The following are the main types of business entities in the USA:
- Corp., Inc. Corporation, Incorporated : used to denote corporations (public or otherwise). These are the only terms universally accepted by all 51 corporation chartering jurisdictions in the United States. However, in some states other suffixes may be used to identify a corporation, such as Ltd., Co./Company. Some states that allow the use of “Company” prohibit the use of “and Company”, “and Co.”, “& Company” or “& Co.”. In most states sole proprietorships and partnerships may register a fictitious “doing business as” name with the word “Company” in it.
Corporation or company can be designated by the following types:
- C Corporation. A corporation is a separate legal entity set up under state law that protects owner (shareholder) assets from creditor claims. Incorporating your business automatically makes you a regular, or “C” corporation. A C corporation (or C corp) is a separate taxpayer, with income and expenses taxed to the corporation and not owners. If corporate profits are then distributed to owners as dividends, owners must pay personal income tax on the distribution, creating “double taxation” (profits are taxed first at the corporate level and again at the personal level as dividends). Many small businesses do not opt for C corporations because of this tax feature.
- S Corporation. Once you’ve incorporated, you can elect S corporation status by filing a form with the IRS and with your state, if applicable, so that profits, losses and other tax items pass through the corporation to you and are reported on your personal tax return (the S corporation does not pay tax).
- Professional corporation : abbreviated as PC or P.C. are those corporate entities for which many corporation statutes make special provision, regulating the use of the corporate form by licensed professionals such as attorneys, architects, accountants, and doctors.
- Doing Business As : denotes a business name used by a person or entity that is different from the person’s or entity’s true name. DBAs are not separate entities and do not shield the person or entity who uses the DBA as a business name from liability for debts or lawsuits. Filing requirements vary and are not permitted for some types of businesses or professional practices.
Limited Liability Companies
- LLC, LC, Ltd. Co. Limited Liability Company : a form of business whose owners enjoy limited liability, but which is not a corporation. Allowable abbreviations vary by state. Note that in some states Ltd. by itself is not a valid abbreviation for an LLC, because in some states (e.g. Texas), it may denote a corporation instead. See also Series LLC. For U.S. federal tax purposes, in general, an LLC with two or more members is treated as a partnership, and an LLC with one member is treated as a sole proprietorship. Tax-wise, an LLC is similar to an S corporation (or S corp), with business income and expenses reported on your personal tax return. If you are the only owner of an LLC, you are viewed as a “disregarded” entity. This means you report the LLC’s income and expenses on Schedule C of Form 1040─the same schedule used by sole proprietors.
- PLLC Professional Limited Liability Company : some states do not allow certain professionals to form an LLC that would limit the liability that results from the services the professionals provide such as doctors, medical care; lawyers, legal advice; and accountants, accounting services; architects, architectural services; when the company formed offers the services of the professionals. Instead those states allow a PLLC or in the LLC statutes, the liability limitation only applies to the business side, such as creditors of the company, as opposed to the client/customer service side, the level of medical care, legal services, or accounting provided to clients. This is meant to maintain the higher ethical standards that these professionals have committed themselves to by becoming licensed in their profession and to prevent them from being immune (or at least limit their immunity) to malpractice suits.
- General Partnership : is a partnership in which all the partners are jointly and separately liable for the debts of the partnership. In most U.S. states, it can be created by agreement without requiring a public filing. The partners may themselves be legal entities or individuals.
- LP Limited Partnership : a partnership where at least one partner (the general partner, which may itself be an entity or an individual) has unlimited liability for the LP’s debts) and one or more partners (the limited partners) have limited liability (which means that they are not responsible for the LP’s debts beyond the amount they agreed to invest). Limited partners generally do not participate in the management of the entity or its business.
- LLP Limited Liability Partnership : a partnership where a partner’s liability for the debts of the partnership is limited except in the case of liability for acts of professional negligence or malpractice. In some states, LLPs may only be formed for purposes of practicing a licensed profession, typically attorneys, accountants and architects. This is often the only form of limited partnership allowed for law firms (as opposed to general partnerships).
- LLLP Limited Liability Limited Partnership : a combination of LP and LLP, available in some states.
Pros and Cons
General Corporation (C Corporation)
A General Corporation (or “C Corporation”) is the most common corporate structure for medium and large companies. Characteristics include:
- Unlimited Number of Shareholders
- Separate Legal Entity
- Taxation of Profits and Losses at the Corporate Level
- Possibility to Raise Capital with Sale of Shares
- Easy Transfer of Shares
- Tax Benefits
- No Obligation for the Shareholders or Directors to be U.S. Citizens or Residents.
A Close Corporation is similar to a C Corporation, except for the following aspects:
- Number of Shareholders Limited to 30
- Transfer of Shares Conditional to Directors’ Prior Approval
- Prohibition to Trade Shares on the Stock Exchange
An S Corporation is actually a C Corporation which then obtains a special tax status from the Internal Revenue Service (IRS). The Corporation must apply to obtain this special status within a certain time frame after its incorporation. Instead of being taxed at the Corporation level, the profits and losses are transferred, for tax purposes, to the Shareholders (as though they were partners). Double taxation is avoided (i.e. at the corporate level and at the personal level) and does not alter any of the legal protection offered by a Company.
- Protection of the Shareholders’ Assets
- Profits and Losses of the Corporation Allotted Directly to the Shareholders
- U.S. Citizenship or Residency Required for Shareholders
- Number of Shareholders Limited to 100
- Only One Class of Shares
- Other Restrictions Applicable
Limited Liability Company (LLC)
Introduced in the United States by the State of Wyoming in 1977 and now recognized by all U.S. States, the Limited Liability Company (LLC) is a profitable mix of a Corporation and a Partnership. As a general rule, the revenues and losses of an LLC are allotted to its Members (the equivalent of Shareholders in a Corporation), which avoids double taxation (to the LLC and its Members). This type of Company resembles the S Corporation, but without the restrictions attached to the latter. The advantages of an LLC are as follows:
- Absence of taxation at the corporative level, except if this tax option has been specifically requested
- Personal Liability of the Members limited to their investment within the LLC
- Protection of the Members’ Assets
- No Possibility for an LLC Creditor to seize control of the LLC’s assets, nor Member’s voting rights
- Profits and losses of the LLC allotted directly to the Members, in the proportion determined by them
- Unlimited number of Members
- Flexibility to organize the LLC
- Elimination of the usual corporative formalities (e.g. Minutes, Bylaws, meetings, Officers and Directors, etc.) if specified in the LLC Operating Agreement
- Drafting of LLC Operating Agreement in any language (no obligation to write or translate into English)
- No Obligation for the Members or Managers to be U.S. Citizens or Residents.