There are many factors to evaluate when preparing to launch a startup: from financial issues and business strategies to marketing. One of the main points is the legal registration of the business.
When registering a startup in the United States, you face a choice: which legal structure to choose, how to register it, and how to formalize relations with partners? Let's look at the main types of legal structures for startup registration.
1. Sole proprietorship
Sole proprietorship is the simplest structure for the legal registration of your startup. Sole proprietorship does not require mandatory registration if you work as a self-employed person on your own behalf. But when you need to work under a certain name (for example, "Joe's Coffee") - registration is required.
What do you need to know about Sole proprietorship?
An entrepreneur is responsible for the activities of his startup. All debts that the business has are personal debts of the entrepreneur. Although the owner is responsible to creditors with his property
Registration is required only in case of using a separate name
An entrepreneur can hire employees and independent contractors
The entrepreneur is taxed at the federal and state levels. This type of taxation makes it possible to optimize part of the taxes because some states do not charge them at their level. Such states include: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. All of these states, except Alaska, do not have a general requirement for entrepreneurs to obtain licenses
Some states may require a license for a sole proprietorship
Sole proprietorship is suitable for those who do not plan to expand or sell the business in the future.
2. LLC (Limited Liability Company)
Limited Liability Company (analogous to a limited liability company) is a corporate structure in the United States. LLC can be created individually or together with other persons. The company must be registered under the laws of the relevant state. LLC is the most popular organizational structure in the United States. Among the famous ones are Google and Pepsi Co.
What do you need to know about LLC?
LLC members are not liable with their property for the company's obligations
There are several taxation options. For tax purposes, the IRS (Internal Revenue Service) may treat an LLC as a corporation, partnership, or as part of the LLC owner's individual tax return
LLC members can be individuals and legal entities, except for banks and insurance companies
Such a company can be registered by a non-resident of the United States
The company's income is not separately taxed
There are restrictions on the type of activity of the company. This organizational form is not suitable for banks and insurance companies
LLC is suitable for startups that aim to limit the liability of members but do not want to register a large corporation and pay taxes at the company level.
Often, when choosing a business structure for future business, people prefer LLC. But in most cases, entrepreneurs do not take into account all the features of this structure. Subsequently, realizing that they should have chosen a corporation because they needed to publicly sell their shares or create a board of directors to control the activities of the company.
S-Corporation — tax definition for certain corporations and partnerships that have chosen the appropriate type of taxation. The main feature of corporations is the limited liability of their shareholders. Shareholders of an s-corporation are not liable to creditors for the company's debts.
What do you need to know about S-Corp?
This type of corporation is only available to US residents
There is no double taxation. It is possible to transfer the profit earned by the company to the personal income of members and not be subject to corporate tax
The activity of such a corporation does not depend on the owner. The exit of the main shareholders does not affect the company's activities. This makes it possible to sell the company by selling shares to other members
Number of shareholders — no more than 100 people
Why among all types of corporations, S-Corporation should be chosen for a startup?
S-Corp is a corporation that combines excellent conditions for a startup. For example, here are the characteristics of other types of corporations:
C-Corp is a legal entity that is separate from its owners and is an independent business entity. Such a corporation provides its members with protection from personal liability. C-Corp is best known for the possibility of double taxation. Such corporations are taxed twice. First, they pay income tax at the company level, and then additionally, when paying dividends to their members. While S-Corp allows its shareholders not to be subject to double taxation.
B-Corp is a corporation established to achieve a specific purpose that is recognized by the state as a public benefit. S-Corp, in turn, does not need to declare one purpose and can carry out activities in a wide range of areas.
Close Corp is a closed corporation, which is similar in type to B-Corp, however, has fewer requirements for compliance with formalities. Such corporations are closed to investment by the general public, as they are not publicly traded. Unlike an S-Corp, a Close Corp will be subject to double taxation.
Non-profit corporation - a non-profit corporation. This type is suitable for charitable, religious organizations, and not-for-profit organizations.
To choose the right startup business structure, you must decide on the scale of the business and decide whether you will have partners or work alone.
There is no single right option, it all depends on various factors. If you are planning to start a startup on your own, are ready to take risks with your property, and do not plan to expand your business significantly - the best choice is individual entrepreneurship. If you plan to significantly expand your startup, involve partners in the activities of your company, and be protected from personal liability by your property, LLC is a good choice. If you are a resident of the USA, do not want to attract more than 100 shareholders, or plan to sell your company in the future, then S-Corp will be an appropriate choice.