BUSINESS ENTITY OPTIONS

In the United States, there are various forms of business entities. Depending on which form is chosen, your tax and ownership considerations change. The most common forms of business entities are:

LIMITED LIABILITY COMPANIES

95% of our clients choose a Limited Liability Company (“LLC”) as the preferred Company registration choice.

A U.S. Limited Liability Company (also known as a “LLC”) is actually a hybrid business entity which allows a person or persons to operate their business while limiting risk to their personal assets and limiting their personal liability, without the business, tax and legal complexity of the also commonly used corporation. Unlike a corporation, an LLC does not issue shares and its owners are referred to as “Members”. Member’s ownership is represented by a proportional ownership interest (as set forth in the “Operating Agreement”), rather than by individual issued shares.

Every State in the United States now allows for Limited Liability Companies. While there are ifferences in the law from State to State, the fundamental concepts are essentially the same.

It is a separate legal entity just like a corporation.
It does not have shareholders. An LLC has “Members”.
An LLC’s Members are personally protected with Limited Liability. Their personal liability is generally limited to the amount invested in the LLC, provided all rules are followed. It is absolutely essential that you be advised by a U.S. attorney in order to avoid the mistakes commonly made by non-lawyer “company registration businesses”.
For U.S. registration the Members can be physical persons or business entities, including corporations, partnerships, trusts etc.
Non-residents can be a Member of the LLC.
An LLC is generally taxed like a partnership which has the benefit of flow-through taxation. If a partnership taxation regime is elected, there are no corporate taxes paid at the Company level and all profits are passed through to the Members in proportion to their ownership interest in the LLC.
Can be formed with any number of Members, including only one Member.
An LLC does not pay taxes; its resident members are tax liable as personal income similar to a partnership. Non-resident members are liable for taxes on income derived only from the US.
Foreign members are not individually liable to tax and don't have to file tax forms if the income derived is not from the United States.

CORPORATIONS

A corporation is limited by shares and carries with it some protection for its stockholders. The corporation pays taxes on its earnings and the owners pay taxes on the distribution of profits, after tax (dividends), which makes it effectively a double taxation entity. The corporation is formed by filing Articles of incorporation with the Secretary-of-State and the control of the corporation is the responsibility of the Board of Directors, scrupulous records and accounts must be kept.

A Subchapter "S" Corporation is a variation of the "C" Corporation and is governed under a different IRS Tax Code. The "S" Corporation is allowed the flow-through taxation treatment similar to that of a partnership and sole proprietorship. Double taxation is thereby avoided by its owners/shareholders. The limitations however are that:

Ownership is limited to 75 stockholders.
Owners cannot be corporations, partnerships, pension plans, charitable organizations, certain trust.
Non-resident aliens cannot be shareholders.

To maintain subchapter "S" Corporation status and therefore flow-through taxation status, there is a requirement for strict compliance with very strict rules.

There are rare circumstances in which a corporate structure is preferable for our clients over a Limited Liability Company. However, most of our clients choose Limited Liability Companies as their preferred business entity.

GENERAL PARTNERSHIPS

A General Partnership is formed when two or more persons join together to conduct a business or trade. A verbal agreement between the partners is enough to form the partnership. However, a written agreement is encouraged. There are no filing or registration requirements. Each partner is taxed on his share of the profits as distributed by the partnership and treated as personal income.

The downside to this business entity is that partnership debt and other liabilities are the responsibility of the partners and extend to their personal assets.

LIMITED PARTNERSHIPS

A Limited Partnership is very similar to the General Partnership, however, the Limited partners are not liable for partnership debt and only their investment is at risk. In the Limited Partnership, there must be a general partner who has total management responsibility. If the limited partner gets involved in management, they risk losing their liability protection. The Limited Partnership is required to file a document with the Secretary-of-State and the partnership is governed by a Limited partnership Agreement.

Taxation is on a personal income basis (flow-through taxation) and the partnership is limited to 35 members.

SOLE PROPRIETORSHIPS

A sole proprietorship is the entity in which a person opens a business alone without incorporation or any agreement with others. No forms or filing is required and the tax liability is the sole responsibility of the owner on an individual basis. Any debt or other liability is totally the responsibility of the proprietor and to the full extent of all his personal and business assets. We do NOT recommend non-U.S. residents utilize this form of business.

COMPARISON OF LIMITED LIABILITY COMPANIES AND C-CORPORATIONS

DESCRIPTION LIMITED LIABILITY COMPANY (LLC) C-CORPORATION

Formation Requirements And Government Costs Must file Articles with the Secretary of State in the State you have chosen as your company “home State”. There is a filing fee paid to the Secretary of State which varies from State to State. For a State by State guide to filing fees, please CLICK HERE. Must file Articles with the Secretary of State in the State you have chosen as your company “home State”. There is a filing fee paid to the Secretary of State which varies from State to State. For a State by State guide to filing fees, please CLICK HERE.

