole proprietorships adhere to specific guideline requirements. Unlike corporations, sole proprietorships do not need to devote time and resources to various government requirements.
  • In Sole proprietorship, the owner of a sole proprietorship needs to pay taxes only one time. In Sole proprietorship, you do not need to pay income tax. 

Partnership

It is a partnership of two or more people (people who are individuals, corporations, other associations, LLCs, trusts or others) to conduct, as co-owners, a for-profit business. These people are responsible for the company, including all liability and profit or loss.

People who intend to form a partnership enter into an agreement to share the profits and losses. The Partnership must submit an informational statement to the government indicating what the Partnership’s gains and losses were and how they were allocated to the partners. Since the liability of the partners is joint and several, any individual partner may be required to pay all the debts of the company, regardless of the allocation of profits and losses or capital contributions made to the company.

Advantages of Partnership

  • Partnership business is the lack of formality compared with managing a limited company.
  • The partners can agree to create the Partnership verbally or in writing. There’s no need to register with Companies House.
  • Compared to a sole proprietorship, In Partnership, you can benefit from companionship and mutual support from partners.

Limited Liability Company

A Limited Liability Company (LLC) is a corporate structure that offers the limited liability protection features of a corporation and the tax efficiency and operational flexibility of a partnership.

Unlike shareholders of a corporation, LLC owners do not pay taxes as a separate business entity. Instead, all profits and losses are “passed on” by the business to each member of the LLC. LLC members report gains and losses on their federal income tax returns, just as partnership owners would.

LLC owners have no personal responsibility for the LLC’s obligations. An LLC is the entity of choice for companies looking to impose losses on their investors because an LLC provides comprehensive liability protection to all of its members.

Advantages of LLC

  • The members and managers of an LLC need not hold regular meetings, while Corporations must hold regular meetings of the board of directors and shareholders.
  • Members of an LLC are free to place their membership interests in a living trust.
  • Unlike a sole proprietorship or partnership, an LLC offers a deeper layer of personal liability protection against business debts.

Business Corporation

A corporation is a legal entity separate from its owners. Under the law, businesses have many of the same rights and responsibilities as individuals. They can contract, lend and borrow money, sue and be sued, hire employees, own assets, and pay taxes.

Advantages of Corporation

  • A corporation provides more personal asset liability protection to its owners than any other entity type.
  • Business Corporation is based on the percentage ownership of shares, which offers more flexibility than other entities.
  • Since most companies sell real estate through publicly traded stocks, they can quickly raise funds by selling stocks.

Final Thoughts

At the end of the day, You need to know which business entity is best for you and business intent. Each business entity included in this guide has its advantages and disadvantages. It totally depends on your business needs which business entity is suitable for you.

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