To start a company in the USA, there are various forms of company to choose from. In addition to the sole proprietorship, there are partnerships such as the General Partnership (GP) or the various forms of the Limited Partnership (LP, LLP). On the other hand, as a corporation there is the corporation (Corp. or Inc.). There are also two other types of companies, namely the Limited Liability Company (LLC) and the Limited Liablility Limited Partnership (LLLP). Both are distinguished by the fact that hybrid societies are. Because you basically always have the choice whether they should be subject to transparent or non-transparent taxation. In the case of transparent taxation, the shareholder bears the taxes, while in the case of non-transparent taxation, the company itself is taxable. This choice of taxation is made as a shareholder by simply ticking the corresponding field in the tax return. This is why we also refer to the check-the-box procedure.

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1st Types of Business in the USA – Introduction

For many people in Germany, the USA is still considered a country with unlimited opportunities. The large population alone opens up the appetite for entrepreneurs to win a piece of this cake for themselves. So for interested entrepreneurs, who usually want to emigrate to the USA for many other reasons, the question is what kind of company they should start there in order to participate in the market as successfully as possible. Therefore, we now analyze for you which forms of company exist in the USA. We also discuss the advantages and other conditions associated with them. A main focus is on the restrictions that interested entrepreneurs in Germany should consider.

General information on corporate forms in the USA

First of all, it is relatively easy for a German entrepreneur to understand corporate law aspects of corporate forms in the USA. After all, both individual companies and partnerships and corporations exist in the USA. So far he knows all this from our legal system in Germany.

However, the US has also taken a path in the field of corporate forms that underlines its reputation as a land of unlimited opportunities. For example, with the Limited Liability Company (LLC), there is a form of company in the USA in which you can choose as a shareholder whether it should be subject to taxation as a partnership (transparent) or as a corporation (non-transparent). But we will of course still go into detail about such hybrid forms of company in the USA.

Another important point is one in which there is also a significant difference to company law in Germany: Some forms of company in the USA are only recognized in certain states. For example, there is no LLLP in California and Illinois. Conversely, there are also federal states in the USA that have followed their own paths in the legal design of company law for certain types of companies, although the differences are usually rather small.

So when considering the corporate forms in the USA in individual cases, you always have to pay attention to what the company law of the respective state provides for regulations for this. The US federal system stipulates that it is in the hands of the individual states to work out the details of company law, which is to apply within their borders. However, such a detailed consideration for all US states and foreign territories goes beyond the scope of this general overview. Therefore, our focus in this report is on the general foundations of the various forms of business in the US.

Let’s start with our excursion to the corporate forms in the USA with the individual companies. This type of company is called Sole Proprietorship in the USA.

Basically, the essentials apply, which also individual entrepreneurs in Germany must observe: the entrepreneur is liable for liabilities of his individual company personally and unrestrictedly, thus also with his private assets. In other words, there is no separation between business assets and private assets in the US either.

Speaking of liability: due to the often immensely high claims for damages in legal disputes that plaintiffs in the USA can expect in a conviction, the sole proprietary is certainly only recommended if you only have to expect a very low liability risk. Alternatively, a good insurance may also offer suitable protection, but the premiums should usually be considerable. At least such premiums are significantly higher in the USA than in Germany.

In taxation, the same applies as for a sole proprietor in Germany: you tax the profit from the sole proprietorship on a private level.

In order to start a sole proprietorship in the USA, however, the residency of the entrepreneur in the USA is also required. This requires a permanent residence permit. Only those who take this hurdle have the opportunity to start a sole proprietorship in the USA. Therefore, this form of enterprise is excluded for entrepreneurs who do not aspire to or obtain residence in the USA. But there are other alternatives.

Partnerships that are similar in character to those in Germany, but at least similar, also exist in the USA. We're going to present them one by one.

4.1. Corporate Forms in the USA: General Partnership (GP)

GP is a partnership in which at least two natural persons participate as shareholders in the management. Therefore, depending on the design, it corresponds to the German company civil law (GbR) or the open commercial company (OHG). This type of company can also be operated without a social contract in the USA. However, there is a legitimate view that the GP is a separate entity (Article 2 Section 201 Uniform Partnership Act (1997)). However, only a number of states have adopted this federal regulation.

As in the case of a sole proprietorship, in the case of GP, the shareholders bear the liability arising from the liabilities of their company directly and without limitation with their private assets. It is irrelevant whether it is a contractual obligation in the external relationship or a claim for damages by a third party. Also without significance for the personal liability of a partner is who is responsible for the liability case. For example, this can also be an employee for whom one or more partners are liable. However, in the internal relationship there may be a claim for compensation of the assumed liability case.

Taxation also takes place here at the private level of the shareholders. Thus, each shareholder has to tax his own profit share to which he is entitled. However, this also requires that the shareholders are based in the USA.

