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Types of Business Structures

When doing business in the US, foreign companies should be aware that they are subject to these parallel systems of laws which often differ from state to state. Entity Ch oic e. A foreign company entering the US must decide on the form of business entity it will use to conduct its US operations.

The most common types of domestic business entities are corporations, limited liability companies LLCs , and partnerships. Each business form has its own benefits and the choice of form depends on case-specific legal and business factors. Each type of business entity must be formed according to the laws of the state in which the entity is formed.

All entity types other than partnerships require organizing documents to be filed with the state government. A foreign company is not required to conduct business in the US through a US entity and could instead open a branch office. Doing so, however, is generally not advised for tax and liability reasons. A branch office, unlike a subsidiary, is not a separate legal entity of the parent company.

A branch office is considered to be the foreign company operating in the US. This can subject the company to taxation on all income earned, rather than limiting taxation to the income of the branch office. Furthermore, liability of the foreign company would not be limited to liability incurred at the branch level. Accordingly, foreign businesses coming to the US do not generally elect to open a branch office unless specifically advised to do so by a US attorney.

Selecting one of the entity forms discussed below is typically more advantageous than opening a branch office. Many foreign companies do business in the US as corporations. Corporations are organized under state law and each state has its own rules for creating and operating corporations. In the US a corporation may be created under the laws of one state and have its principal place of business in a different state. A logical choice is to incorporate in the state where the business intends to locate its operations.

The state of Washington is popular choice for business to incorporate in due to predictable and business-friendly laws. To form a corporation, a certificate of incorporation must be filed with the Secretary of State—typically online—in the chosen state. The directors of a US corporation can be foreign nationals and must be natural persons and not foreign companies.

The internal structure and bylaws of corporations are similar across jurisdictions but can be customized to meet individual company needs. The most common corporate form is called a C-corporation. This means that profits distributed as payments to the owners are taxed twice—first at the corporate level and second at the owner level.

A foreign company, however, cannot elect to be treated as an S-Corporation. US law treats corporations as legal persons, meaning that a corporation can enter into contracts, sue and be sued, and carry its own liabilities as a natural person does. Protection from personal liability for directors and owners is among the most important features of a corporation. Like a corporation, an LLC is formed by registering with the Secretary of State in the state in which the company is to be created. An LLC must have at least one member, and members do not need to be natural persons.

LLCs offer flexibility with respect to how the company can be financed and managed. While most companies elect to create an operating agreement, doing so is optional. For example, under Washington law, members are not required to adopt a written agreement, but without an operating agreement, the LLC will be governed by default provisions set forth by Washington state statutes.

Many foreign companies prefer to be taxed at the corporate level to avoid having distributions to members reflected on their personal tax returns. Like a corporation, an LLC has a legal identity separate from its members.

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A foreign company can also form a partnership by agreeing with another party to do business together in the US. While a written agreement is not required to form a partnership, it is advisable to formalize the arrangement through a written agreement. General partnerships do not offer the same liability benefits as corporations and LLCs.

Foreign companies should also know that partnerships can be formed by oral agreement or by conduct without filing any documentation with the state.

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In some instances, a partnership can be formed unwittingly through an informal agreement to undertake a particular business with another person. Foreign companies should engage counsel early on to avoid these misunderstandings. It can be difficult to open a bank account in the US for a foreign entity without a US presence.

Even once a foreign individual or company has created a US entity, it is not uncommon for banks in the US to be more willing to lend money to US businesses over their foreign counterparts. Once a foreign business has been successfully doing business in the US for a period of time, that business often has increased access to capital through US banks. All foreigners coming to the US to work must obtain permission to do so in the form of a visa. US visa laws are complicated and strictly federal.

Individual states do not regulate or provide visas. Visas are issued by the US embassy or consulate abroad. Many types of visas, including most types of work visas, require approval from US Citizenship and Immigration Services. It is important for foreigners to obtain the correct type of visa for their stay in the US. There are numerous employment categories for admission to the US and there are particular categories for investors, for business visitors, and for sponsor-based employment. Many entities bringing a business to the US seek advice from a US immigration attorney to select the correct visa category and to avoid application mistakes.

Each of the numerous types of visas have different requirements and allow for different authorized lengths of stay in the US.

Selecting a Business Entity

For example, the E-2 non-immigrant visa allows individuals from countries with which the US has a treaty of commerce and navigation to be admitted to the US if the person seeking the visa is investing a substantial amount of capital in a US entity. The individual must be seeking to enter the US solely to develop and direct the investment entity.

Separate visas may also be obtained for employees and family members of qualifying E-2 visa recipients. A qualified individual can stay in the US on an E-2 visa for an initial stay of 2 years and requests for extension of stays may be granted in additional 2-year periods. It is critical for foreign business owners and their workers to adhere to the terms of their particular visa as any violation can result in removal from the US or denial of re-entry into the US.

Contract s. Contracts are governed by state law. When interpreting such contracts, courts will look to UCC provisions to fill in gaps that the parties did not address in their agreement. Not all countries require consideration for contract formation, but in the US, an agreement without consideration is invalid.

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Performance or a return promise must be bargained for between the parties in order to qualify as consideration. For example, consideration can be money, performance of a service, forbearing from doing something, or the modification of a legal right. It is common for legal counsel to be involved early in negotiating and drafting contracts.

Foreign companies should be comfortable with this dynamic when working with US companies and will often benefit from engaging legal counsel prior to agreeing on important deal points.

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Making these selections allows for predictability and avoids litigation in unfamiliar or distant jurisdictions. Given the complexity of US tax law, careful tax planning and counsel is important for all companies doing business in the US. Companies in the US are subject to separate federal, state, and local taxes. The federal government, through the Internal Revenue Service IRS , collects income tax, capital gains tax, tax on dividends, interest, and other passive income, and employee payroll taxes.

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  6. Businesses will also likely have some additional tax obligations in the state in which they conduct business. The EIN is required for filing taxes and to identify the company. This number is often required before a company can transact business or open a bank account. This can be done online www. International applications may be made by telephone by calling to obtain their EIN. The person making the call must be authorized to receive the EIN and to answer questions concerning the SS-4 form.

    The US is party to bilateral tax treaties with numerous foreign countries. If your home country has a tax treaty with the US, the tax treaty should be consulted as a primary tax planning tool. These treaties have significant differences, but generally aim to prevent double taxation and tax evasion and to facilitate commerce between countries. Failing to comply with this requirement can result in significant penalties. Operating through a US entity, such as a corporation, eliminates some of the concerns about double taxation that foreign companies rely on tax treaties to resolve.

    Limited Liability Company (LLC)

    A corporation formed in the US is subject to federal income taxes on all of its income earned anywhere in the world. The tax is levied on net taxable income, which is gross income less allowable deductions. There are a wide variety of deductions available to taxpayers and the rules governing those deductions are complex. Companies in certain sectors may also be eligible for tax credits, which are often used to incentivize investment in emerging industries like renewable energy.

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    Foreign companies doing business in the US may not shift profits to a foreign parent company to avoid taxes. The IRS can investigate companies for this practice and may impose steep penalties for violations. Defending a US tax audit is expensive and time-consuming, further adding to the costs of non-compliance.

    Any short term benefits gained are outweighed by the risk of being audited and caught by the IRS. Individuals that are US citizens or US resident aliens are subject to tax on their worldwide income, regardless of where they work or live. Generally, an individual is considered a US resident for tax purposes when they either obtain legal permanent residency status or are present in the US for at least days of the latest tax year. Even if an individual is not a US resident or legal permanent resident, such individuals must still pay US federal income tax on income earned in the United States.