We discussed the things to consider when starting a company in the USA in our previous blog post. One thing to consider is the company types in the USA and selecting the most optimal type for you.
The general goal of starting a company or incorporating a business in the USA is to protect the shareholders from business responsibilities. The liabilities of shareholders or investors can be legally held separate from their company. Being treated as a separate entity or not is determined based on the company types in the USA.
There are many company types in the USA; however, Corporations and LLCs’ most preferred ones (limited liability). In this blog post, we’ll roughly explore the company types in the USA.
What is a Corporation?
Corporation types of companies are legal entities that exist separately from their owners. A corporation can be formed after paying the necessary fees and delivering the establishment document called “articles of incorporation” to the state authorities.
So, what does it mean to exist separately from its owners? We can say that a corporation functions independently of its owners. In other words, even if all the shareholders left the corporation, everything, such as agreements, bank accounts, tax id numbers, and lease agreements, continues to exist and maintain their validity. The successors of the shareholder retain the ownership of the corporation. However, the corporation is not affected by this issue and continues to do business.
When it comes to types of corporations, they are generally divided as follows;
- Nonprofit Corporation
What is a C-Corporation?
A “Corporation” is automatically considered a “C-Corporation” by the American tax system. It is regarded as a separate legal entity from its owners and is subjected to pay its taxes based on its income. Nobody is allowed to receive money from the corporation except for the reasons such as salary and service fees. After deductions such as business expenses and depreciation, the available income is taxed by the federal government and sometimes by the state administration. Then, the remaining balance can be used to raise capital in your corporation or distribute to shareholders as shares out of the profit.
In short, a C-Corporation is a regular organization that doesn’t want to be automatically taxed as an entity. It is double-taxed: One is at the shareholder level (for dividends), and the other is at the corporate level (for corporate profits).
What is an S-Corporation?
The taxation of S-Corporations usually shares similarities to partnerships. The tax can be paid as a personal tax by combining the share of profit and salary received from the company, instead of paying the tax twice both as a corporation and an individual. For many shareholders, this means avoiding double-taxations.
There are specific eligibility requirements to be met to have an S-Corporation: The corporation should not have more than 100 shareholders; shareholders must be US citizens or residents, and they should not be related to any other company.
In short, an S-Corporation is one of the company types in the USA and taxed as partnerships under the Internal Revenue Service rules (IRS).
What is a Nonprofit Corporation?
Nonprofit corporations are subject to a different law than profit-focused corporations. The corporation must be established for nonprofit reasons such as education, charity, religion, and science. Nonprofit corporations have the right to apply for tax exemption both at the state and federal levels.
What is a Partnership?
Partnerships are organizations that are considered to be established by two or more parties to trade, operate a business, and share its profits and losses, even though they don’t enter into a written agreement. Incomes, expenses, profits, and losses of partnerships are considered to be obtained by their partners. Each partner reports these items on his or her individual tax return. Thus, there is no tax payment based on the shares of profit. Partners pay the tax for their share of the partnership’s profit at their individual tax rate.
What is an LLC (Limited Liability)?
LLC, one of the company types in the USA, combines features of both a corporation and a partnership. It combines the limited liability advantages of corporation types of companies with the individual taxation and management flexibility advantages of partnerships.
- LLC means Limited Liability Company.
- LLC means that the owners are not personally liable for the company’s debts or liabilities.
- LLC offers management flexibility when deciding who will conduct the operations, manage the company, and how the tax-related procedures will be handled.
- If you decide to establish an LLC, but the requirements change over time, it is still possible to convert your LCC to a Corporation.
Among the company types in the USA, LLC can be considered the most optimal option in meeting the company’s requirements.
What is an Authorized Share?
While exploring the company types in the USA, we should also discuss what an authorized share means. Many states require companies to demonstrate how many shares they will offer to their shareholders during the establishment period. When a share is sold, it is considered “issued” if issued, while the registered shares outstanding are called “unissued” if they aren’t issued. Suppose a company wants to sell/issue more shares than it has indicated. In that case, it must be officially changed in the registered shares section on the Certificate of Formation of the company.
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