Corporate Formation when Doing Business in the US: Should you set up a Partnership, LLP, LLC or a C-Corp?

Many foreign businesses operate in the US either as a foreign corporation or through a US subsidiary. Selling goods and/or services directly into the US seems the easiest way to do this. Nevertheless, most foreign operators with sales of reasonable quantitative and monetary value choose to incorporate in the US. Incorporation separates the US operations from those in the home country (and perhaps other countries). In case of a tax audit by US federal or state agencies, only the US activities will be exposed and reviewed as the US entity will have its own set of books. Unless there is transfer pricing involved, the activities outside the US remain invisible to US authorities.

Moreover, as a consequence of the separation, the parent company is shielded from negative results and liabilities of the US operations. The US entity may face a lawsuit for infringement of intellectual property rights, or for damages in a personal injury case. Litigation costs may be excessive relative to sales and profit. The success of the US operations may not meet expectations, and the cost of closing may consume all what is left in profit or more. Perhaps a bankruptcy follows. Without incorporation, these risks accrue to the foreign company. With incorporation these risks are isolated from the parent company.

Another reason for incorporation is the preference of the market to purchase from a domestic company. A domestic company often instills more confidence and a degree of assurance that redress will be available if, for instance, a product fails.

The choice between different types of corporate formation is an important aspect. A group of individuals, perhaps together with a venture capitalist, may want to enter the US market jointly.

A general partnership could be considered. Such a partnership arises from a contract between the parties. Each partner shares directly in the profits and losses, but each is also personally responsible for the debt and liabilities of the partnership. A general partnership is not a separate entity for tax purposes. Partnership income is taxable to the partners in proportion to their share in the partnership. A benefit of the general partnership is the avoidance of double taxation in that profits are not taxed before distribution and then again when distributed.

A limited partnership is popular as it still allows the pass-through of profits to the partners but limits the liability for losses of each partner to their capital contribution. In a Limited Liability Partnership (LLP) partners are only liable for business debts but not for acts of wrongdoing committed by the other partners in the course of the business. LLPs are created by statute and papers need to be filed with a state in order to form one.

A limited liability company (LLC) is quite popular as it is a hybrid entity with characteristics of both a corporation and a partnership. It is very flexible in that it combines the limited liability of a corporation with the pass-through taxation of a partnership. However, the LLC can choose to be taxed as a corporation. LLCs must be formed by filing papers with a state. In addition, an operating agreement between the partners (called: members) must be made.

The most common form of organisation is the corporation (C-Corp). It is a legal entity separate from its shareholders and employees, who are not personally responsible for the debts or other liabilities of the corporation (shareholders can only lose their investment and employees their jobs). A corporation has delegated management vested in a Board of Directors, can more easily attract outside investors, and shares are transferable. The corporation is taxed on its profits, and dividends are also taxed when distributed to the shareholders.

Essentia is on hand to assist in making the choice of organisation from a practical, legal, and tax perspective; filing the necessary paperwork; and writing corporate by-laws, operating agreements, and labour contract for corporate executives. Of course, we also advise on and assist with compliance with all US federal and state taxes.

*Robert F. van Brederode is a partner of Essentia Global Services supporting foreign investors in the US