Types of Companies: All You Should Know About Company Types in USA

Starting a business in the USA requires careful consideration of the different types of companies and their pros and cons. Understanding these types and their legal structures is necessary for decision-making. This article provides an explanation of the types of companies in the USA, giving entrepreneurs insight into the best companies to start or invest in and whether or not to form an LLC.

What is a Company?

A company is a legal entity formed by a group of individuals to engage in and operate a business enterprise in a commercial or industrial capacity. It is separate from the individuals who own, manage, and support its operations.

Companies are generally organized to earn a profit from business activities, though some may be structured as nonprofit charities. A company may be organized in various ways for tax and financial liability purposes, depending on the corporate law of its jurisdiction. The line of business the company is in will generally determine which business structure it chooses, such as a partnership, sole proprietorship, or corporation. These structures will also denote the ownership structure of the company.

How Do You Classify Companies?

Companies can be classified in multiple ways based on different criteria. The criteria for classification include the following:

Size: Companies can be classified based on their size, such as small, mid-size, and large companies.
Number of members: Companies can be classified based on the number of members they have, including one-person companies, private companies, and public companies.
Control: Companies can be classified based on control, such as holding companies, subsidiary companies, and associate companies.
Liability: Companies can be classified based on liability, including limited companies (by shares or by guarantee), unlimited companies, and companies limited by guarantee (with or without share capital).
Access to capital: Companies such as listed and unlisted companies can be classified based on their access to capital.
Objects: Companies can be classified based on their objectives, such as profit-oriented companies and otherwise.
Holding of shares: Companies can be classified based on the holding of shares, such as private companies, public companies, and government companies.

In addition to these classifications, companies can also be classified based on their industry, such as those classified under the Standard Industrial Classification (SIC) system. It’s important to note that companies can have multiple characteristics, and these classifications are not mutually exclusive. The classifications are meant to better understand companies’ complex legal structures and help regulate their operations.

Types of Companies in the USA

Based on ownership, companies can be divided into two types for legal and regulatory purposes: public and private.

Public Company

A public or publicly-traded company allows shareholders to be equity owners when they purchase shares through a stock exchange. Someone who owns a large number of shares has a larger stake in the company than someone with a small number of shares. The U.S. Securities and Exchange Commission (SEC) holds public companies to strict reporting and regulatory requirements. Under these guidelines, companies must file financial statements and reports annually outlining the company’s financial health. This prevents fraudulent reports and activities.

Private Company

Private companies, on the other hand, are held under private ownership. Although they may issue stock and have shareholders, equity in private companies is not traded on an exchange. They come in various sizes and shapes and are only sometimes subject to the strict regulations and reporting requirements that public companies must follow. These companies do not have to disclose financial information or outlook to the public, giving them more opportunity to focus on long-term growth rather than quarterly earnings.

What Are the Different Types of Private Companies?

There are four main types of private companies:

#1. Sole Proprietorships

Sole proprietorships put company ownership in the hands of one person. A sole proprietorship is not its legal entity; its assets, liabilities, and all financial obligations fall completely on the individual owner. It’s the simplest business entity type and offers the lowest protection for owners, who are fully liable for the company’s financial and legal liabilities.

#2. Limited Liability Corporations (LLCs)

Limited liability companies (LLCs) often have multiple owners who share ownership and liability. This ownership structure merges some of the benefits of partnerships and corporations, including pass-through income taxation and limited liability, without incorporating them.

#3. S Corporations (S-corps)

S Corporation elects to pass corporate income, losses, deductions, and credits to shareholders for tax purposes. It offers similar protections as a regular corporation but with pass-through taxation. S corporations can have no more than 100 shareholders and are not taxed on profits.

#4. C Corporations (C-corps)

C corporations are similar to public companies with shareholders. However, these companies can remain private and must not submit quarterly or annual financial reports. C corporations can have unlimited shareholders but are subject to double taxation. C corps offer strong protection to owners from personal liability but require more extensive record-keeping and operational processes.

Types of Companies LLC

Several types of limited liability companies (LLCs) cater to different business needs. They include:

Domestic LLC: A domestic LLC is the most common type and is formed and operates within the same state. It may also register to do business in a different state, which would be considered a foreign LLC.
Series LLC: A series LLC consists of a parent or “umbrella” LLC with one or more LLCs owned and operated under it. It allows business owners to separate assets and strengthen liability protection among different business ventures without starting a new LLC with each venture.
Professional LLC (PLLC): PLLCs are available in some states and cater to specific professional services like accounting, law, and medical practices. The details and requirements for PLLCs may vary depending on the state.
Low-profit LLC (L3C): L3Cs are available in some states and designed for social enterprises prioritizing social goals over profit. They are similar to nonprofit organizations but can operate with a mix of social and financial objectives.
Nonprofit LLC: Nonprofit LLCs are available in some states and are similar to traditional nonprofit organizations. They are designed for charitable or educational purposes and are exempt from federal taxes.
Restricted LLC: Restricted LLCs are available only in Nevada and have specific ownership and membership restrictions. They are designed for a single owner who wants to protect their assets and limit the number of members in the LLC.
Anonymous LLC: Anonymous LLCs are available only in three states and provide additional privacy for the LLC’s owners. The owners’ identities are not publicly disclosed, providing more confidentiality.

Why Start a Company

Starting a company can be a life-changing experience for various reasons.

Starting a business gives you full control over your decisions and actions. You don’t have to answer to a manager or supervisor, which can be liberating and empowering. Also, you can start a company to pursue your interests. You can choose the type of business you want to start based on your passions and interests. This can make work more enjoyable and fulfilling.

