Choosing the right legal form is a crucial step in starting a business in the USA.

With a variety of options available, it’s important to understand the pros and cons of each legal form and choose the one that best fits the needs and goals of the business.

In this article, we will provide a comprehensive overview of the various legal forms for businesses in the USA and offer decision aids to help entrepreneurs select the optimal legal form.

From the Limited Liability Company (LLC) to the Corporation and other possible options, we will highlight the key aspects of each legal form and provide practical advice to assist you on your entrepreneurial journey.

Table of Contents:

• Overview of Legal Forms in the USA
• Comparison of Key Legal Forms
• Pros and Cons of Each Legal Form
• Decision Aids for Choosing the Right Legal Form
• Expert Opinions and Advice
• Conclusion
• Glossary
• FAQs

Types of Companies in the USA

Starting a business in the USA offers many advantages, but also challenges. One of the most important decisions founders must make is choosing the right legal form.

The various legal forms offer different advantages and disadvantages in terms of liability, taxation, formalities, and costs.

This article will introduce the main legal forms in the USA and compare them.

Overview of the Main Legal Forms in the USA

• Corporation (INC): The corporation is the classic legal form for large businesses. It offers unlimited liability protection for the shareholders and is tradable on the stock market. However, forming and managing a corporation is relatively complex and expensive.
• Limited Liability Company (LLC): The Limited Liability Company (LLC) is the most popular legal form for startups. It offers a good mix of liability limitation and flexibility. Forming and managing an LLC is simpler and more cost-effective than forming a corporation.
• Sole Proprietorship: The sole proprietorship is the simplest and most cost-effective legal form to establish. However, the owner of the sole proprietorship is personally liable for all debts and liabilities of the business.
• Partnership: The partnership is formed by two or more people who share management and liability.
• Limited Liability Partnership (LLP): The Limited Liability Partnership (LLP) offers similar liability limitation as an LLC but is specifically for partners in certain professions such as lawyers, doctors, and architects.
• Limited Partnership (LP) with a Corporation as General Partner: A Limited Partnership (LP) is a partnership where at least one partner has unlimited liability (the corporation) and the other partners have limited liability.
• Limited Liability Limited Partnership (LLLP): A Limited Liability Limited Partnership (LLLP) offers liability limitation for both the partners and the shareholders.

Comparison of Key Business Legal Forms:

Liability Limitation:

• Corporation: Unlimited liability protection for the shareholders.
• LLC: Liability limited to the business assets.
• Sole Proprietorship: Personal liability of the owner.
• Partnership: Personal liability of all partners.
• LLP: Liability limitation for partners in certain professions.
• LP with a Corporation as General Partner: Unlimited liability protection for the corporation and limited liability for the other partners.
• LLLP: Liability limitation for both partners and shareholders.

Taxation:

• Corporation: Corporate tax on the company’s profits.
• LLC: Taxation of profits at the shareholder level (Pass-through Taxation).
• Sole Proprietorship: Taxation of profits at the owner level (Pass-through Taxation).
• Partnership: Taxation of profits at the shareholder level (Pass-through Taxation).
• LLP: Taxation of profits at the partner level.
• LP with a Corporation as General Partner: Taxation of profits at the shareholder level.
• LLLP: Taxation of profits at the partner and shareholder level.

Formalities:

• Corporation: Complex founding procedure with many formalities.
• LLC: Simple founding procedure with fewer formalities.
• Sole Proprietorship: Simple founding procedure without formalities.
• Partnership: Simple founding procedure with few formalities.
• LLP: Similar formalities as an LLC.
• LP with a Corporation as General Partner: Similar formalities as an LP.
• LLLP: Similar formalities as an LP.

Costs:

• Corporation: High founding costs and ongoing costs.
• LLC: Lower founding costs and ongoing costs.
• Sole Proprietorship: Very low founding costs and ongoing costs.
• Partnership: Lower founding costs and ongoing costs.
• LLP: Similar costs as an LLC.
• LP with a Corporation as General Partner: Similar costs as an LP.
• LLLP: Similar costs as an LP.

Pros and Cons of Each Legal Form:

Inc. (Corporation)

• Advantages:
  • Unlimited liability protection for the shareholders.
  • Ability to trade on the stock market.
  • Higher prestige with business partners and investors.
• Disadvantages:
  • Complex founding procedure with many formalities.
  • High founding costs and ongoing costs.
  • Double taxation of profits.

