Before you can start a business you need an idea, a business plan, and the necessary financial backing. But, that’s just enough to get you started.
The next big question you’ll need to tackle before you start trading is which entity is right for your US business startup?
It’s a good idea to get some professional guidance on this as it’s essential to know the right entity to use; it will make a difference to the paperwork you’re required to keep as well as your personal liability.
The Main Types Of Business Entities
Here’s a quick guide to the different options available to you:
In effect you’re a one-person operation, you are the company. Your business will operate in your name, you’ll be liable for all income, expenditure, and taxes.
This is the simplest arrangement and ensures you have complete control of your business.
If there is more than one of you investing in your business, this can be financial, via available resources, or just for experience; then you’re a partnership. You can’t be a sole trader if there is more than one person running the business.
You’ll need a proper agreement between the partners, this will establish responsibilities. However, all the partners will still remain liable for the debts of the business; the line between personal and business finances is still blurred.
This is similar to a partnership but it is permissible to have partners that don’t have the financial liability for the business. This keeps your personal assets safer, limiting any loss to the amount of a partner’s investment.
Limited Liability Company (LLC)
At this stage, your business is going to become more formalized. Limited liability companies are effectively separate structures to the business founders. Any funds you invest in the business will be seen as a loan that needs to be repaid and you’ll have no personal liability.
However, the paperwork side of things will dramatically increase when you have this type of business. You can also issue shares to each investor and classify the shares, allowing you to pay different dividend rates.
This is a good option if your developmental and looking to attract investors who want you to make a loss to help their tax declarations!
At this stage, you’ll have the option to float on the stock market and offer shares to the general public. This is generally an option for much larger companies that are well-established and may need venture capitalist help.
However, you should note that there are two types of corporation; C class and S class. Both will require you to do more filing and record minutes of annual meetings. But, there are also crucial differences that you should speak to a professional about first.
The great news is that you can change the entity of your business, this is commonly done as the business grows and improves; allowing you to benefit from the different entity types, helping your business to become successful.