Forming a legal business entity or structure has many advantages, with the most notable one being protection against business liabilities. According to a report by LegalZoom, incorporating a business with the Secretary of State Offices costs between $100 to $250, depending on where an organization is filing for incorporation. Choosing a legal entity is an important consideration when starting a business.
Typically, entrepreneurs should choose legal structures for their business before registration. While all business structures have similar requirements, each state has set unique rules for structuring a corporation. Keep reading to understand various types of business legal formations in the US and their regional differences.
Sole Proprietorship
This is the most common type of business structure because it has minimal requirements compared to other legal entities. Other benefits of sole proprietorship include easy tax filing and it’s tax deductible. This business model appeals to service providers like freelancers, consultants, and established ventures, like retail stores. To start a sole proprietorship business, you don’t need to register with the state. However, many states require sole proprietors to apply for general business licenses and permits, depending on their industry.
In a state like Alabama, sole proprietors don’t need a general business license. Instead, they apply for a privilege license approved by a probate judge in the county they plan to set up their business. Cost of starting a sole proprietorship also varies across the country. For example, in Washington State, sole proprietors pay a filing fee of $20, while those in Florida spend about $50. So, take time to research the regional differences of sole proprietorship requirements before making a decision.
Limited Liability Company
There are many benefits of incorporating your startup or existing business as an LLC. Considering a limited liability company exists as an independent entity, entrepreneurs are not liable for the business’s obligations or debts. Unlike many corporations that are subject to business taxation on their income, an LLC allows you to choose a pass through status. That way, you can avoid paying double tax.
Another reason for forming an LLC is organizational flexibility. Many states have standard rules that require limited liability companies to follow business formalities similar to those of corporations. But some states also allow operating agreements set by LLCs to override default requirements. For example, your LLC’s operating agreement can restrict company owners who are not proactive in the business’s management from making important business decisions.
The regional differences of LLC also revolve around costs, filing annual reports, and certification. For example, let’s say you want to create an LLC in Georgia. You’ll need to meet default requirements like choosing a business name, drafting an operating agreement, getting a tax ID number and business licenses, and filing an article of organization. However, you’ll need to file annual reports, a requirement LLCs in Arizona don’t need.
You also need to pay a filing fee of $110 when registering an LLC in Georgia for the first time and $50 every year. In states like Arizona, Idaho, New Mexico, and Ohio businesses pay a one time filing fee. LLCs in Georgia also attract a penalty of $25 for late filing of annual reports. With that said, invest time to understand how the formation of LLCs varies from state to state to avoid mistakes.
Partnership
Partnership and sole proprietorship are similar. The major difference is that a partnership has two or multiple business owners. You can also choose to form a general partnership, limited partnership, or limited liability partnership business models. In a general partnership entity, partners share the business responsibilities equally, while in limited partnership, the general partner has unlimited liability and handles all the day-to-day operations of the business. This means the limited partner or silent investor doesn’t have responsibilities or voting rights and their personal liability is limited.
In a limited liability partnership arrangement, members take part in the business’s management and don’t carry any liability. The essential requirements for establishing a partnership include choosing partners, selecting a business name, getting a business license, creating a partnership agreement, and applying for a tax ID number. However, there are regional differences on how to form partnerships .
For instance, if you’re planning to start a partnership in California, you don’t need general business name registration. Therefore, your business will be named after the last names of the partners. But if you choose a fictitious name, the state requires you to file a certificate to protect it from copyright infringement. This rule also applies in New York and New Jersey. The costs of starting a partnership also vary, with filing fees in California starting at $70, while in New Jersey filing costs $125.
Incorporating your business as an LLC, sole proprietorship, or partnership will have a significant impact on your taxes. Typically, there are default rules of structuring your business as a legal entity. But there are unique requirements set in each state. In most cases, the filing fee for incorporation will vary across states, while the requirement for general business licenses is not mandatory in states like Alabama. Understanding different requirements for business incorporation in your state is key to ensuring you choose the right legal entity for your company, based on needs and finances.
