Main Types of Companies in the United States

In the United States there are several types of companies that have different legal and tax structures, and today we will explore a little bit the four main structures allowed by American law. Many investors have doubts in which one to choose, and the answer will always depend on the short and long term objectives that this investor has.

However, it is always possible to start a company with a structure that is more geared toward short-term objectives, and as the business develops, the American government allows the company to change its tax and even legal structure.

• Corporation

In this structure the company may have one owner with 100% of the shares or several partners, and in this modality it is necessary, besides the formalization in the State where it will be incorporated, other corporate documents, such as the "By Laws" and the "meeting minutes", where it is pointed out who the partners are and their obligations within the company.

A Corporation is the most common company structure in the United States, since it sends its returns and pays its Taxes to the government within its own structure, without the need for its partners to report on their personal taxes.

Obviously a tax study is necessary before deciding on the correct choice of tax structure, but in general it is the most indicated for foreign investors, since withholding taxes will only occur if you distribute dividends to your partners, avoiding the creation of accessory obligations to your Shareholders (partners).

Currently the Corporation pays 21% income tax to the federal government on net income, and in the State of Florida in the year 2021 the State income tax rate is 4.448% on income the Corporation has over $$50,000. Some US states exempt State Income Tax in some circumstances.

• S Corporation

This type of business is only allowed for US residents and citizens who have a social security number, as it has tax advantages in its choice.

In general a regular business structure is opened before applying to the IRS for a Corporation or LLC to be treated as an "S Corporation". In this structure the company sends its tax return to the IRS, the United States tax control agency, but the taxes are passed on to the partner in his or her personal return to pay. In this way, the purpose of the return is to point out all the company's operations and the amounts that will be reported in the partner's individual Income Tax.

The main advantage of the S Corporation is the exemption from the so-called Self Employment Tax of 15.3% levied on the profit in the operations of the LLC company, and the exemption from Income Tax on the distribution of any results through a Corporation, avoiding the so-called double taxation.

Therefore, the IRS requires the partner in an S Corporation to submit a monthly payroll to collect a portion of the exempt Self Employment Tax, obviously, depending on the profits generated by the company, in the end the partner in an S Corporation can enjoy an excellent reduction of federal taxes to be paid.

As explained above, an S Corporation will not pay its own taxes, which will be passed on to its partners, and they will collect according to the IRS progressive table, going from 10% to 37% currently. Some US states exempt an S Corporation from State Income Tax, such as the State of Florida.

• LLC - Limited Liability Company

The LLC - Limited Liability Company is very widespread among American residents and citizens, however it is also possible for a foreign investor to opt for this type. From the LLC derives two types of structures, one that has only one owner of the entity, called disregarded entity, and one that has two or more partners, called Partnership.

In the LLC the partners will always pay the tax, so two declarations are always generated, one by the Partnership informing all the company's operations and which values will be allocated in the Income Tax of the individual partners, and the other personal declaration of the partners, informing not only their personal income but also the values of their LLC.

Although the opening of an LLC by a foreign investor is allowed, it is important to be aware that the IRS requires withholding of 37% of Income Tax on the Partnership's profit, which obviously may be offset in the personal tax of the partners a posteriori. And this withholding does not occur on the occasion of distribution of results, but for the simple generation of net profit ascertained in the annual operation.

It is a mistake to say that the LLC does not pay taxes as many spread across the country, leading to error and the application of heavy fines by the IRS to its partners. What you must keep in mind is that this tax is passed on to its partners for collection from the IRS.

As tax is paid by the partner, a progressive tax rate will be used ranging from 10% to 37% on income in addition to the payment of Self Employment Tax of 15.3% on LLC profits. In the LLC the distribution of results is not taxed since the profit tax payment has already been passed on to the partner for payment.

• NonProfit Organization

It is A non-profit organization organized to provide social services, as opposed to a corporation that operates as a business with the goal of generating profit for its members. A non-profit organization is subject to the restriction of non-distribution, and any income in excess of expenses must be used for the purpose of the organization, and never used by private parties.

A wide range of non-profit organizations, including most political organizations, schools, business associations, churches, social clubs, and consumer cooperatives.

No Nonprofit entity is automatically exempted by the IRS or States in the payment of Taxes. After it is opened, the entity must apply to the IRS for tax exemption, and once approved, this will be used by the State to also exempt the entity.

If you want to learn more about the types of companies in the United States, contact us today and schedule a tax consultation with one of our experts.