An Introduction To Common Entity Types For New U.S. Business Ventures

If you are coming to the United States to set up a new business venture, the international tax team at LSL CPAs understands the importance of choosing the right business entity for your new venture.  To get the most out of your company and avoid unnecessary problems, you need to pick the correct entity.

When it comes to questions of taxation, entity selection is very important for a new business venture in the United States. Federal and state tax consequences of each type of entity play an essential role in entity selection. This is especially true in regard to closely held entities where the combined tax liabilities of the parties involved need to be analyzed in order to make an educated decision.

Tax Treatment of Common Entity Types

In addition, the tax treatment of distributions often vary in respect to the type of entity making the distribution, the type of entity receiving it and the type of property being distributed. For example, property distributed from a C corporation is generally taxed to the recipients. In stark contrast, cash and property distributions for LLCs are generally tax-free, but there are many exceptions.

When it comes to choice of business entity types, tax questions are like entering a labyrinth to find an answer. This is why the help of an international tax professional is essential. To learn more about how entity types selection could affect your tax situation, please contact the international tax consultants at LSL CPAs. After all, the selection of the right business entity type could be the firsts step of helping your company stand out from the crowd.

Without question, we all understand the difficulties involved in starting a new business venture. The goal is to make the process as easy as possible by providing clarity based on experience and expertise. By providing you with this short and easy guide to common business entity types and structures, the international tax consultants at LSL CPAs hope to provide you with the confidence to securely move forward with your new venture.

Common Business Entity Types include —

1) Sole Proprietorships

1. Owner needs not be a U.S. Citizen or Resident
2. Owner is personally liable for lawsuits filed against the business
3. No state filing required to form a sole proprietorship
4. The easiest business entity to form and operate
5. Report business profits and losses on personal U.S. tax return

2) Partnerships & Limited Partnerships

1. Owner needs not be a U.S. Citizen or Resident
2. In California, certificate of limited partnership must first be filed with the California Secretary of State
3. Partners of general partnerships remain personally liable for lawsuits filed against the business entity
4. In limited partnerships, only the general partner is liable
5. Although easy to form and operate, a partnership agreement is needed
6. Partnerships are required to file both federal and state tax returns, but income taxes are not paid on the partnership level
7. Partners report their share of profit and loss from the partnership entity on their personal tax returns

3) Limited Liability Companies (LLCs)

1. Owner needs not be a U.S. Citizen or Resident
2. Must be set-up according to the rules of specific state
3. Clear separation of personal assets from business debts
4. LLC Law is based on partnership law while allowing the limitation of liability common to corporations
5. Taxed similarly to a sole proprietorship if one owner or a partnership if multiple owners
6. No limit to the number of owners
7. Not required to hold annual meetings or record minutes
8. Pass-through taxation benefit combined with liability protection make LLCs a good entity choice for real estate ownership for U.S. residents
9. Created by a state-level registration that usually protects the company name
10. LLC members report their share of profit & loss on their personal income tax returns
11. If owners are foreign residents, they will be required to file income tax returns in the United States

4) C Corporations:

1. Owner needs not be a U.S. Citizen or Resident
2. Clear distinction between personal assets and business debts
3. A tax structure that is separate from owner’s personal taxes
4. A legal structure that creates a separate legal entity
5. No limit to the number of shareholders provides flexibility
6. Pays taxes on corporate profits, but dividends taxed individually
7. Required to hold annual meetings and record meeting minutes
8. Created by a state-level registration that usually protects the company name

5) S Corporations

1. Independent legal and tax structures separate from owners
2. Clearly separates personal assets from business debts
3. Owners can report their share of profit and loss in the company on personal tax returns
4. Limits on number of shareholders
5. Shareholders must be U.S. citizens or residents
6. Must hold annual meetings and record meeting minutes
7. May issue stock to attract additional investors
8. Created by a state-level registration that usually protects the company name

Although this does not cover all of the intricacies of choosing a business entity, it’s a great place to start and a handy reference guide. To learn more and access the help you need, please contact the International Tax Consultants at LSL CPAs.

Pursuant to U.S. Treasury Department Regulations, any federal tax advice in this article is not intended or written to be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

It is important to further note that this article presents only a partial view of the subject matter. It does not claim or attempt to be comprehensive or perfectly accurate. To learn more about how these issues might apply to your particular business venture, please call International Tax Consultant Yana Weaver at 714.672-0022.