4.2. Corporate Forms in the USA: Limited Partnership (LP)

As the name basically suggests, there is limited liability with the shareholders in the limited partnership. However, this only applies to some of the shareholders. Because at least one of the shareholders bears a personal risk here. Thus, he is liable both unrestrictedly and directly with his private assets. He is also responsible for the management. And yes, this company relationship is also known from German commercial law as a limited partnership. The general partner of the KG corresponds to the general partner in the LP, while the limited partner finds its equivalent in the limited partner. From this point of view, the role of the limited partner is that of an investor.

However, if the limited partner is able to influence the fortunes of LP, he may still be liable for liabilities of the company. In this respect, LP differs from the German limited partnership, in which the legally protected position of the limited partner does not in principle permit any restriction of his liability. But his influence on the management is also excluded, which, however, is open to a limited partner of an LP in a certain way.

The LP is also subject to transparent taxation at shareholder level. This type of company can only be considered if the shareholders are based in the USA.

However, if the General Partner is a limited liability entity, the LP is subject to non-transparent taxation.

Corporate Forms in the USA: Limited Liability Partnership (LLP)

There are still two related forms of company for the Limited Partnership in the USA. The Limited Liability Partnership stands for a company in which the shareholders assume liability only for their own actions. Thus, this regulation is reminiscent of the conditions as we know them from the German partnership. Therefore, LLP only knows limited partners.

Regarding the liability of Limited Partners, there is something important to note. Because here there can be considerable differences in the legal basis depending on the federal state. This affects both liability due to errors of the co-partner and the employees. Furthermore, under certain circumstances, a partner may also be liable for a mistake by another partner if he had knowledge of it. The limitation to tortious liability cases may also be extended in individual cases by liability based on contractual ties. And of course, many factors in different combinations can have found their way into the company law of the individual states.

Of course, this latent joint liability of partners of an LLP, in whatever form it may be legally available, represents a risk that is hardly relevant to us in Germany. However, this may lead to serious consequences in the USA. Therefore, a detailed consultation before the establishment of such a form of company in the USA is also mandatory.

In taxation, a shareholder of an LLP follows the same rules as an LP. So you tax the profits that the LLP distributes annually, as part of the personal income tax return.

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5th Types of Company in the USA – Corporations

5.1 Forms of business in the USA: Corporation

Unlike in Germany, where there is a strict legal distinction between a GmbH and an AG, there is no direct equivalent in the USA. Of course, there, too, a distinction is made between companies in which a shareholding can be acquired on the stock exchange and those in which there is no public distribution of shareholdings. But this separation is regulated in the USA in the social contract rather than by law. Thus, in contrast to the large variety of partnerships, there is basically only one type of company among the corporations in the USA, namely the corporation. As permissible abbreviations for corporation, Corp. or Inc. can be used.

As just mentioned, the actual design of the US corporation takes place by means of a social contract. Thus, it is also subject to the legal guidelines of the state in which it is founded. Because at the federal level, due to the federal legal system of the USA, only the rough outline of the basic legal principles of the corporation takes place. Nevertheless, one can generally distinguish some basic types of these types of companies in the USA.

And, of course, corporations in the USA are also regarded as corporate forms that have their own legal personality. Therefore, the corporations are usually liable for liabilities of the company. As a result, the shareholders or shareholders have only limited liability.

5.1.1. Public traded corporation

A publicly traded or often simply called public US corporation is a classic stock corporation. Your company shares can be traded freely as shares on the stock exchange. Most major US corporations, such as Apple Inc., Tesla, Inc. or Alphabet Inc., are among them.

As a shareholder, you tax the profits from the purchase and sale of the shares as well as the dividends received.

5.1.2. Privately held Corporation

In contrast, the privately hero or closed as well as simply private corporations in the USA are corporate forms that are the most similar to the German GmbH. In the US, too, private corporations are the most widespread corporation. It characterizes that as a shareholder you hold shares in the company instead of shares, which you can trade freely, provided company law allows this. Other forms of transfer of the components are also possible here.

5.1.3. S Corporation

The Small Business Corporation, which is generally called S Corporation, is a special form of private corporation. Here, the number of shareholders is limited to a maximum of 100. It should also be noted that the shareholders must be resident in the USA or, otherwise, have the US citizenship.

The taxation of the S Corporation takes place at the shareholder level. This allows transparent taxation for a corporation. To be precise, this is actually a requirement for an S corporation.

5.1.4. Mutual benefit corporation

At mutual benefit Corporation, the focus of the company’s business activities is on fulfilling a common goal that serves to promote the shareholders. Thus, this form of company in the USA comes very close to the content of the German cooperative. For example, many insurance companies in the US originally started as mutual benefit corporations, transforming them into other forms of companies over time.

5.1.5. Public benefit corporation

A certain similarity to the mutual benefit corporation also has the public benefit corporation, in some US states also simply called benefit corporations, because it also aims to promote. However, they also have B Corp. or PBC public benefit corporation abbreviated the common good in promoting in the foreground. If one disregards the fact that B Corp. may also distribute a profit to its shareholders, one could certainly compare it with a German non-profit GmbH. Thus, B Corp. as a corporate form in the USA is a model for a corporation in which social aspects go hand in hand with the economic interests of the shareholders.

