Types of companies
If you’re doing business internationally this topic is quite important to understand.
We will try to explain and simplify all the types of companies, so you get a better understanding of what are you looking at when you decide to form a company.
We’d say that there are typically three major types of companies, and many variations that come from these three types, depending on the country. Some might not exist in your country, or might be named differently.
Limited company – the most basic type that you will see. Limited company means limited liability.
Your losses are theoretically limited to what you’ve invested in that company.
All over the world, there is a limited company in some form.
In Spanish speaking countries, such as Latin American countries, you will see SA.
In German-speaking countries you will see GmbH, in the Netherlands there are BV.
In places like Canada, UK, Hong Kong you will see the ending ‘’limited’’ in the company’s name. Sometimes you will see variations of this, such as ‘’inc’’, or ‘’corp’’.
They all mean the same thing but can be named differently- incorporated company, limited company, Ltd, corp.
A limited company can have multiple shareholders and it’s considered a separate legal entity.
This is the key defining point of this type of company.
It can go bankrupt, it can have its credit, it can be sued, it can sue people – it is considered to be a separate legal person.
Sole trader or sole proprietor
Differently from a limited company, a sole proprietor is acting on his/her own as a company.
In the case of a corporation the company gets taxed, and distributions to shareholders are made afterward.
In the case of a sole trader or sole proprietor, your company’s income is your income.
Liability, in this case, is unlimited, meaning that debt that you take is personally yours, your credit is being used, etc.
After you’ve reached a certain point, it is advised to switch from sole proprietor to corporation.
The concept of sole proprietor also exists in some form all over the world.
There are various forms of partnerships: partnership, limited partnership, limited liability partnership, etc.
The common one that you will see in investment structures and real estate will be LP or Limited Partnership.
If you’re looking at law firms you will see LLP or Limited Liability Partnership.
In this form, you will see multiple people involved, hence the partnership.
In this case, flow-through taxation is being used. Whatever income the company makes, it will be equally distributed to partners (if they own equal portions of the company) and then they will be taxed on their portion of income.
What’s different here than incorporation is that in a case of a corporation, corporations will pay tax on profits, then later it will distribute after-tax dollars to its shareholders, usually at a lower tax rate.
In partnerships, the company doesn’t pay tax itself, instead the partners get taxed immediately on their share of the income. In other words, the company’s income and their income is the same.
If we are talking about Limited Partnership you will find a limited partner and a general partner. In theory, there can be many limited and general partners. Usually, there is one general partner and many limited partners.
If you’re doing a development project, a general partner would be the one who is raising the money and managing the project. They have unlimited liability, meaning if something goes wrong it will go to them.
The limited partners simply participated by putting the money in, and their risk is limited to the amount they’ve brought. This means that if creditors are coming after company, if there is a lawsuit, etc they will not be liable to any of this.
In Limited Liability Partnerships, all partners will have limited liability.
Just like the other types of companies, you will see partnerships all over the world in one form or the other.
Sometimes you will see a ‘’joint venture’’, this is similar to partnership just less formal.
On the far end, there is a more extreme version of a corporation called Joined Stock Company, JSC.
This would be a larger version of a corporation. Sometimes it’s useful to use JSC for privacy purposes because only directors would be shown but shareholders can maintain their privacy.
Variations of the three most common types
In the US there are many variations that you will not see in many other countries. For example, there is S Corp, C Corp, B Corp, and LLC.
The normal corporation would fall under the C Corp category.
B Corp is a non-profit company.
In certain places such as Canada, you can see non-profit corporations.
Benefits of S Corp
S Corp is a sole trader but with liability protection.
Generally speaking, if you’re someone in the US who is getting set up, and you want to be most efficient in terms of how you manage things and in terms of taxes that you pay, S Corp is probably a good starting point.
We’d often recommend this for freelancers and online marketers. For people who are not having big operations and who are not bringing investors.
In terms of asset protection, S Corp is not the most fortunate option. If someone goes after you it will be easy to prove that you are the one responsible for this company.
From a tax standpoint, this type of company doesn’t exist. It is defined as a disregarded entity, meaning that there is only you and your income. For S corp flow through taxes apply.
Its majesty-the LLC
The most common corporate form in the US is LLC.
LLC or Limited Liability Company gets people confused quite often.
LLC can have many people involved, meaning it can have many shareholders. In this case, they would be called members.
They would have membership interest as opposed to shareholding.
LLC will have an operating agreement, which will define how it should operate. This agreement gives you lots of flexibility.
In the US you might see LLC instead of Partnership even when it comes to a development project. It depends on the situation.
Under the law, if you get over 500 shareholders LLC will need to become a public company.
If LLC is a single member, then it will be taxed as S corp, meaning that they’ll use flow-through taxation.
If LLC has 2 members it will by default be taxed as a partnership.
If there are more members you will be taxed as a corporation.
That being said, you can opt to be taxed differently.
Also, in the US there is something called Series LLC. In Great Britain, this would be called a Protected Cell Entity.
In theory, this could be a good piece of legislation. It doesn’t exist in all the states. This is commonly used in real estate.
In this case, you would have one legal entity, and you could form multiple series. These are sub-companies within the one company.
You would do this to simplify your filings, and you’d have liability protection separating all of them.
For example, you would put 5 properties as one company, and the other 5 as another one. liability is only existent within the sub-company not at the level of entire LLC.
The problem with this type of company is that banks don’t get it, so it can be challenging.
Special Purpose Vehicle- SPV
You will often see this type of company in the news. The idea if SPV is that it doesn’t have a beneficial owner.
In theory, it sounds amazing, but in practice when you go to the bank you will still have to provide the details on beneficiaries.
This shows us that the law and the execution don’t necessarily match always.
This type of company lets you pull resources together, and separate liabilities.
What some companies would do is throw lots of liabilities in SPVs and clean them from their balance sheets, so it would look like they have more assets and fewer liabilities, even though this isn’t the case.
SPV is a fancy legal tool to get around certain rules.
To conclude, this was our overview of the most common company types.
As we said, those will vary from country to country. It especially gets complicated when you’re dealing with many countries at the same time.
You could have LLC in the US, but there are no LLCs in Australia, Canada, or the UK. So how would it get treated for tax purposes will vary from country to country.
In Australia they will treat it as a partnership, in Canada they will treat it as a corporation in the UK it gets more complicated.
It’s very important to know which type of company to form, especially when you’re dealing with multiple countries. If you play it right it can bring you many benefits, but if you don’t you might end up with lots of extra costs and hassle.