How To Start A Business In US:

Types of Business Entities


Starting a business in the U.S. can be quite a daunting task. One of the first tasks involved is choosing the right business entity. The most common types of business entities in the U.S. are:

  1. Sole Proprietorship
  2. Partnership
  3. Limited Liability Company (LLC)
  4. Corporation

In this article, we primarily focus on Limited Liability Companies and Corporations, the 2 types of business entities that are popular among those establishing a new office in the U.S.

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1. Limited Liability Companies (LLCs)

Limited Liability Companies (LLCs) are essentially part corporation, and part partnership or sole proprietorship. Like a partnership or sole proprietorship, there is “pass through” taxation – meaning that profits of the LLC are passed through to the owner’s personal tax returns. This can be beneficial to individual members of the LLC in that they can use losses from the business to offset their income. However, like corporations, members of an LLC are personally protected from the liabilities of the entity.

LLCs are popular in that they are generally easier to form than a corporation but offer more protection than a sole proprietorship or partnership. However, LLCs do have some disadvantages, including the fact that an LLC cannot survive the death or bankruptcy of even one member.


a. What documents do I need to form an LLC?

Generally, you would need to prepare and file the Articles of Organization with the State along with the requisite filing fees, initial franchise taxes, and/or other initial fees.

b. Do I need an attorney to form an LLC?

It is not necessary to employ the services of an attorney to form your LLC. However, it is advantageous to have a discussion with an attorney/tax advisor to avoid errors, and ensure that you choose the correct legal entity for your situation.

c. Are there any guidelines for naming my entity?

Yes. The name of your business entity must not match or be too similar to the name of an existing company established in your desired State. Almost every State requires and accepts the identifiers such as Incorporated, Corporation, Limited, LLC, etc.

d. Can I be the sole member of my LLC?

Most States allow single-member LLCs, which is increasingly becoming the most common type of small business. The IRS will generally treat a single-member LLC as a “disregarded” entity unless the company affirmatively elects to be treated as a corporation. Also, sole members of a single-member LLC must be sure to file and pay self-employment taxes as the net income from the business is essentially their income.

e. How is an LLC managed?

An LLC is generally managed by its members; however, it may also be managed by selected managers. Management by members operates much like a partnership where each member has equal rights in the management decisions. In certain instances, the members may choose or elect a manager or managers. This is more like a corporation’s board of directors and the managers are in charge of the management of affairs of the LLC.

f. What are the advantages of an LLC?

The main advantages of an LLC are:

  1. Limited liability of members
  2. Flexible management structure
  3. Flexible ownership is permitted
  4. Tax benefits in certain situations

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3. Corporations

A corporation is a distinct legal entity that is completely separate from its owners. In fact, corporations, as distinct entities, have many of the same rights as people, including the right to enter into contracts, hire employees, own other companies or assets or obtain loans.

A corporation is an entity that is separate from its owners so that regardless of what happens to individual shareholders, the corporation continues until it is legally dissolved. This also limits the liability to the shareholders. For example, if a corporation is properly formed, the most a shareholder risks losing, even if there is a lawsuit, is what the shareholder invested.

Depending on State law, a corporation can be owned by just one person, and have just one director and officer. The owner(s) of a corporation are known as shareholders. The shareholders elect directors to set the policies of the corporation and represent their interests. The directors appoint the officers of the corporation to manage day to day operations.

Corporations are legally required to follow more formalities than any of the other entities, including holding annual meetings of the shareholders and directors and obtaining board approval of significant acts by the corporation. Because a corporation is separate from its shareholders, even if one person is the sole shareholder/director/officer, that person cannot just take company funds for him/herself without documenting the reason and entering a board resolution into the corporate records.

Taxation of corporations is also much more complex than sole proprietorships or partnerships: depending on the number of, residency of and type of shareholders. A corporation can elect to be treated for tax purposes as if it were a partnership (an S corporation) and therefore not pay taxes itself, or it can be treated as a taxable entity (a C corporation).

4. Corporation FAQs

a. Is it necessary to hire an attorney to form a corporation?

Though it is not necessary to employ the services of an attorney to form your corporation, incorporation of an entity involves several complex issues that have legal implications. It is advantageous to have a discussion with an attorney/tax advisor to avoid errors and ensure you choose the correct entity for your situation.

b. Is there any minimum capital requirement to start a corporation?

In most of the States there is no minimum requirement of capital for starting a corporation, other than the State filing fee for incorporation.

c. How long does this entire process of incorporation take?

The time taken for the incorporation process depends upon the State where the business is incorporated. Different States have different processing times depending upon the workload at the State office as well as the time needed to perform prerequisite activities. For example, a few States require a notice to be published in the newspaper upon the formation of a corporation.

d. Are there any specific guidelines for selecting the name of the corporation?

Yes. The name of your corporation must not match or be too similar to the name of an existing company established in your desired State. Almost every State requires and accepts the identifiers such as Incorporated, Corporation, Limited, LLC, etc.

e. What are the advantages of incorporation?

The main advantages of incorporation are:

  1. Limited liability of shareholders
  2. Perpetual succession i.e. unlimited life independent of its shareholders
  3. Raising of capital is comparatively easy
  4. Easy transferability of ownership
  5. Centralized management

5. Strategic Considerations In Selecting Appropriate Structure

Selecting the most suitable legal business structure is the first and foremost step in starting a business entity in the U.S. The decision depends upon various factors such as the capital involved, the nature of business, the nature of ownership, legal formalities required, tax issues, management and control etc. The following points highlight the distinction between the major types of business structures:


Sole Proprietorship and Partnerships may not require filing in some States; however, for establishing a LLC or a Corporation, State filing is required.


In sole proprietorship, full control of management and operations rests with the proprietor, whereas in Partnerships generally each partner has equal control, unless there is an agreement to the contrary. The management and control of an LLC is outlined by the operating agreement between the members. A Corporation is managed by directors, who are elected by the shareholders of the corporation.

Raising Capital

Raising of capital from external sources is often difficult for a sole proprietor and he has to depend on his own contributions. In a partnership, contributions can be invited from the partners or a new partner may be added who may bring his share of the contribution. LLC members can raise capital by selling interests, however it is subject to the operating agreement. A corporation has the option of raising external capital through the issue of shares.


Sole proprietors and partners have unlimited liability, whereas members of an LLC may not be liable for the debts of the LLC. In a corporation, the liability of shareholders is generally limited to the extent of value of shares purchased. They may not be held personally liable for the debts of the corporation.


A sole proprietorship dissolves if the sole proprietor dies or discontinues with his business. A partnership dissolves with the death or withdrawal of a partner, unless a partnership agreement contains contrary provisions. The duration of an LLC depends upon the requirements imposed by the State where it has been formed. The major advantage of a Corporation lies in its perpetual existence.

Tax Issues

There are different tax rules that apply to each type of entity. Generally sole proprietorships, partnerships, and LLCs are taxed at the individual level, while the corporation are taxed at the company level with dividends being taxed a second time at the individual level. There are several taxation levels you have to account for when establishing a business in the U.S. At a minimum, you will be subject to taxation at the State and federal level. In some jurisdictions, you will need to be aware of local (city and/or county) taxation.


Setting up a business in the US can be quite exciting. But there are also many challenges.

The L-1 intra-company transfer visa can be used for setting up a company in the US when it is a subsidiary, parent, branch or affiliate of an overseas company. Foreign nationals from countries with certain treaties with the US also have the choice of using the E-1 or E-2 visas for starting a business in the US.

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