5.2 Taxation of the US Corporation

The taxation of a corporation in the USA is also separate at the federal level and with state and local taxes. However, a US corporation has the advantage that it has to expect a uniform corporate tax rate of only 21% at the federal level. Together with state and local taxes, the total tax burden is less than 35 %.

In addition, there are also exceptional rules that further privilege the taxation of corporations in the USA. For example, other rules apply to income related to the establishment of intangible assets abroad. In this way, among other things, the tax can fall to only 11%.

As with other corporate forms subject to corporate tax, a corporation in the US is free to distribute its profits to its shareholders or shareholders. If a profit distribution takes place, the shareholders bear the further associated taxation.

6 Business Forms in the USA – Hybrid Companies

Hybrid companies are companies that, strictly speaking, do not belong firmly to partnerships or corporations. The reason for this is that they contain elements from both forms of society. Thus, the liability and the method of taxation can be variable. In this respect, there is no direct comparison to German company law. But precisely these flexible forms of business in the USA also offer great freedom for entrepreneurs from home and abroad.

Corporate Forms in the USA: Limited Liability Limited Partnership (LLLP)

6.1.1. Company Law Aspects of an LLLP

The Limited Liability Limited Partnership is the second type of company based on the LP. It emerged only some time ago as a form of company in the USA. The aim was to legally define a construction that many entrepreneurs had previously implemented using an LLP. In the past, it was possible to set up an LLP with a corporation as a general partner with a usually low participation of at most 1% together with a natural person as a limited partner. Who is aware of this? True, it basically corresponds to a German GmbH & Co. KG.

However, there is a significant difference to the German GmbH & Co. KG. Because the LLLP can also have one or more limited General Partners who are not legal, but natural persons. Nevertheless, this leads to the fact that the LLLP basically acts like a corporation. Thus, LLLP alone is liable as a corporation. The shareholders, on the other hand, are only liable with their contribution (if they have already provided it). The only difference between a General Partner and a Limited Partner in an LLLP therefore concerns the management that the General Partner is responsible for.

6.1.2 Taxation of an LLLP

The taxation of the LLLP takes place in the USA either as a partnership or as a corporation. The shareholders can determine this by opting for one of the two procedures in the income tax return. If the choice falls on tax treatment as a partnership, then transparent taxation takes place at shareholder level. In the opposite case, this leads to a taxation as a corporation with a flat-rate tax rate of 21 % at federal level and additional state and local taxes of the regions in which the LLLP is located and to which it has an economic connection (nexus).

Unlike the taxation by corporation tax, which is also open in principle for German partnerships, the procedure by which one determines the type of taxation in the USA as a shareholder of a hybrid form of company is quite easy. Because with the US tax return you simply make a check mark at the desired point. Thus, no application and no lengthy examination by the tax office is necessary.

Corporate Forms in the USA: Limited Liability Company (LLC)

6.2.1. Company Law Aspects of an LLC

More known than LLLP, however, is the Limited Liability Company. The LLC can also be founded in many states with only one shareholder. However, as with many other legal aspects, this is by no means universal. Nevertheless, the LLC can best be compared with a German GmbH, whereby this only applies at the level of company law and management, but can end with taxation.

In contrast to the partnerships, it is possible for a shareholder of an LLC to establish them from abroad in the USA. This allows us to operate an LLC from Germany as well as from another country without being taxable even in the USA.

6.2.2. The Public Limited Liability Company as a special form of LLC

A subform to the LLC is the Public Limited Liability Company (PLLC). This is a special LLC, in which a state requires the distinction to the regular LLC for certain professional groups such as doctors or architects. This may mean that the shareholders of a PLLC, despite their generally limited liability, still remain liable in special cases (for example, in the case of medical errors).

6.2.3 Taxation of the LLC

Of course, the taxation of the LLC is just as variable as in the likewise hybrid LLLP. Thus, even with an LLC, the shareholders or the shareholders’ meeting decides whether the LLC wants to pay its taxes transparently like a partnership or non-transparently like a corporation. Thus, the check-the-box method is also used here.

Since an LLC can be transparent in taxation, it offers tax advantages in taxation abroad. These benefits can be significant if the LLC is considered a disregarded entity due to transparent taxation in the US while the shareholder is resident in a low-tax foreign country. The shareholder receives the greatest advantage here if he is resident in a country that taxes strictly according to the territoriality principle instead of the world income principle.

7th Corporate Forms in the USA: Cooperative (coop)

The list of corporate forms in the USA would be incomplete without mentioning the cooperative (abbreviated co-op or coop). In fact, cooperatives in the US are quite widespread and strong in sales. Above all, they exist as so-called housing cooperative in the real estate sector, as a credit union in the financial services sector, as well as in the retail sector, in the service sector or in the agricultural sector.

A cooperative, like a corporation, is one of the non-transparently taxed tax entities in the USA. This means that she has to file her own tax return. However, at least at the federal level, there may be some tax advantages over a corporation.