Five major corporate entities in the United States
An independent company is the simplest form of corporate entity in the United States. It means that an individual owns and operates a company. The owner of the company can exercise all of its functions, which includes making decisions independently, enjoying all profits, paying all taxes, compensating for all losses and assuming unlimited legal liability. In addition, all the assets of a company or individual can be legally used to pay off debts.
The incorporated company is the most typical form of the modern enterprise system. It refers to the separation of corporate entities from their owners, in order to maintain the independence, coherence, and permanence of corporate personality. Shareholders may have privately held, closed-end holdings or may sell equity to the public. The shareholder’s personal property is protected by limited liability and is not liable for the company’s debt.
A partnership company is formed by two or more partners who jointly operate through the signing of partnership agreements. The owners of the partnership are jointly responsible for the business and the governance rules are relatively simple. The partnership company collects income tax at the individual level in the form of pass-through taxation—without double taxation. The three types of partnerships in the United States are general partnerships, limited partnerships, and limited liability partnerships.
Limited Liability Company (LLC)
A limited liability company is a hybrid business entity that combines the advantages of both an incorporated company and a partnership company. It avoids double taxation and allows shareholders to assume only limited liability. It is a more popular corporate form in the United States today. The difference between LLC and other entities is its flexibility — it can be organized, governed, and managed like an incorporated company or a partnership. It can also be managed by any other method that the owner deems appropriate.
Non-profit companies set up social charities for the promotion of charity, education, religion, technological and cultural progress. Of the five corporate structures, only this kind of company does not aim at commercial profit as the ultimate goal. However, it can promote the goals it pursues by collecting fees or making profits. Given its charitable nature, the federal and state governments give such companies a lot of preferential treatment.
Differences and similarities between C-corporation and S-corporation
“Generally, all for-profit corporations are automatically classified as a C corporation unless the corporation elects the option to treat the corporation as a flow-through entity known as an S-corporation. Here is how we compare the two.
- C-corporation and S-corporation are identical in non-tax terms, and their operations are governed by the same rules as the state laws.
- The company operates independently of the owner, and everyone is exempted from the related responsibilities (except criminal liability) of the company’s business.
- The costs of composing a company, carrying out shareholders’ meetings and maintaining the company’s image are high, and the establishment procedures are complicated. It requires the establishment of board meetings, shareholder meetings, and formal regulations.
- Tax：C-corporation must be subjected to double taxation, that is, company-level taxation and personal taxation that is paid by the owner. S-corporation does not have corporate-level tax obligations. The company’s profits are reported by the shareholders themselves.
- Operation：The difference in tax treatment between C-corporation and S-corporation may lead to a more formalized operation of C-corporation. The income of C-corporation is taxed, and the income of S-corporation (with a few exceptions) is not taxed according to the federal income tax law. The income or loss is distributed to each shareholder in proportion and shown on its tax return as Schedule E income/ (loss).
- Shareholders：S-corporations have many restrictions on the number of shareholders and the structure of the share capital. The number of shareholders may not exceed 75 and its shareholders must be American citizens or persons with permanent right of abode. A company can only issue one category of stock and cannot issue preferred stock. In contrast, a C-corporation does not have these restrictions. They may have an unlimited number of owners. The shareholders of the company can include individuals, other corporations, trusts, partnerships, LLCs, and other quasi-entities.
In conclusion, a C-corporation is the most commonly used company type for registered U.S. companies. Because it has few requirements for registrants, non-US individuals can also register. Its corporate structure is clear while powers and responsibilities are distinct. The investors are easy to attract. It is one of the types that Chinese investors choose to set up in the United States.
Contact us if you have more questions concerning your corporation status or tax laws that you may not be fluent in. We at Solutions For can take you through all of the logistic processes of running your business so you can focus on the parts you enjoy.