Filed under BlogFriday, 18 January 2019
There are a variety of different corporate structure types that your business can take, and deciding which one is an important step in setting up in the U.S.
The key to choosing the right one is knowing what your goals are as a business as well as getting advice from an expert. Depending on what these are, each model will offer its own benefits and limitations.
Let’s start by explaining what each model is along with their advantages and disadvantages.
Business structure: Sole Proprietorship
Advantages: The go-to setup for a single owner business which requires very little paperwork, cost and administration; the owner has total control; any profits pass through the owner's personal tax return.
Disadvantages: The business owner (or owners) are liable for the business' debts and obligations and is a poor vehicle for raising external investment.
Business structure: General Partnership
Advantages: The go-to setup for a multi-owner business which requires very little paperwork and administration; any business profits pass through to the owners' personal tax returns; owners are able to divide control how they see fit.
Disadvantages: There is no separation between the business's and the owners' personal liability and is a poor vehicle for raising outside investment.
Business structure: Limited Partnership
Advantages: Provides the business with a partnership structure while making it easier to raise outside investment.
Disadvantages: Limited partners have no control in the management of the business as this would be left to the general partners.
Business structure: Limited Liability Company (LLC)
Advantages: Owners' personal liability is protected; owners have greater flexibility than a corporation on management and also how profits may be split.
Disadvantages: The income of an LLC are subject to self-employment tax contributions (Medicare and Social Security) which can be avoided as a Corporation.
Business structure: C Corporation
Advantages: Shareholders' personal liability is protected; external investment and capital is easier to raise, and this is typically seen as an established corporate entity.
Disadvantages: Double taxation occurs when tax is paid on corporate income and then again at the personal level when dividends are drawn from the corporation; personal taxes are due on any salary or dividends that are drawn; expensive to form the entity at the beginning and burdensome paperwork requirements.
Business structure: S Corporation
Advantages: Shareholders' personal liability is protected; no income tax is paid at the corporate level and instead is 'passed through' to the business and reported on the owners' personal tax returns.
Disadvantages: There are more restrictions around ownership and the issuing of shares which offers less flexibility to owners. Foreigners cannot be owners of an S-Corp.
Choosing the right corporate structure is an important step, but by no means the only one. Join PGC’s Commercial Director, Jeremy Wastall as he interviews two experts on the legal, tax and accounting implications and decisions that you will face when setting up in the USA.