Doing Business in the U.S.: Key Structures, Pros and Cons

When starting a business in the U.S., choosing the entity type is one of the first—and most important—steps. The structure you choose affects liability, taxation, ease of registration, and how attractive your business is to investors. Below is a breakdown of the business entity types in the U.S., focusing on registration and operational requirements, investor suitability, and tax implications.

Before diving in, it is worth mentioning that in the U.S., the states regulate businesses. Each state has its laws and regulations regarding business structure and governance.

Sole Proprietorship

What is it?

A sole proprietor is someone who owns an unincorporated business by themselves. If you decide to do business this way, there is no legal separation between you and the business. You are the business, and the business is you – for better and worse, so you’re liable for all business debts and legal claims.

Tax treatment

From a tax standpoint, income is taxed once at the personal level. You’ll report the income and expenses on your personal tax return (typically Schedule C, Form 1040) and pay progressive income tax based on your income brackets.

Pros

A sole proprietorship is the easiest and cheapest way to start working. No formal registration is required beyond a local business license or DBA (“doing business as”).

Cons

First, there is no liability protection for your assets. All your personal assets are at risk should anything go wrong with the business. Second, there is a limited option to raise capital or bring investors due to the high risk and lack of proper equity structure. Third, it is not suitable for high-risk or growth-oriented businesses.

Who is it suitable for?

This type of business is most suitable for freelancers, solo consultants, small local service providers, or side hustlers who do not take on significant liability or investment.

Partnerships

What is it?

A partnership is a relationship between two or more people to conduct trade or business. Each person contributes money, property, labor, or skills, and shares in the business’s profits and losses.

There are several types of partnerships. The most common is the General Partnership (GP), where all partners share management and personal liability. Another type is the Limited Partnership (LP), which has both general partners – with liability and control – and limited partners – investors with no management role and limited liability. Lastly, there is the Limited Liability Partnership (LLP), which professionals such as lawyers and accountants typically use, where all partners have limited liability – with some exceptions for malpractice.

In the U.S., the states do not require GPs to register at the state level in most jurisdictions. However, many states require local business licenses or DBA filings if the partnership operates under a name different from the partners’ legal names, in addition to state taxes and employer accounts. Also, almost all cities and counties still require local licenses and permits.

LPs and LLPs, on the other hand, must register with the state government, typically by filing a Certificate of Limited Partnership (for LPs) or Statement of Qualification (for LLPs). There are additional requirements, depending on the business and state, such as registered agent, partnership agreement, annual report, and franchise taxes or fees.

Tax treatment

There is no reasonable way to cover all possible tax treatments and partnership caveats in an introductory article like this one. We tried to summarize the general rules, but partnership taxation is complex, even for tax lawyers and CPAs. Always consult with a tax attorney or a CPA when dealing with partnerships.

Generally, with some differences between the types of partnerships, the default tax status is pass-through unless expressly electing corporate tax treatment. Typically, the partnership files Form 1065 (informational return), and each partner receives a Schedule K-1 reporting their share of income, losses, and credits. Partners then report income on their tax returns (Form 1040). While there is no entity-level tax at the federal level, self-employment tax applies to partners on active income, and income is taxed regardless of whether it is distributed.

Partners should be aware of phantom income, where a partner might owe taxes for his share of the partnership profit, even if no cash was ever distributed. A well-structured partnership agreement comes in handy. Partnership agreements often include a “tax distribution clause” that says the partnership will distribute enough cash to each partner to cover their expected tax liability on their allocated income. The idea is to reduce or eliminate the need for partners to pay taxes out of pocket on phantom income.
LPs are especially favorable due to a tax perk usually enjoyed by LP investors: carried interest treatment, which is taxed at the long-term capital gains rate after the investors get a preferred return. This considerable advantage is why LP structures dominate private equity and venture capital.

Pros

For GP – its simplicity of structure, ability to quickly combine skills and resources, and pass-through taxation.

For LPs and LLPs – the limited liability it offers for the limited partners in an LP and all partners in an LLP – again, with some exceptions to professional malpractice for LLPs – and its pass-through taxation, in addition to its ability to combine skills and resources quickly.

Investors especially favor LPs because they separate management and control from investment capital. While the general partner manages the business, makes investment decisions, and assumes liability, the limited partner usually only contributes capital and doesn’t manage the business. Hence, the limited partner enjoys limited liability—up to the amount invested—and no personal assets are at risk beyond that.

