What is US Business Formation?
It is the legal and administrative process of creating a new business entity in the United States.
It involves choosing a business structure, registering with government authorities, and complying with local, state, and federal requirements.
Key Steps in US Business Formation:
- Choose a Business Structure
Common types include:- Sole Proprietorship – Simplest form, owned by one person, no separate legal entity is involved.
- Partnership – Two or more people share ownership.
- Limited Liability Company (LLC) – Offers liability protection and flexible tax treatment.
- Corporation (C-Corp or S-Corp) – Separate legal entity, formal structure, more regulation.
- Nonprofit – Formed for charitable, educational, or social purposes.
- Select a Business Name
- Must be unique and comply with state naming rules.
- Option to register a DBA (“Doing Business As”) if operating under a different name.
- Register the Business
- File formation documents with the Secretary of State (or equivalent) in the state of incorporation.
- LLCs: Typically file Articles of Organization.
- Corporations: Typically file Articles of Incorporation.
- Pay required filing fees.
- File formation documents with the Secretary of State (or equivalent) in the state of incorporation.
- Apply for an EIN (Employer Identification Number)
- Issued by the IRS.
- Required for tax purposes, hiring employees, and opening a business bank account.
- Register for State and Local Taxes
- Depending on location and business type, this may include:
- Sales tax permits
- State income tax registration
- Unemployment insurance, etc.
- Depending on location and business type, this may include:
- Obtain Licenses and Permits
- May be required at federal, state, or local levels.
- Varies by industry (e.g., food service, construction, retail).
- Create Internal Governance Documents
- LLCs: Operating Agreement.
- Corporations: Bylaws, shareholder agreements.
- Open a Business Bank Account
- Keeps personal and business finances separate.
- Often requires EIN and formation documents.
Why It Matters:
The key advantages of proper business formation are:
- Limits liability, which could be personal or group liability in the case of UK or international groups seeking to expand)
- Establishes credibility
- Enables access to finance – business loans and investors
- Ensures compliance with the law
Comparison of US Business structuresÂ
We have put together this coparison of the most common U.S. business structures, broken down by the main legal, tax, and operational differences:
| Feature | Sole Proprietorship | Partnership | Limited Liability Company (LLC) | Corporation (C-Corp) | S Corporation (S-Corp) |
| Legal Entity | Not separate | Not separate (general partnerships) | Separate legal entity | Separate legal entity | Separate legal entity |
| Ownership | One person | Two or more people | One or more members | Shareholders | ≤100 shareholders (US citizens/residents only) |
| Liability Protection | No | No (unless LLP or LP) | Yes (limited liability) | Yes (limited liability) | Yes (limited liability) |
| Taxation | Personal income tax | Pass-through (to partners) | Default: Pass-through (can elect corporate tax) | Double taxation (corporate + dividends) | Pass-through (no corporate tax) |
| Management Structure | Sole owner manages | Partners manage | Flexible (member- or manager-managed) | Board of directors + officers | Board of directors + officers |
| Formalities & Maintenance | Minimal | Low to moderate | Moderate | High (board meetings, minutes, filings) | High (same as C-Corp) |
| Profit Distribution | All to owner | Split per agreement | Flexible | Dividends or reinvestment | Pro rata to shareholders |
| Ease of Formation | Easiest, lowest cost | Easy | Moderate | More complex and expensive | Same as C-Corp, plus IRS election |
| Fundraising & Investment | Limited | Limited | Easier than SP/Partnership | Easiest (can issue shares) | Limited (restrictions on shareholders and one class of stock) |
| Best For | Freelancers, small one-person businesses | Small groups or family businesses | Small to mid-size businesses wanting liability protection | Startups, growth companies seeking investment | Small businesses seeking tax benefits with liability protection |
Key Takeaways (General Comments):
- LLC is the most popular choice for small businesses due to its balance of liability protection, flexibility, and simplicity.
- C-Corp is preferred by startups seeking VC funding due to its ability to issue multiple classes of stock.
- S-Corp offers tax benefits but has eligibility restrictions.
This is only a summary and please be sure to take the proper legal and professional advice from qualified US formation specialists when you decide to proceed with your US setup.