When starting a business in the United States, there are four main types of business and legal entities to consider – sole proprietorship, a partnership, a corporation, and a limited liability company. Firstly, a sole proprietorship is when one legal individual solely owns and administers the business. Thus, that one individual account entirely for all the liabilities, profit, or losses the company may have, making this the most simplified and standard entity.

Advantages of starting a sole proprietorship include an easy set-up of the business as if you are the only owner of a business; you are automatically its sole proprietor. However, owners of such entities are personally liable for any of the responsibilities and obligations of the business, like financial obligations. Additionally, it’s important to note that securing investors in a sole proprietorship is quite tricky as banks are very reluctant to trust a business that depends entirely on one individual. Hence, businesses that usually intend on being small for their future should opt for this kind of entity. Secondly, a partnership is when two or more individuals run the business; thus, these individuals share the responsibilities and obligations. There are two kinds – a limited partnership and a limited liability partnership. In limited partnerships, there is one partner who has unlimited liability, while the other partners have a limited amount and hence have a lesser amount of control over the business as well. In a limited liability partnership, each partner has limited liability, and there is no single one with unlimited liability. In terms of taxation, partners must adhere to personal taxes, and the partner with total liability in the case of a limited partnership must also pay the self-employment tax. It’s also important to note that when considering a partnership, drawing up a “partnership agreement” is essential as it would allocate liability among the partners, provide a protocol for when a partner wants to leave, and other such matters.

Next, we have a corporation, which is a business entity that provides the greatest safeguarding for its owners from personal liability as it is separate from the legal individuals. However, since the corporation is itself held liable, this causes it to be more expensive than other entities because it requires greater record-keeping and higher operational costs. While in other entities, the business’s life depends on the partner, in a corporation, even if a shareholder leaves, the company remains uninterrupted and continues its workings. Furthermore, unlike other entities, a corporation must file an income tax based on the profits they generate. Sometimes, corporations are taxed twice, first when the business makes a profit and secondly when the profits are given to the shareholders on their personal tax returns. To avoid being taxed twice, companies register as an S Corporation instead, which is a variation from the norm. It permits the profits to be directly streamlined into the shareholder’s income without being influenced by the corporate tax rates. However, there is a strict criterion to register as an S Corporation with the IRS. It must be a domestic corporation; the corporation should not have more than 100 shareholders; it must only have allowable shareholders, among other prerequisites. Aside from this, another form of corporation is the nonprofit corporation. A corporation can classify as a nonprofit if its work has public utility, such as educational, religious, charitable, or scientific businesses. As a result of this, nonprofits are not required to pay taxes on any profits that they make. Thus, if a corporation serves any of these public purposes, filing with the IRS as a nonprofit is crucial to attaining that tax exemption. However, to ensure that this tax exemption is not abused, there are limitations as to what nonprofits can do with their revenue, such as it can’t be dispensed to its members.

Finally, there exists the limited liability company, which is the mixture of the advantages of both a corporation and a partnership. This kind of entity safeguards an individual from personal liability if the company is facing debt, bankruptcy, or fraud charges. Additionally, in a limited liability company, the profits and losses of the company are directly streamlined into an individual’s income without being faced with corporate taxation. Unlike corporations, in some states, the limited liability company must be dissolved and set up once again in case a member decides to leave or if the company goes bankrupt. They are the most flexible kind of corporation and can be used for a range of different businesses. They are usually most suitable for those companies whose members have high personal assets they want to safeguard.

In the United States, having a Taxpayer Identification Number (TIN) is imperative regardless of the business entity one wants to set up. It is the identification used by the United States Internal Revenue Service (IRS) to control taxation. There are several different types of TIN numbers, such as a Social Security Number (SSN), an Employer Identification Number (EIN) or federal tax identification number, and an Individual Taxpayer Identification Number (ITIN). The SSN is a 9-digit identification number necessary for all lawful American citizens and residents to attain for social security purposes. It can be acquired through Form SS-5 on the IRS website. Secondly is the ITIN or Individual Taxpayer Identification Number, a 9-digit taxation number required for non-residents and their spouses or dependents who otherwise cannot attain a Social Security Number. This number can be achieved by filling out Form W-7, also found on the IRS website. Lastly, the EIN is the federal tax identification number for any business entity in the United States. This identification can be achieved through Form 1041 found on the IRS website.