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Choose The Most Suitable Type of Business Entity for an Effective Expansion

Choose The Most Suitable Type of Business Entity for an Effective Expansion

Looking for information on business entities? Well, you are at the right place.  

Business entities come into picture once you start thinking about global expansion. 

The type of business entity you want to choose plays a crucial role in determining the structure of your business operations. 

Lets dive straight in.

What are business entities?

Business entities are organizations created by one or more people to participate in a business, trade, or other activities. Different countries follow different entity types. The most commonly observed types of business entities are:

  • ~Sole Proprietorship
  • ~Partnership (General and Limited)
  • ~Limited Liability Company
  • ~S Corporation 
  • ~C Corporation

Depending on the choice of your business location, these may vary, depending on the laws prevailing. Based on the location of your business and the laws governing, you are free to choose the desired type of business entity.

Why are the types of business entities important to you?

Before you set up a business entity, you should understand what type of entity suits the business you are planning. Each type of business entity has its regulations to follow.
The type of business entity you set up is based on:

  • ~Taxes you pay
  • ~Legal status of business
  • ~Ownership possibilities
  • ~Viability to expand and more

These are critical elements you need to consider while starting a business. 

With so many options available, it is quite a task to recognize which business entity type fits your needs. You must have extensive knowledge of the different types and what they offer and do not. 

What are the different types of business entities? 

Different types of business entities have different rules and regulations. For instance, partnership entities are run by two or more individuals who share assets, liabilities, responsibilities, and risks. This is not the case with sole proprietorship, which has only one owner.

It is time to understand the ground rules applicable to the various types.

Sole Proprietorship

The sole proprietorship entity type is the simplest. 

You run the business yourself. There is only a single owner and decision maker. You cannot have any investors and don't have to file articles of incorporation. 

If you choose sole proprietorship as the business entity type, the IRS treats you and the business as one and the same. 

A sole proprietorship is not required to register with the state. But you might need licenses and permits depending on the industry of operations. Also, you need to track profit and file Schedule C along with your Form 1040, which is for personal income tax returns.

Examples of sole proprietorship businesses can be freelancers, consultants, and other professional service providers who work as sole proprietors.

Pros Cons
Easy to start. No requirement to register the business with the state. The owner is personally liable for the business liabilities and debts. Third-party creditors can sue the owner's assets if they win a lawsuit against your business.
Less paperwork. No formal meetings, minutes, bylaws, etc. The business is not considered a separate legal entity. It is the same as the owner.
Easy to file taxes. You need to fill out form 1040 and attach Schedule C (Profit or Loss from business). Challenging to raise capital without investors.
Business losses are considered deductions on your income tax returns.

Partnership

The main difference between a sole proprietorship and a partnership is that there is only one owner in a sole proprietorship. In contrast, in a partnership, more than one partner is involved, and they enter into a partnership agreement. 

A partnership business can be: 

  • ~General partnership
  • ~Limited Partnership

General partnerships – In this type of partnership business, there are at least two partners, investing capital and sharing risks. Plus, they share their profits and losses. 

Similar to a sole proprietorship, in general partnership type business entities, you need not have to register with the state. 

Limited partnerships – Unlike general partnership, limited partnerships need registration with the state. In limited partnership, at least one partner is not involved in the management but only invests. That investor is a silent partner.

Pros Cons
Higher availability of financial resources. In a general partnership, each partner is personally liable for the business liabilities or debts.
Access to greater resources for business operations, decision-making, and management. There are states where each partner might be personally liable for the negligent behavior or action of another dispute that might impact business decisions, and growth.
Since there is more than one owner in partnership, you can divide liabilities, profit, losses, and responsibilities. General partnerships are not required to be registered. Hence, it might be challenging to raise capital.
The financial burden is less in partnership. Forming a limited partnership can be an expensive affair.
There is less documentation in this type of business entity. Plus, there are fewer forms in taxes as well. You must divide business profits.
In a limited partnership, a partner can leave without dissolving the business partnership. You do not have the freedom to make your decision alone. You must consult the partner.

Limited Liability Company (LLC)

LLC can be a single-member LLC or a multi-member LLC. The members are the owners of the company, just like partners in the previous instance. 

LLCs have features of both sole proprietorship and partnership. Unlike a sole proprietorship, LLCs have limited liability. But there is less paperwork involved in registering the business. So, in that case, LLCs are more like sole proprietorships.

Income benefits in LLCs are more like partnership businesses. They have operational flexibility. But they also have limited liability exposure. However, this type of business entity seems more like a limited partnership. There are statutory and legal differences to it.