Type of Ownership Ownership in an LLC is represented by proportional “Membership Interests” expressed as a percentage ownership interest. Different classes of membership are usually permitted. There are no stocks issued and there are no "shareholders". The owners are referred to as "Members" rather than “shareholders”. Ownership in a C-corporation is evidenced by issued stock shares and they relative ownership interest of individuals is determined by the number and type of shares that they own. There maybe different classes of stock shares such as common stock, Class A, Class B, Preferred shares, etc., each of which may have different attributes and entitle the share owner to different rights.

Liability of Owners There is limited personal liability for owners (Members). Members are not generally held personally liable for debts or other obligations of the LLC except to the extent of their interest in the LLC. There may be some limitation on liability for shareholders, with a limitation on liability to the extent of their shareholdings. Officers and Directors are not generally liable for the debts of the corporation but, may be personally liable for malfeasance, acts exceeding their authority or breaches of fiduciary duties. ORATION

Ownership Agreement Generally known as an “Operating Agreement”, this document establishes and defines the relationships between the members, including defining their capital contributions and proportional ownership interests. The Operating Agreement also generally defines the operating parameters of the business and defines the management structure and the role of various members in the operations of the LLC. Generally defined by a “Shareholders Agreement” which defines the relative rights and responsibilities of shareholders.

Eligible Owners There are generally no restrictions. An LLC may be formed by single individual or entity or by more than one Member or entity. The Member(s) may be Non-U.S. residents. There are generally no restrictions. An owner may be a Non-U.S. resident individual or a Non-U.S. resident corporation. A C-Corporation can be owned by one shareholder - "sole owner" or by an unlimited number of shareholders.

Management May be managed by all Members collectively or by a designated Manager who is usually, but not necessarily a Member and is referred to as the “Managing Member” whose duties are defined in the Operating Agreement. Members and/or Managers, including Managing Members may be a Non- U.S. Resident and they are not required to be present in the U.S. in order to perform their functions for the LLC. Generally, managed by Director(s) and Officer(s). Director(s) and Officer(s) may be a Non- U.S. Resident. Shareholders elect Directors who manage business activities in accordance with the By Laws of the corporation..

Administrative Requirements Few administrative requirements. Generally, LLC are intended to be relatively easy to administer. Administrative requirements are generally defined by the Operating Agreement. Some states require filing an annual report. May be considered burdensome in comparison to LLC, particularly for small and medium enterprises. Administrative requirements include, but are not limited to, elections of Board of Directors/Officers, annual meetings, annual report filing requirements, in some instances publication of certain actions taken by the corporation, etc. Record keeping requirements are more exacting and, in most cases somewhat more burdensome.

Ease of Operation Relatively simple and, for the most part, operating requirements are defined by the Operating Agreement which the Members have created and agreed to. You must have annual meetings, Board of Director’s meetings, maintain corporate minutes and other detailed records, hold stockholder meetings and, in some instances, publication of certain actions of the corporation is required.

Transfers of Ownership Interests There may be some restrictions under certain State laws but, generally, restrictions outlined in the Operating Agreement govern restrictions on transfers of ownership interest. Such restrictions on transfer of ownership interest are usually beneficial to the owners in a properly drafted Operating Agreement. Shares are generally freely transferable from one shareholder to another. There are generally no restrictions or limitations unless specifically enumerated in a shareholder agreement.

Capital Members may sell interests subject to Operating Agreement. Securities laws may also apply in limited circumstances. Capital contribution of Members generally determines Shares of stock are sold to raise capital. Specific securities laws apply to share offerings in most cases.

Tax Upon Sale There is a single tax levy at member level upon sale of appreciated assets thereby avoiding double taxation. Generally, there is no tax on distribution of appreciated assets upon sale. A serious drawback for many persons considering what type of entity to form. Potential double taxation. Corporation may be taxed on sale of assets while the shareholders are also taxed on dividends or capital gains.

Pass Through of Losses Losses passed through to members, subject to certain restrictions. This may be a substantial benefit to Members of an LLC. Losses not passed through which may be a substantial loss for shareholders of a corporation.

Fiscal Year Uses tax year of members having a majority interest in the LLC, or the tax year of all principal members if there is no majority member. May use any fiscal year with the exception of Personal Service Corporations which must use a calendar year, subject to certain exceptions.

Taxation No tax at the entity level. Income passed through to members. Taxed at corporate rate and possible double taxation: Dividends are taxed at the individual level if distributed to shareholders.

Double Taxation No double taxation. Yes, taxed first at the corporate level and then again if distributed to shareholders in the form of dividends.

Pass Through Tax Treatment Yes. A substantial benefit of LLC use in most cases. No

Duration Dissolves at the time specified in the Operating Agreement or upon the loss of a member unless other members agree to continue. Indefinitely.