Cons

For GPs, the main drawback is their unlimited personal liability for all partners, where the partner’s assets are at risk should the business fail or get sued. Also, there is a higher risk of partner disputes, especially when there is no strong partnership agreement between the partners. This structure is also less attractive to outside investors.

For LPs and LLPs, the main drawbacks are their complex structure, the unlimited liability for the general partners in LPs, and the unlimited liability for a partner who commits malpractice in LLPs. In addition, these structures are less familiar outside specific industries.

Who is it suitable for?

GP is most suitable for founders who trust each other and want a simple, low-cost way to operate their business, family-run businesses, joint ventures, or small service businesses such as designers and consultants, and people who are okay with personal liability and don’t plan to raise outside capital.

LP is most suitable for private equity and venture capital funds, where GPs manage, and LPs invest; real estate syndications, where developers operate and investors provide capital; family estate planning, where senior family members manage while younger heirs are passive LPs; and Situations where some people want to control, and others wish to returns.

LLP is most suitable for professional services firms like law firms, accounting firms, architectural firms, and medical groups; partnerships where all partners are actively involved and want liability protection from each other’s mistakes; and firms needing limited liability without incorporating.

LLC – Limited Liability Company

What is it?

A Limited Liability Company—LLC—is a flexible U.S. business structure that combines a corporation’s liability protection with a partnership’s tax simplicity. It’s created by filing Articles of Organization with the state. The Operating Agreement governs the Agreement, which is crucial in multi-member setups.

Members are called owners of an LLC. Most states do not restrict ownership, so members may include individuals, corporations, other LLCs, and foreign entities. There is no maximum number of members. Most states also permit a single-member LLC with only one owner.

Certain regulated professions in certain states, such as lawyers, physicians, accountants, etc., will form PLLCs—Professional Limited Liability Corporations, which typically includes an additional step prior to filing the Articles of Organization with the state.

Tax treatment

Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership or as a “disregarded entity” – pass through.

Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it affirmatively elects to be treated as a corporation.

For income tax purposes, the IRS treats an LLC with only one member as an entity disregarded as separate from its owner unless it elects to be treated as a corporation. However, an LLC with only one member is still considered a separate entity for employment tax and certain excise taxes.

LLCs are highly adaptable. By default, income is taxed once at the personal level, avoiding the corporate double taxation problem, but members can also elect to be taxed as corporations if that offers a financial advantage.

Pros

One of the main advantages of an LLC is the limited liability protection it offers its members. The members’ assets are generally protected—with some exceptions with PLLC and professional responsibility. Unlike sole proprietorships or general partnerships, an LLC creates a legal separation between the owner and the business.

From a management standpoint, an LLC can be managed by its members or appointed managers, giving business owners the freedom and flexibility to structure the business.

The biggest pro of LLCs is their simplicity and minimal formalities compared to corporations. There’s no requirement for annual shareholder meetings or a board of directors, which makes them easier and less costly to run—especially for solo owners or small teams.

LLCs allow for unlimited members, including foreign individuals or entities, and offer strong credibility in the eyes of clients, vendors, and banks.

Cons

Self-employment tax burden. One of the main cons is the self-employment tax burden. By default, all profits passed through to the members are subject to self-employment tax, including Social Security and Medicare’s employer and employee portions. This can be a significant expense, especially for high-earning businesses, unless the LLC elects S-Corp taxation (which adds complexity).

State requirements. Another downside is the cost and compliance requirements, which vary by state. Forming an LLC is more expensive than starting a sole proprietorship or general partnership, and some states impose hefty annual franchise taxes or minimum fees regardless of income.

Some Formalities. While formalities are generally much lesser than those of a corporation, LLCs are still expected to maintain good records, follow an operating agreement, and keep personal and business finances clearly separated. Failure to do so can risk piercing the corporate veil and putting the members at risk of personal liability for the business.

It is not attractive for outside investors, particularly venture capital firms, which typically prefer corporations, especially Delaware C-Corps, for their standardized stock structure and ease of issuing shares. This can limit funding options for startups seeking scalable growth.
Lastly, while tax flexibility is a benefit, it can also create confusion, especially for first-time business owners unfamiliar with pass-through rules or entity election procedures.

