What Are The Most Popular Types of Business Form In The U.S.? Whilst the COVID-19 pandemic has disrupted the working lives of many during the last couple of years, its upset with the status quo could not have been predicted. In fact, contrary to what economists would expect, given one of the highest inflation rates in decades and myriad supply chain issues, there has been an explosion in new business applications.
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This is perhaps one of the most surprising positives to COVID-19, especially given the fact that small businesses remain the lifeblood of the American economy. According to data from the U.S. Census Bureau’s Business Formation Statistics, 5.4 million applications were filed for new business formation last year.
When forming a business it is an important, yet the tough, decision to know which structure to set your business as, particularly for new entrepreneurs. This article will explore some of the most popular business forms in the U.S. as well as an additional tax designation often confused with a business form.
Limited Liability Companies (or LLCs for short), are a type of business form in the U.S. that combines the benefits of a sole proprietorship with those of a corporation. Namely, it exhibits the passthrough taxation of the former and the limited liability protection of the latter.
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This is one of the most popular types of business entities among small business owners as it grants them access to the perfect amount of personal asset protection while maintaining optimum simplicity.
Owners of an LLC, of which there can be an individual or multiple, are referred to as members. LLCs can thus be described depending on their ownership as either single-member or multi-member.
The primary benefit of LLCs over sole proprietorships and general partnerships is that LLCs offer their owners personal asset protection through their inherent limited liability. What this means is that the business form places a demarcation between business and personal assets so that the latter cannot be chased in a lawsuit in order to reclaim business debts.
The formation process for LLCs is also extremely straightforward, and they are very easy to sustain. On top of this, they are distinguished from corporations as they are not liable to pay double taxation.
Corporations are another popular legal entity. Unlike LLCs, a board of directors leads the company and shareholders own it. The benefit of this is that the company then gains many of the same rights as an individual. For example, it can enter into contracts, ask for loans, open lawsuits, and own assets.
The primary reason small businesses structure themselves as a corporation is to attract investment (since the limited liability protection it benefits from is also offered by LLCs). Investors are attracted to this business form because they gain ownership (in the form of shares) and they prefer the way in which corporations are taxed in comparison to LLCs.
It is recommended all owners of small businesses form legal entities in order to ensure their personal assets are protected. This is because informal business structures (such as those below) would leave a business owner to be held personally responsible to recover the debts of a business if it were to go bankrupt or be sued (so their assets would be taken).
As mentioned above, sole proprietorships are a type of informal business structure. They are considered informal because there is no legal separation between the owner and the business. In other words, the owner is responsible for the business’s debts and his assets will be used to pay them if he cannot.
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As such, it is only recommended that businesses remain as sole proprietorships if there is very little profit or risk associated with their operation. Furthermore, many startups will begin their life as sole proprietorships since they become one merely by conducting business.
In the same vein as a sole proprietorship, general partnerships are also informal. The term is used to describe any business entity that is shared by multiple owners. Essentially, it is just a sole proprietorship with several business owners. This means that the company’s profits, assets, and liabilities are all shared.
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Neither sole proprietorships nor general partnerships require any sort of formal application process in order to operate.
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