There are different types of companies you can start which will be best for a diverse and exciting experience, with different tasks and challenges every day. Also, it allows you to express yourself and develop your ideas. There may be financial constraints involved in different types of companies, but the freedom to be creative makes it more appealing to start than working in a restrictive job.

Best Types of Companies to Start

Several types of companies are considered the best to start. Your best choice will depend on your passion, skills, and resources. However, you can consider these popular options:

Digital products: Building a business model based on digital products can help you cast a wider net when building a customer base and a business model that’s easier to scale.
Service-based businesses: These businesses, such as freelance writing, graphic design, tutoring, or pet sitting, typically have low startup costs. This is because they primarily rely on your skills and time.
Dropshipping: This affordable option involves selling products online without holding inventory.
Home-based businesses: These businesses leverage existing resources, such as starting a home bakery or offering home-based childcare services, and can be cost-effective to launch.
Gaming Software: Video game companies are among the best types of businesses to start, as there is a 21% net profit margin.

As for the best types of companies in the USA, the limited liability company (LLC) is recommended, as it separates your assets from your business assets, protecting you from bankruptcy. Some types of profitable companies to start in the USA include financials, transportation companies, energy, technology, healthcare, investments and asset management, and real estate investment trusts (REITs)

You can adopt different business models such as direct sales, manufacturing, distribution, product-to-service, tiered pricing, advertising revenue, crowdsourcing, freemium, peer-to-peer, affiliate marketing, and dropshipping to increase your profit margins.

Why Invest in a Company

Investing in a company can benefit both the investor and the company itself.

Investors can help a company overcome financial obstacles and develop by providing the necessary funds for growth and expansion. It is an effective way to grow your wealth over time through compounding and long-term growth and allows you to diversify your investment portfolio and reduce risk.

By investing, you can benefit from the power of compounding, which allows your investment to grow in value over time, which will help you build a retirement portfolio that will support you in later life.

Investing in a company can enable it to acquire other businesses and expand its product offerings, leading to long-term growth, better employee benefits, a supportive work environment, and increased employee motivation.

Types of Companies to Invest In

There are several types of companies to invest in the USA, which include investment companies, stocks, and mutual funds. Here’s a breakdown of the different types of companies to invest in:

#1. Investment Companies

These companies are financial institutions that primarily invest in, manage, and invest in securities on behalf of their clients. There are at least three types of investment companies in the USA:

Open-end funds: These funds raise capital by issuing shares not traded on stock exchanges but handled by specified dealers in over-the-counter transactions. The money obtained from the sale of shares is invested directly in the shares of other companies.
Closed-end funds: These companies issue a fixed number of shares, which may be listed on a stock exchange and bought and sold like any other company’s shares. If the management desires, it might revise additional equity issues, bonds, or preferred stock issues. Closed-end funds offer various advantages to investors, such as greater diversification, better returns, and the ability to plow back profits.
Unit Investment Trusts: These trusts invest in a diversified portfolio of securities and distribute the income and capital gains to their investors.

#2. Stocks

Stocks represent shares in a company and can be classified in various ways, such as growth stocks, value stocks, ESG stocks, and foreign stocks. Growth stocks see their sales and profits rising quickly, while value stocks are companies with inexpensive shares relative to their peers or their past stock price. ESG stocks focus on environmental, social, and governance concerns, and foreign stocks are issued by companies outside the United States.

#3. Mutual Funds

Mutual funds are investment vehicles that pool the assets of multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. There are various types of mutual funds, such as those that invest only in equity shares, securities with high income, growth-oriented securities, and funds that divide their investments between equity shares and bonds.

In addition to these categories, investors can also invest in exchange-traded funds (ETFs) and index funds, which track various market indexes and provide exposure to a certain area of the stock market without having to do extensive research on individual companies. Also, when selecting companies to invest in, it’s essential to consider factors such as the company’s values, products, services, and long-term potential. It’s also crucial to analyze the underlying business and understand its competitive position and valuation before investing.

What Are the 4 Types of Corporations?

There are several types of corporations, but the main four are:

S Corporations (S Corps): These corporations allow profits and certain losses to pass through the owners’ income to avoid corporate taxes. This structure provides limited liability protection to the owners and may offer tax savings compared to other corporations.
C Corporations (C Corps): C corporations are taxed separately from their owners and offer the strongest protection from personal liability. They are more costly to form than other business structures and may be subject to double taxation.
Nonprofit Corporations: These corporations are tax-exempt due to being organized for charitable, educational, civil, religious, social, and cultural purposes. They are not intended to generate profits and must be formed under specific laws.
Limited Liability Companies (LLCs): Although not technically a corporation, LLCs are a popular business structure. It combines the advantages of corporations and partnerships. Depending on the owners ‘ election, they offer limited liability protection to their owners. Also, they can be taxed as a corporation or pass-through entity.

What Is the Most Common Type of Company?

Limited liability companies (LLCs) and C corporations (C-corps) are the most common business entities in the US. LLCs offer partnership and corporation features, providing limited liability to their members and pass-through taxation. Hence, profits and losses are reported on their personal tax returns. C-corps are taxed as separate entities and owned by multiple shareholders, allowing for an unlimited number of shareholders or owners. This structure is popular among larger companies listed on the stock exchange.

What Are Three Major Categories for Classifying Businesses?

Industry and commerce are two categories that can broadly classify business activities. Industry involves the production of goods and services, while commerce is concerned with distributing goods and services. Secondly, businesses can be classified according to their ownership structures, which include sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Thirdly, businesses have different categories depending on where they operate, such as local, national, and multinational.

References

IRS
Tax Guru

TYPES OF COMPANIES: All You Should Know About Company Types in USA

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