Pros Cons
In LLCs, the owners are not personally liable for the business debts and liabilities. Establishing an LLC is more expensive than a sole proprietorship or partnership. It requires registration with the state. It requires registration with the state.
LLCs can be taxed as a partnership or a sole proprietorship. Generally, single-member LLCs have the same taxation as sole proprietorships. Depending on your state, LLC renewal fees or publication needs can be expensive.
Less paperwork It might be difficult to raise financial resources for LLCs, especially single-member LLCs
You can establish an LLC with a single member or with an unlimited number of members. In single-member LLCs, you get the benefits of a sole proprietorship with limited liability.
An LLC is a type of business entity that is highly flexible. So, it requires a proper operating agreement.

C Corporation

Among the legal entity types, a corporation is an independent entity that operates under state law and exists as a separate entity from the company owners or shareholders.
C Corporation is a legal type of business entity that operates under the state law, and whose owners and shareholders are taxed separately from the entity. The best examples of C corporations are Microsoft and Walmart. 

C-corps are considered to provide best protection from personal liabilities. However, it is also the most elaborate of business structures and may consist of shareholders, a board of directors, and officials, who decide the company's course of action.

A corporation has quite a complex structure that requires more documentation, operational processes, record-keeping, tax compliance, and reporting.

If you choose the corporation type of entity business, you must file the Articles of Incorporation with the state. To file taxes, C Corporation needs to file taxes on the profit and loss using Form 1120. 

Pros Cons
The shareholders or owners in a C Corporation are not personally liable for the business debts and liabilities. The costs of establishing a C Corporation are much higher than sole proprietorships and partnerships.
The owners of C Corporations pay lower self-employment taxes. C Corporations have two layers of taxes - i.e. double taxation. On the one hand, the company pays corporate tax returns, while shareholders pay taxes on dividends on their returns.
Compared to the other business entities, a C Corporation is eligible for more deductions on taxes. No deduction of business losses on personal tax returns of the owner.
C Corporations can issue and offer stock. Thus, raising funds might be slightly more accessible in this legal entity type than in others. C Corporations involve a lot of work when it comes to formalities – conducting shareholders and board meetings, keeping minutes, and establishing bylaws.
Since the owners or shareholders and the business are separate legal entities, the firm has perpetual life. That means it will continue as a legal entity even if an owner expires. You can pass on the shares to your heirs.
Ownership can be easily transferred through the selling of shares.

S Corporation

An S corporation is a type of closed corporation. It means the corporation is held by a finite number of shareholders and does not have public trading.

The S Corporation is constituted by converting the C Corporation created by Articles of Incorporation through Form 2553.

This type of business entity also provides limited liability, like C Corporation. But S Corporations are pass-through entities for tax purposes. That means, S Corporation's profits and losses pass through the personal tax returns of the shareholders.

There are many regulations around the S corporation, from a limited number of shareholders to the fact that a C Corporation cannot be a shareholder. The taxes are filed through Form 1120S.  It has to be noted that S Corporation does not have corporate-level taxes. 

Also note, for S Corporation, the shareholders have to be US citizens/residents.

Pros Cons
There are no personal liabilities for owners or shareholders. Difficult to establish. It involves higher costs than sole proprietorship and partnership.
Unlike C Corporation, there is no double taxation in S Corporation. Higher limit on issuing stock than C Corporations
Like in C Corporations, S Corporations also involve formalities like creating bylaws and holding meetings with shareholders and the board.

A Comparison Between Different Types Of Legal Entities

Now that you are well aware of the common types of business entities, have a look at the comparison between these business entity types.

Types of Business Entities Ownership Liability Taxes
Sole proprietorship One individual Unlimited personal liability Personal income tax

Self-employment taxes

Partnership More than one owner Unlimited liability unless it is a limited partnership Self-employment taxes

Personal taxes

LLC One or more than one Owners are not personally liable for business liabilities and debts Self-employment taxes

Personal or corporate taxes

C Corporation One or more than one Owners are not personally liable Corporate taxes
S Corporation One or more than one, but within 100 (all US citizens) Owners are not personally liable Personal taxes

Looking to simplify the process? Well, you got solution!

Multiplier offers SaaS-based EOR solutions for businesses to expand globally without creating a business entity. With entities in over 160 countries around the world, it allows you to take your business to almost anywhere in the world.

Rather than investing strenuous effort, time, and costs in creating an entity of your own, you can simply use the Multiplier Employer of Record to kick-start your enterprise in any foreign land. 

Well, coming to costs, we have even better news - quite affordable. Get to know how Multiplier makes a difference as compared to setting up a business entity in a country.

Key Criteria Setting up an Entity Multiplier advantage
Cost of setting up an entity Average cost of setting up an entity anywhere across the globe can range from $25000- $50000 Not Applicable
Documentation The documentation requirements per country vary and can be exhaustive Not Applicable
Time for incorporation Average time taken to incorporate can take almost upto 50 weeks Immediate
Payroll Costs The average payroll cost can range between $100-$150A Included
Transfer Pricing The average transfer pricing percentage can range between 10% - 20% can vary based on sector, services offered and domain N/A

Are you thinking of a particular country for your global expansion? 

We are here to help. Click here to contact us.

Why chain your business while you can let it fly high?

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