Introduction

Starting a new business in the United States requires making many important decisions, including choosing the right form of business organisation. According to the Small Business Administration, there were 31.7 million small businesses in the US as of 2020, accounting for 99.9% of all businesses. Of these, 22.9 million were self-employed with no additional employees, while the remaining 8.8 million had employees. The structure of a business affects its legal, financial, and operational aspects, so it’s essential to choose the right one.

Form of Business Organisation in the US

Here are some common forms of business organisations in the US:

Sole proprietorship

A sole proprietorship is the simplest form of business organisation, and it’s often used by small businesses. The owner is personally liable for the business’s debts and legal actions in a sole proprietorship.

Partnership

A partnership is a business structure in which two or more people share ownership of a business. Partnerships can be either general partnerships or limited partnerships.

Limited Liability Company (LLC)

An LLC is a flexible business organisation that offers limited liability protection to its owners while providing pass-through taxation.

Corporation

A corporation is a separate legal entity that offers limited liability protection to its shareholders. Corporations can issue stock and raise funds through the sale of stock.

Cooperative

A cooperative is a business owned and controlled by its members, who share in the profits and benefits of the business.

Legal requirements for each business organisation

These are just some of the legal requirements for each business organisation. Entrepreneurs need to research and understand all the legal requirements and regulations associated with their chosen structure to ensure compliance with state and federal laws. Consulting with a business attorney or accountant can help navigate the complex legal landscape of starting and operating a business.

LegaMart is a platform that assists entrepreneurs and small business owners with the legal requirements of starting and managing their businesses including choosing the right form of business organization. The platform offers various legal services, including support with forming a business, drafting legal documents, and navigating regulatory requirements. 

Sole proprietorship

• Must obtain any necessary licenses and permits for the business
• Must file a “doing business as” (DBA) form with the state if the business operates under a name other than the owner’s name
• Must report all business income and expenses on their income tax return
• May be required to collect and remit sales tax

Partnership

• Must file a partnership agreement with the state outlining the terms of the partnership
• Must obtain any necessary licenses and permits for the business
• Must report all business income and expenses on the partnership’s tax return
• May be required to collect and remit sales tax

Limited liability company (LLC)

• Must file articles of organisation with the state
• Must create an operating agreement outlining the management and ownership structure of the LLC
• Must obtain any necessary licenses and permits for the business
• Must report all business income and expenses on the LLC’s tax return
• May be required to collect and remit sales tax

Corporation

• Must file articles of incorporation with the state
• Must create bylaws outlining the management and ownership structure of the corporation
• Must obtain any necessary licenses and permits for the business
• Must report all business income and expenses on the corporation’s tax return
• Must hold regular shareholder meetings and maintain proper corporate records and filings

Factors to choose the right form of business organisation in the US

Here are some factors to consider when choosing the right form of business organisation in the US.

Liability

One of the most important factors to consider when choosing a business structure is a liability. Some structures, such as sole proprietorships and partnerships, offer little to no protection for personal assets in the event of legal action or debt. In contrast, corporations and limited liability companies (LLCs) provide a shield that separates personal assets from business assets.

Tax implications

Another significant factor to consider when choosing a business structure is tax implications. Different business structures have different tax implications, and choosing the right structure can result in significant tax savings. For example, pass-through entities like partnerships and co-owned LLCs do not pay corporate income tax. Instead, the profits and losses are passed through to the owners, who report them on their individual tax returns.

Management and control

Another factor to consider is management and control. Some structures, such as sole proprietorships and partnerships, offer the owner(s) full control over the business. Other structures, such as corporations, have a more complex management structure, with a board of directors and officers responsible for making major decisions.

Funding and financing

The structure of a business can also affect its ability to raise funds and obtain financing. Some structures, such as corporations, are more attractive to investors because they can issue stock. In contrast, sole proprietorships and partnerships may have limited options for raising funds.

State laws and regulations

Finally, it’s essential to consider state laws and regulations when choosing a business structure. Each state has its own laws and regulations governing business structures, and it’s important to choose a structure that complies with state law.

Benefits of different forms of business organisations

Choosing the right form of business organisation is critical to minimising personal liability, maximising tax benefits, and ensuring the smooth operation of your business. There are several benefits to choosing the right form of business organisation. Each structure has its own advantages and disadvantages, so it’s important to consider your specific business needs and goals before making a decision. Here are some of the benefits of different forms of business organisation:

Sole proprietorship

One of the most significant benefits of a sole proprietorship is the ease and affordability of setting it up. This structure requires minimal paperwork and no legal fees, making it an attractive option for small businesses and solo entrepreneurs. Additionally, the owner has complete control over the business and can make decisions quickly without consulting with other partners or shareholders.

Mary’s Cupcakes is a small bakery owned and operated by Mary. She started the business as a sole proprietorship because it was easy and inexpensive to set up, and she wanted to maintain complete control over the business. Mary has been able to deduct business expenses from her personal income taxes and has had no issues with personal liability. Her business has grown steadily, and she has been able to reinvest profits to expand her product line and hire part-time employees.

Partnerships

Partnerships offer shared management responsibilities and decision-making authority, allowing partners to contribute their individual skills and expertise. Partners can share in the profits and losses of the business, which can provide financial stability and flexibility. Partnerships are also relatively easy and inexpensive to set up and maintain.

Airbnb is an online platform connecting people who need accommodation with people with extra space. The company was founded as a partnership between two friends who saw an opportunity to monetise unused living spaces. By operating as a partnership, the founders were able to split management responsibilities and share profits. This structure has allowed Airbnb to grow into a multi-billion dollar business and expand into new markets worldwide.

LLCs

LLCs offer the liability protection of a corporation with the tax benefits of a partnership. Owners of an LLC are not personally liable for the debts and obligations of the business. This means that if the company incurs any debts or legal issues, the business assets are at risk, not the personal assets of the members. Additionally, LLCs offer flexibility in management and ownership structure, allowing members to customise the business structure to fit their needs and goals.

Warby Parker is an eyewear company that was founded in 2010. The founders chose to set up the company as an LLC because it offered the liability protection of a corporation and the tax benefits of a partnership. This structure has allowed Warby Parker to grow rapidly while minimising personal liability. The company has expanded from its original online-only model to include brick-and-mortar stores, and it has been able to attract significant investment from venture capitalists.

Corporations

Corporations are separate legal entities from their owners, providing the most significant liability protection of any business structure. This means that the owners are not personally liable for the debts and obligations of the business. Corporations can also raise large amounts of capital from investors and issue shares of stock to employees as part of their compensation packages. However, corporations have complex regulations and are required to pay corporate income tax on their profits.

Apple Inc. is one of the world’s largest technology companies, with a market capitalisation of over $2 trillion as of 2021. Apple was founded as a corporation, which has allowed it to raise large amounts of capital from investors and issue shares of stock to employees as part of its compensation packages. The corporate structure has also allowed Apple to expand globally and protect its intellectual property through patents and trademarks. However, the company is subject to complex regulations and is required to pay corporate income tax on its profits.

Conclusion

To sum it all up, choosing the right form of business organisation is crucial because it can affect the success of the business. Entrepreneurs can choose the structure that best suits their needs and goals by considering liability, tax implications, management and control, funding and financing, and state laws and regulations. It’s always a good idea to consult with an attorney or accountant when making this decision to ensure compliance with state laws and regulations.