Are you interested in the different types of businesses one can register in the United States? Here’s a bulleted list with advantages, disadvantages, and examples for each of the 6 business structures:
- Sole Proprietorship
- Advantages: Simple and inexpensive to set up, owner has complete control over the business.
- Disadvantages: Owner is personally liable for all debts and legal issues, can be difficult to raise capital.
- Example: Freelancers or independent consultants, such as a freelance writer.
2. Partnership
- Advantages: Shared responsibility and workload, more access to capital, partnership income is taxed as personal income.
- Disadvantages: Partners are jointly liable for all debts and legal issues, disagreements between partners can arise.
- Example: Law firms, accounting firms, or creative agencies, such as Ogilvy & Mather.
3. Limited Liability Company (LLC)
- Advantages: Personal liability protection for owners, flexible management structure, pass-through taxation.
- Disadvantages: Can be more expensive to set up and maintain, limited life span.
- Example: Uber, Airbnb, or PayPal.
4. Corporation
- Advantages: Limited liability protection for owners, ability to raise capital through selling stocks, perpetual existence.
- Disadvantages: More complex and expensive to set up, subject to double taxation.
- Example: Apple, Amazon, or Coca-Cola.
5. S Corporation
- Advantages: Pass-through taxation, limited liability protection for owners, ability to raise capital.
- Disadvantages: Limited to 100 shareholders, restrictions on types of stocks that can be issued.
- Example: Subway, KPMG, or Zillow.
6. Cooperative
- Advantages: Democratically controlled by members, shared risk and reward, ability to negotiate better prices with suppliers.
- Disadvantages: Can be difficult to raise capital, decision-making can be slow and cumbersome.
- Example: REI, Organic Valley, or Ace Hardware.
To provide a little clarity, pass-through taxation is a unique tax structure that allows the income of a business to pass through to its owners, who then report the profits or losses on their personal tax returns. This eliminates the need for corporate taxation and avoids double taxation that corporations are subject to. Double taxation occurs when corporations are taxed once at the corporate level and again when the profits are distributed to shareholders as dividends. To avoid this, many businesses choose to register in states such as Delaware, which offers favorable corporate laws, lower taxes, and a well-established legal system. Additionally, Delaware’s Court of Chancery is widely regarded as an expert in corporate law, making it an attractive choice for businesses seeking legal protection and stability.
Of course there are some situations where it may not make sense for a business to register in Delaware. Here are a few examples:
- If the business operates primarily in another state — While Delaware offers many advantages, in this case, it may be more beneficial to register in the state where the business is located to avoid having to pay additional fees and taxes associated with registering in multiple states.
- If the business is a small, locally-owned business — Delaware’s advantages are often more beneficial to larger corporations with shareholders across the country. The benefits of registering in Delaware may not outweigh the additional costs and administrative burdens associated with registration and compliance.
- If the business operates in a highly-regulated such as healthcare or finance — Delaware’s business-friendly laws may not be as beneficial. In these industries, there may be more regulatory requirements that are specific to the state where the business operates, which could make it more beneficial to register in that state.
Ultimately, the decision to register in Delaware or another state depends on a variety of factors specific to each business. It is important for businesses to weigh the pros and cons of registration in each state to determine which option is the best fit for their needs.
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