U.S. Business Entities:

Sakura Consulting works with you to ensure you establish a business entity that fits your needs for the U.S. Below are the most common business entities in the U.S.:

Corporation:

A Corporation in general is a more complex business structure and is a separate legal entity formed under state law. The corporation owns the business and all of its assets and properties and shareholders own the corporation. The main advantage of incorporating is that shareholders are not liable for the business’ debts but the corporation is.

A corporation might be the right business type if the following is needed:

  • Venture capital for financing
  • Flexible profit-sharing among owners
  • Company earnings to stay in your business so that it can grow
  • Flexibility to spread the business earnings between the corporation and shareholders for tax-planning purposes
  • Flexibility to set salaries for employees/owners to minimize Social Security and Medicare taxes.
  • Flexibility to provide (through the corporation) substantial health and medical benefits and other fringe benefit programs for things like education, life insurance, and transportation costs
  • To be able to easily sell your business
  • To provide an accountable plan for travel & entertainment
  • To be able to offer stock options to employees

Tax differences between a C Corporation and S Corporation

Once you’ve incorporated your business, you have to decide whether it should be taxed for income tax purposes as a C corporation or an S corporation.

A “C Corporation” (C corp)—so called because it is taxed under Subchapter C of the Internal Revenue Code—is a separate taxpayer, with income and expenses taxed to the corporation. If corporate profits are then distributed to the shareholders as dividends, the shareholders must pay personal income tax on the distribution, creating “double taxation. Many small businesses do not opt for C corporation tax status because of this tax feature.

An “S Corporation” (S corp) if qualified, can elect S corp status by filing a form with the IRS and with the state of incorporation.  The profits, losses, and other tax items pass through the corporation to the shareholders and are reported on the shareholders’ personal tax returns. The S corporation is called so because it is taxed under Subchapter S of the Internal Revenue Code.

Limited Liability Company (LLC):

Another business entity type that is formed under state law and provides personal liability protection is the LLC.  An LLC gives its owners (called members) greater flexibility than a corporation in deciding how it will be managed and how financial interests will be split. Tax-wise, an LLC is similar to an S corp because it is a pass-through entity. The business income and expenses are reported on the personal tax return of its member(s).

If you are the only member of an LLC, the LLC is 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. If there is more than one member, the LLC is taxed like a partnership. An LLC can also choose to be taxed like a C corp by filing a form with the IRS and if it qualifies, it could also be taxed like an S corporation.

General Partnership:

A General Partnership is composed of 2 or more persons who agree to contribute money, labor, or skill to a business. Each partner shares the profits, losses, and management of the business, and each partner is personally and equally liable for debts of the partnership. Formal terms of the partnership are usually contained in a written partnership agreement.

Limited Partnership:

A Limited Partnership is composed of one or more general partners and one or more limited partners. The general partners manage the business and share fully in its profits and losses. Limited partners share in the profits of the business but their losses are limited to the extent of their investment. Limited partners are usually not involved in the day-to-day operations of the business.

Limited Liability Partnership (LLP):

A Limited Liability Partnership (LLP) is similar to a General Partnership except that normally a partner doesn’t have personal liability for the negligence of another partner. This business structure is used most by professionals such as accountants and lawyers.

Sole Proprietorship:      

This is a business run by one individual for their own benefit. It is the simplest form of business organization. Proprietorships have no existence apart from the owners. The liabilities associated with the business are the personal liabilities of the owner and the business terminates upon the proprietor’s death. The proprietor undertakes the risks of the business to the extent of their assets, whether used in the business or personally owned.  Although, a sole proprietorship is not a separate legal entity from its owner, it is a separate entity for accounting purposes. Financial activities of the business (e.g., receipt of fees) are maintained separately from the person’s personal financial activities (e.g., house payment).