Limited Liability Company (LLC)

• Advantages:
  • Good mix of liability limitation and flexibility.
  • Simple founding procedure with fewer formalities.
  • Lower founding costs and ongoing costs. Avoidance of double taxation.
• Disadvantages:
  • Not tradable on the stock market.
  • May be perceived as less prestigious than a corporation in some states.

Sole Proprietorship

• Advantages:
  • Simple and inexpensive to establish.
  • No formalities at founding.
  • Full control over the business.
• Disadvantages:
  • Personal liability of the owner.
  • No liability limitation.
  • More difficult to obtain capital from investors.

Partnership

• Advantages:
  • Simple founding procedure with few formalities.
  • Lower founding costs and ongoing costs.
  • Opportunity to pool the skills and resources of multiple people.
• Disadvantages:
  • Personal liability of all partners.
  • More difficult to regulate business management.
  • Potential for conflicts among partners.

Limited Liability Partnership (LLP)

• Advantages:
  • Liability limitation for partners in certain professions.
  • Simple founding procedure similar to an LLC.
  • Ability to use partnership structures with limited liability.
• Disadvantages:
  • Not available for all professions.
  • May not be available in all states.
  • Potential additional requirements for professional licensing.

Limited Partnership (LP) with a Corporation as General Partner

• Advantages:
  • Unlimited liability protection for the corporation.
  • Limited liability for the other partners.
  • Ability to raise capital from external investors.
• Disadvantages:
  • More complex structure with additional legal requirements.
  • Potential conflicts between the partners and the corporation.
  • Possible tax complexities.

Limited Liability Limited Partnership (LLLP)

• Advantages:
  • Liability limitation for both partners and shareholders.
  • Combination of partnership structures and liability limitation.
  • Opportunity to utilize the benefits of partnerships and LLCs.
• Disadvantages:
  • Not available in all states.
  • Potential additional requirements for professional licensing.
  • Potential tax complexities.

Which Legal Form in the USA is Right for My Business?

The right legal form depends on various factors, such as:

• Size of the Business: For large businesses, the corporation is the best choice as it offers unlimited liability protection and is tradable on the stock market.
• Liability Risk: If the business has a high liability risk, such as in healthcare or construction, the corporation or LLC is a better choice.
• Taxation: Taxation can vary depending on the legal form. The corporation is subject to corporate tax, while the LLC and sole proprietorship tax the profits at the level of the shareholders or the owner.
• Formalities: Establishing a corporation is more complex and involves more formalities than establishing an LLC or a sole proprietorship.
• Costs: The costs of starting a business in the USA and the ongoing costs vary depending on the legal form. The corporation is the most expensive legal form, while the sole proprietorship is the cheapest.

Clevver, Your Partner for Business Formation in the USA

Clevver specializes in services related to business establishment in the USA and offers comprehensive support in navigating the country’s complex system.

Our team has the necessary experience with incorporation services in the US and compliance with accounting standards.

Additionally, we offer tax and accounting services and virtual offices in the USA and worldwide, including registered agent services, business addresses and digital mailboxes.

Are you ready to start your business in the US? Get in touch with our Team.

Conclusion

Choosing the right legal form is an important decision for any business in the USA. There are various legal forms with different advantages and disadvantages. The right choice depends on various factors, such as the size of the business, liability risk, taxation, formalities, and costs. It is important to seek advice from an expert before choosing a legal form.

FAQs About Legal Forms in the USA:

• What is the best legal form for a startup?

The best legal form for a startup is the LLC. It offers a good mix of liability limitation and flexibility and is simple and cost-effective to establish.

• What is the best legal form for a large business?

The best legal form for a large business is the corporation. It offers unlimited liability protection and the ability to trade on the stock market.

• How can I choose the right legal form for my business?

It is important to seek advice from an expert before choosing a legal form. A lawyer or tax advisor can help you choose the right legal form for your business and understand the associated legal and tax aspects.

• How do I start a business in the USA?

Starting a business in the USA is a complex process. There are various requirements and formalities that vary depending on the legal form and state. It is important to seek advice from an expert to ensure a smooth start-up process.

• What costs are associated with starting a business in the USA?

The costs of starting a business in the USA vary depending on the legal form, state, and service provider. The following costs are typically to be considered:

• Registration fees: The registration fees for establishing a corporation or LLC vary depending on the state.
• Fees for licenses and permits: Depending on the industry and activity, additional fees for licenses and permits may be required.
• Lawyer fees: The costs for consulting a lawyer vary depending on the lawyer’s experience and the complexity of the case.
• Consulting costs: Tax advisors and other consultants can incur additional costs.