Determining the appropriate structure for foreign-owned businesses
Business formation in the United States is relatively easy, and businesses can be organized without regard to the citizenship or residency of the owner. There are many different types of legal entities available in most U.S. jurisdictions. The entity type most often used by companies from abroad is the business corporation, but other entity types may also have a role.
Required company records
Businesses and individuals subject to U.S. and state taxes are required to maintain records that sufficiently verify tax returns. Companies must satisfy the reporting requirements of states having jurisdiction over their operations. Publicly traded companies must file annual reports with the federal U.S. Securities and Exchange Commission. Financial statements required by the SEC must be audited.
Generally, there are no uniform national requirements as to the type of accounting and reporting systems used. Business systems should follow U.S. generally accepted accounting principles (GAAP) and meet the specific accounting and management information needs of the business. The SEC issues guidelines for those companies whose shares are publicly traded. There are also various tax accounting rules, and regulated industries frequently are subject to statutory reporting. GAAP accounting records can be modified to satisfy tax or statutory reporting requirements.
The following are the most common business entities:
Corporation (business corporation)
The U.S. entity known as a corporation or business corporation is the business form most comparable to limited liability entities found in other countries. It continues to be the most common legal form used in the United States. Corporations are governed by state law. Ownership is represented by shares issued by the corporation. In most cases, corporations pay federal income tax based on their earnings. Most states (but not all) also impose an income tax and franchise taxes on corporations registered in their jurisdictions. However, in certain circumstances, corporations can elect to be treated like a partnership, so that the corporate income is attributed to, and income taxes are paid by, the shareholders. Corporations making this election are known as S corporations—a name derived from a section of the federal Internal Revenue Code.
Limited liability company
Another common type of business entity, and one that has become very popular in America, is the limited liability company, or LLC. LLCs have characteristics in common with corporations and partnerships. These entities are formed under the law of one of the states and operate like corporations, in many respects. However, LLCs are not subject to income tax. As in partnerships, the income of an LLC is attributed to the owners in proportion to their ownership stake, and these owners are responsible for the payment of income tax. LLCs can provide many advantages for business owners, but various elements of U.S. tax law can create serious disadvantages, if the owner is a foreign company.
Partnerships generally are created by contract. They are governed by state law. Generally speaking, partnership entities are not subject to income tax. Instead, the earnings of a partnership flow through to the partners, and any federal or state income tax is the obligation of the partners in proportion to their partnership interest. There are general partnerships and limited partnerships. In general, every partner is legally responsible (liable) for the obligations of the partnership. In a limited partnership, legal liability is limited to the partner’s capital contribution to the partnership.
Foreign companies can establish unincorporated branches in the United States. In such cases, legal liability flows through to the parent corporation. However, given the ease and moderate expense of forming a formal U.S. entity, and the possible tax and legal advantages, most foreign companies choose to organize under one of the entity arrangements described above.
Contractual joint ventures
Joint ventures are usually formed for specific, limited purposes, such as a construction project or mineral exploration. Joint ventures can be undertaken between any two or more business entities or persons. The operating entity can be either a partnership or a corporation.
A holding company is a corporation formed for the principal purpose of owning the stock and securities of other legal entities. A U.S. holding company permits certain costs of searching for and starting a new business to be charged against present or future profits for tax purposes. Where two or more operations are contemplated, a holding company may allow the losses of one to be charged against the profits of the others.
It is not uncommon for very small businesses in the United States to be set up as sole proprietorships. All assets and liabilities belong to the owners, and all business and personal assets are at risk. However, this risk can be limited through liability insurance. This approach is seldom used by foreign companies with operations in the United States.
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