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Different formation structures for businesses around the world

by Staff Reporter
05 Nov 2021 at 11:45hrs | Views
Entrepreneurship and business ownership are highly valued in American society. Findings of the Global Entrepreneurship Monitor United States Report suggests that 75% of Americans believe that entrepreneurs have a high status in society. This is a higher percentage than found in most other innovation-driven economies. According to research from the Global Alliance of SMEs and the University of Ohio, the most common business formation structures globally and in the United States (US) are a sole proprietorship, partnership, business corporation and limited liability company (LLC).

Below we will discuss the key differences between these 4 business structures:

Sole Proprietorship
A sole proprietorship is an informal, one person business, where the owner is the business. No formation process is required but this business type does not offer asset protection.
A partnership is essentially the same as a sole proprietorship with the difference that there are at least two owners.

Business Corporation
A corporation has a separate corporate personhood, meaning it has the ability to own assets in its own name and there is a separation of owners' personal assets from the business assets. Individuals are able to buy ownership or part ownership of a corporation. This is an advantage as it allows corporations to increase investment in the business by issuing stock.

Limited Liability Company
LLCs are a popular choice for entrepreneurs for a number of reasons. As such, prospective business owners should learn how to start an LLC.

Like a corporation, an LLC has corporate personhood. This means it can own its own property and have a bank account in its own name. The main benefit of this is that there is a separation of personal and business assets. Owners of LLCs are referred to as members. There can be one or more members and they can own the LLC in equal or unequal shares. The separation of personal and business assets as well as the flexibility in ownership are why LLCs are a popular choice for business owners.  Another benefit LLCs have over corporations is the amount of paperwork required. LLCS are required to file annual reports but the paperwork requirements are not as extensive as those of a corporation. With an LLC you are also able to choose the best tax structure for both the business and its members. Due to the flexible tax structures, LLCs generally pay lower tax than corporations.

LLCs are formed by filing articles of organization with the Secretary of State in the state in which the business will function. The articles need to contain certain information such as:
  • The proposed name of the LLC. Before naming your LLC you will need to make sure the name is available, and should register a URL with that name.
  • The names, addresses, and signatures of all LLC members.
  • The name and address of the registered agent who will accept delivery of important documents from the state. Each state has their own rules regarding who can act as a registered agent.
  • The business's physical address.
  • What the management style of the business will be, i.e., will it be member managed or manager managed.

The articles of organization are the legal requirement for forming an LLC and the details that need to be included vary by state. Although not legally required, it is also advisable to create an operating agreement between the members which will set out important details related to the running of the business such as how disputes will be resolved and how new members will be added. Before you can start operating you will also need to obtain an EIN (federal tax number), set up the LLC's financial infrastructure (bank accounts and accounting structures), acquire the licenses and permits required of your state and business type, and obtain business insurance.

An online business formation service such as ZenBusiness or Incfile can assist with most of the steps required to start the business.

There are some disadvantages to forming an LLC that prospective business owners should consider. Because there are limitations on how new members are added, one cannot simply buy ownership. This means it is difficult to raise money through investment because they cannot issue stock. Furthermore, while the flexible tax structures may be good for the business, members are seen as self-employed and therefore pay self-employment tax. This means they will have to pay Social Security and Medicare in both their capacities as employer and self-employed.  

Final Thoughts
All business structures have their own benefits and are more suited to different types of businesses. Generally LLCs are the popular choice due to the protection of members, flexible ownership structure and limited formalities and paperwork requirements.

Source - Byo24News