Who is it suitable for?

It is best suited for entrepreneurs and small businesses seeking liability protection without the complexity of a corporation. It’s an ideal structure for solo business owners, freelancers, and small partnerships who want to limit personal liability while keeping taxes simple through pass-through treatment.

It’s also a popular choice for real estate investors, consultants, online businesses, and professional service providers (like therapists, designers, and tech developers) who don’t plan to raise venture capital but want a formal structure to build credibility, open business bank accounts, and separate personal and business finances.

LLCs are particularly attractive to foreign owners since many states allow non-U.S. residents to form and own LLCs without citizenship or residency requirements. For businesses with moderate to high profits, an LLC taxed as an S Corporation can offer substantial tax savings on self-employment taxes while still preserving flexibility.

However, it’s less suitable for startups planning to raise money from venture capital or issue stock, as investors overwhelmingly prefer the clarity and predictability of a C Corporation.

C Corporation (C-Corp)

What is it?

A C Corporation is a standalone legal entity that exists separately from its owners, called shareholders. It is formed by filing Articles of Incorporation with the state and is governed by a board of directors, officers, and corporate bylaws. The C-corp structure is the default form under U.S. law, and it’s the standard vehicle for larger companies, especially those planning to raise capital, issue stock, or go public.

Tax treatment

The double taxation problem. Under Subchapter C of the Internal Revenue Code, C-corporations are separate entities for tax purposes. The corporation pays tax on its profits at a flat federal corporate tax rate. When the corporation distributes profits to shareholders, it does it as dividends, and they are taxed again at the individual level, with rates depending on the taxpayer’s income and situation.

Owners actively working in the business, such as in the CEO position, operations, or sales, are considered employees and must pay themselves a reasonable salary through payroll. They should base the reasonable salary – otherwise known as reasonable compensation – on industry standards, role, and workload. In this case, the salary is subject to federal and state income tax withholding, Social Security and Medicare taxes, and employer-side payroll taxes.

Pros

Its ability to raise capital. It can issue multiple classes of stock, attract venture capital, take on institutional investors, and go public — something most other business structures can’t do easily.
Strong liability protection for shareholders. This structure insulates personal assets from business debts and legal claims, provided the business follows corporate formalities. Otherwise, shareholders may lose this protection by piercing the corporate veil. The veil is usually pierced due to commingling personal and business funds, failing to follow corporate formalities, undercapitalization, or using the corporation to commit fraud.

Certain tax benefits, such as potential eligibility for the Qualified Small Business Stock (QSBS) exclusion, are also available.

With some exceptions, C corporations can generally retain earnings within the company without triggering tax on the owners, which is helpful for long-term growth planning.

Cons

Double taxation is the most well-known downside of C corporations. It occurs twice at the corporate level and again when profits are distributed as dividends.

Complexity. C-corporations are also more complex and expensive to maintain. They must adhere to corporate formalities like board meetings, shareholder meetings, corporate minutes, and detailed records. Many states impose annual franchise taxes or filing fees.

Who is it suitable for?

C-Corps are best suited for startups planning to raise venture capital, businesses looking to issue stock options or go public through an IPO, companies with foreign or institutional investors, businesses that plan to retain and reinvest earnings rather than distribute profits, and U.S. subsidiaries of foreign corporations as many tax treaties require C-Corp status to qualify for benefits.

It’s less suitable for solo practitioners, lifestyle businesses, or closely held companies where owners want to distribute profits regularly – in those cases, an LLC or S-Corp is usually more tax-efficient.

Conclusion: choosing the proper structure

The business structure you choose will impact everything from your liability and tax obligations to your ability to raise capital and scale. There’s no one-size-fits-all solution — it depends on your goals, risk profile, and growth strategy.

Whether you’re launching a solo venture, investing in U.S. real estate, forming a startup, or structuring a fund, making the right decision from day one is critical.

Mayo Law helps entrepreneurs, investors, and international clients navigate U.S. business formation clearly and confidently.

Contact us today for a strategic consultation. We’ll help you choose the best structure for your needs and set you up for long-term success.

Disclaimer

This article describes the general types of business entities that are familiar in most states. It is not comprehensive, as there is no one-size-fits-all, nor does it constitute legal advice. Each case is unique and requires deeper analysis. Always consult with an attorney to understand the best strategy and legal implications for your situation.