Monday, October 02, 2023, By Shannon Lam- Legal Assistant at SILMEXICO
Legal department
In the United States, there is a wide variety of types of corporations that can be created. These corporations pose opportunities for both entrepreneurs and foreign investors. The six types of corporations are sole proprietorships, partnerships, corporations, limited liability companies, S corporations, and C corporations.
I. SOLE PROPRIETORSHIP
Sole proprietorships are unincorporated businesses owned by a single individual. In a sole proprietorship, the owner retains complete control over the business and is responsible for any of its debts and obligations.
ADVANTAGES
One of its advantages is that it is simple to establish and operate. This is because they do not have to formally register their business. They are, however, required to register their business name and procure the proper licenses and permits.
DISADVANTAGES
Some of the disadvantages are that there is limited growth potential and personal liability. It is not uncommon for sole proprietors to struggle in the process of raising capital and scaling their business.
Since the owner is solely responsible for all of its debts, liabilities, etc., their personal assets are also at risk in the case that their business liabilities exceed what they are able to pay.
TAX ADVANTAGES
Though, one of the main perks of having a sole proprietorship is that you are only taxed on an individual level. This is called pass-
through taxation. The owner reports their profits on their individual income tax return and gets taxed at their individual tax rate while avoiding corporate income taxes, or double taxation.
APPROXIMATE COSTS
Generally, the costs of establishing a sole proprietorship are low. Fees typically consist of licensing and failing costs.
II. PARTNERSHIP
Partnerships are relationships between two or more persons conducting trade or business. These partners commit to sharing profits and losses, as well as contributing their personal assets and capital.
ADVANTAGES
The advantage of a partnership is that it is collaborative. Unlike a sole proprietorship, you are working alongside multiple partners,
and therefore have access to their network and expertise. With all of these individuals involved, there are expectations. Each partner typically signs an agreement that outlines their rights, responsibilities, and expectations in the partnership.
DISADVANTAGES
Working with multiple people can also have its disadvantages. In a partnership, similar to a sole proprietorship, there is unlimited
liability, and the partners are jointly liable. Additionally, there can be disagreements that arise when it comes to decision-making.
III. CORPORATIONS
A corporation is a legal entity, separate from its owners, that can be entered into contracts, incur debt and have its shareholders elect a board of directors to manage its business.
ADVANTAGES
Some advantages are that it has limited liability, meaning shareholders do not have to take on the burden of the businesses’ debts, and that they live on in perpetuity, meaning they can exist forever regardless of ownership changes.
DISADVANTAGES
The disadvantages are that they do get double taxed, so they have to pay both corporate income taxes and individual taxes based on the dividends that they receive, and they have to follow an abundance of formalities and regulations that have to be strictly followed.
TAX ADVANTAGES
Some of its tax advantages are that owners
IV. LIMITED LIABILITY COMPANY
A limited liability company, more popularly known as an LLC, is a business structure that consists of members as opposed to owners. There is no maximum to the number of members that an LLC can have. You might come across an LLC with a single member.
ADVANTAGES
Some of its advantages are that it has limited liability and flexible management. LLCs are able to be managed by their members or
elected managers.
DISADVANTAGES
The disadvantages are that its members may have to pay self-employment taxes on their share of profits and that they have to adhere to certain legal formalities.
TAX ADVANTAGES
Like sole proprietorships and partnerships, they also have pass-through taxation. LLCs can actually elect to be taxed as a corporation, partnership, or as part of the owner’s tax return. The decision of tax classification is usually done to benefit the members.
APPROXIMATE COSTS
LLCs are costly to form and maintain, in comparison to sole proprietorships and partnerships, with many of the same fees mentioned previously.
V. S CORPORATION
S corporations are corporations that have limited liability and additional tax benefits. Shareholders of S corporations report
income and losses on their personal tax returns, meaning their taxes are assessed at their individual income tax rates. To quality
to be an S corporation, you must meet the requirements as follows:
1. Be domestic
2. Have allowable shareholders (U.S. citizens and residents can be shareholders of an S corporation)
3. Does not exceed 100 shareholders
4. Have only one class of stock
5. Has to be an eligible corporation (cannot be insurance, domestic international sales, etc)
ADVANTAGES
Its advantages are that it’s a limited liability and, like corporations, members can classify themselves as employees to reduce self-employment taxes.
DISADVANTAGES
The disadvantages are its stock ownership restrictions and its cost of maintenance. It can only have one class of stock and no foreign ownership is permitted. The fees to create and maintain S corporations are high since you have to incorporate your business and pay the on-going administrative fees.
TAX ADVANTAGES
Luckily, S corporations have pass-through taxation.
APPROXIMATE COSTS
As mentioned earlier, forming and maintaining a S corporation can be costly.
Some costs include accounting, bookkeeping, filing, and administrative fees.
VI. C CORPORATION
C corporations are legal entities that are taxed separately from their owners. They are referred to as C corporations because they follow the regulations in Subchapter C of the Internal Revenue Code. They are different from S corporations in that they are required to pay both federal and state taxes.
ADVANTAGES
Their advantages are that it is a limited liability, it lives on in perpetuity, and raising funds is simpler with its unlimited shareholders. If they require any funding or capital, then they can sell their stock.
DISADVANTAGES
They are subject to double taxation, but they can reduce this by reinvesting their profits back into the business.
TAX ADVANTAGES
Alternatively, they have a flat rate of taxation and shareholders can identify as employees and take a salary, however, if they were to receive dividends then they would be taxed twice.
APPROXIMATE COSTS
Forming and maintaining a C corporation can be costly with many fees being similar to those of standard corporations.
VII. STATE-SPECIFIC BENEFITS
Now, forming a business in specific states can be more advantageous than others. Two states that hold many business benefits are Delaware and Nevada.
DELAWARE
Delaware is a popular state for incorporating corporations for a couple of reasons. Firstly, they offer a variety of corporate structures, which allows for some flexibility. Secondly, they value privacy. Shareholders are not required to disclose their names in public filings, unless they choose to do so. Thirdly, judges in Delaware are well-versed in business matters, since this is what they primarily deal with, and it allows for more consistency in legal proceedings.
NEVADA
Nevada is known for its favorable tax environment. They do not have state corporate taxes and their extensive asset protection laws can be attractive to companies with significant assets. Instead of corporate taxes on income, they tax corporations’ gross receipts. And like Delaware, they also value privacy and allow businesses to nominate officers and directors, which is helpful in the case that a business wants to maintain discretion.
VIII. WHAT TYPE OF COMPANY DO FOREIGN INVESTORS CHOOSE TO CREATE?
Most foreign investors choose to create LLCs in the United States. This is because of their liability protection, pass-through taxation, and operational flexibility. As a foreign investor, it is important that the business is straightforward and that the complexities are kept low so it can run as streamlined as possible. Because, unlike domestic investors, they will not always be familiar with that country's regulations and laws, and may not be able to handle erupting business issues in person.
References:
Business structures. Internal Revenue Service. (n.d.). https://www.irs.gov/businesses/small-
businesses-self-employed/business-structures
Crail, C. (2023, June 3). Why incorporate in Delaware? Benefits & Considerations. Forbes.
https://www.forbes.com/advisor/business/incorporating-in-
delaware/#:~:text=The%20most%20famous%20reason%20Delaware,not%20pay%20corporat
e%20income%20tax.
The Nevada Advantage. Nvsos.gov. (n.d.). https://www.nvsos.gov/sos/businesses/the-nevada-
advantage
