There are many different forms of commercial entities that can be formed to conduct business in the United States. The laws of their formation are mandated by the individual U.S. states.
Possible commercial structures include sole proprietorships, partnerships, corporations, and limited liability companies (LLCs). The following is a summary of the various types of legal entities that operate in the U.S. of course, the information provided in this article is general information only, and readers should consult with their legal counsel with respect to particular transactions and situations.
Sole Proprietorship
A sole proprietorship is a business in which one person owns all of the assets of the business and is solely liable for all of the debts and other liabilities of the business. This, however, is not a recommended form to use for a foreign entity or individual doing business in the U.S.
Partnership
Partnerships come in a variety of forms, the most common of which are general and limited partnerships.
General. A general partnership is one where all the partners share the profits and losses as well as the management of the business, even though their capital contributions may vary. In a general partnership, each partner has joint and several liability for the debts and liabilities of the partnership. A joint venture is a general partnership for a finite period of time and/or specific business.
Limited. A limited partnership is a business consisting of one or more general partners who are jointly and severally responsible as ordinary partners and who manage the business, and one or more limited partners who contribute a specific sum as capital to the partnership stock. The limited partners are only liable for debts of the partnership up to the amount of their contributions.
Many states now also have limited liability partnerships, in which all the partners’ liability for business debts is limited to the amount of their capital contributions.
Corporation
The corporate entity arose to allow a number of investors to own a business, each with only limited liability for tort and contract claims. A corporation generally has the following characteristics:
- it is owned by shareholders, who own shares of stock in the corporation
- each shareholder’s liability is limited to the amount of his/her investment in the corporation
- the corporation’s lifespan is unlimited; and
- it is managed by a group, or board, of directors.
Corporations are generally subject to “double taxation,” because the corporation itself must pay tax on its profits, and the shareholders then pay tax again on the profits, if and when the profits are distributed to the shareholders as dividends.
There are several kinds of corporations in the United States. Basically, a business corporation can be formed to carry on any business where the purpose of the organization is financial profit. Close corporations are companies whose voting shares are held by one shareholder or a small, closely-knit group of shareholders. A Subchapter S corporation is a small business corporation that avoids double taxation by electing to have its income (whether distributed or not) “passed-through” and taxed directly to its shareholders Unfortunately, the “S-corporation” structure cannot currently have any non-U.S. shareholders (shareholders must be either U.S. citizens or resident aliens, with limited exceptions), and is therefore not currently a viable structure for non-U.S. entities or individuals entering the U.S. market.
Foreign entities often incorporate wholly-owned subsidiary corporations within a state in order to conduct business and shield the parent entity from the debts and liabilities of the subsidiary. The advantages of incorporating in one state over another vary, and counsel should be consulted before making this decision.
Limited Liability Company
Most of the states have now adopted statutes that allow creation of the limited liability company (“LLC”), an entity that includes aspects of both a partnership and a corporation. LLC’s are similar to entities that have been popular in many civil law jurisdictions beginning with the German GmbH in the mid-nineteenth century. The limited liability company is sometimes compared to a limited partnership without a general partner, because each of the owners enjoys limited liability for tort and contract claims. The LLC’s major advantage over the corporation is that LLC’s receive “pass-through” tax treatment, avoiding the double taxation of company profits. LLC owners can thereby enjoy a lower effective tax rate than corporation shareholders. Like a corporation or a limited partnership, a limited liability company must be formed under a state statute.
Qualification
In order to gain access to a state’s courts, a business entity conducting business within that state must register the entity with the Secretary of State’s office within the state. Whether an entity is “conducting business” within the state is a determination usually based upon an assessment of the amount of inventory located within the state, the number of contracts executed or to be performed within the state, and/or the amount of revenues the entity derives from its activities within the state. Registration usually entails providing information on the nature of the entity (corporation, limited partnership, etc.) and paying a fee. A domestic corporation is one incorporated under the laws of a particular state. A corporation is “foreign” to a state if it transacts business there, but is incorporated in another state or country.
Determining Which Entity to Use for Your U.S. Operations
Of the entities listed in this article, the two most often used by international companies to conduct business in the U.S. are the corporation and the LLC. Determining which entity is best for you depends on a number of factors, such as types of goods or services being sold, whether or not there will be U.S. or other foreign investors in such entity, and the various ways to handle taxation issues that will arise between the parent company and its U.S. subsidiary.