Use of U.S. corporations by the foreign investor
In the U.S., business is seldom done by personal ownership. Here, we explain how and why the various kinds of corporate vehicles are chosen and used.
A juridical being
Along with real people, the law has created a fictional being called by various names: a corporation, a company, a limited company, a limited liability company. The important thing to remember is that this legally-created entity is treated as a distinct legal person that may operate within the economic and social systems of the United States somewhat autonomously, offering several advantages.
These advantages are:
1. Shielding owners from personal liability
If the company suffers a loss it cannot bear and becomes insolvent, the owners (shareholders) may lose their investment, but their personal assets may not be seized or foreclosed upon by the company’s creditors.
There are some circumstances in which creditors may go beyond the corporation and proceed directly against the shareholders, or owners — this is sometimes called “piercing the corporate veil” — but these are rare and usually require the shareholders to have engaged in active malfeasance.
2. Continuity of life
Human life is precarious, but corporate life may be eternal. The death of an individual shareholder, even of one who controls the company, does not necessarily interrupt the company’s business.
Continuity is also advantageous in family-owned enterprise. allowing a more orderly and formal means of distributing and transferring control amongst family members.
3. Professional management
An individual operating as a sole proprietorship may hire professionals and advisors, but the corporation promotes a more formal and probably better way of centralizing the overal direction of the enteprise in a board of directors, who must answer to the shareholders.
4. Tax planning
Corporations are routinely used in lawfully reducing U.S. tax obligations. One way in which they enter into tax planning arises from the need to create a “pass-through” entity that will allow taxable income (most likely negative income, or a tax loss) to be imputed advantageously to the company’s owners. The legal challenge is to fashion a corporate vehicle that satisfies the Internal Revenue Services’ criteria, while continuing to offer the advantages of the corporate form, such as shielding personal assets.
In the case of foreign ownership of U.S. real estate, the use of corporations to take title to U.S. real property, including personal residences, is common, offering the means to greatly reduce if not eliminate the estate tax.
In the U.S., corporations are creatures of each of the 50 states
This is the first major difference a foreign business may experience when coming to the United States. In most countries, companies are governed by, and are creatures of, federal law and the federal government.
Knowing this may help you understand why you may hear the terms such as, “Delaware corporation,” or “Nevada LC.” Delaware, for example, has legislation considered favorable to the management of large enterprises. A disproportionate share of large U.S. enterprises have incorporated in Delaware, despite a small percentage of their business occurring in that state, and despite their corporate headquarters being located elsewhere. On the other hand, states such as Nevada attract many small companies owned by one or a small number of individuals, due perhaps to low filing fees, light regulations, minimal annual maintenance, and the lure of Las Vegas.
In the case of our clients, we recommend incorporation in the state in which the business will operate and have the closest ties. This decision usually results in the best saving of time and money, in the short and long terms.
The major categories of corporate entity
1. Corporation -- ordinary, plain vanillla
The standard corporate form is called the “corporation,” although that word is not used with rigor. When employed, the name of the company (Tesla) will be followed by the initials, “Inc.” (incorporated) or “Corp.” (corporation).
The standard corporate form includes three primary groups: the owners or shareholders (holders of stock), which in most states may consist of a single shareholder; the board of directors, which in most states may consist of a single director; and the officers, which may be any number and kind, but which usually include a “president” and a “secretary.”
In terms of functions and powers, these three groups operate as follows: the shareholders appoint and supervise the directors. The directors hire and supervise the officers. In most states there is no prohibition against the same person being a shareholder, a director and an officer.
The basic process of incorporation generally goes as follows: The “articles of incorporation” are submitted to the “Secretary of State” (of the state of incorporation). They are signed by an “incorporator,” who is usually the secretary of the lawyer representing the client, and who plays no further role once this is done. Those articles name the initial director(s). Once the Secretary of State accepts the papers, the company springs into legal existence. No notary is involved. Then the director(s) meets to approve the initial issuance of stock to the shareholders, name the officers, and adopt the “bylaws” which is a detailed guide as to its internal operation. From that point forward, the shareholder(s) and the director(s) may be required to meet at least once a year to take care of important business. At this annual meeting, at the very least, the shareholders shall name the new director(s), and the director(s) shall name the officers.
Approximate counterparts of the corporation in various countries include:
—Spain and almost all of Latin America: Sociedad anonima. Initials: S.A. (most often, S.A. de C.V.)
—France: societe anonime. Initials: S.A.
—UK: Limited company (note: “limited company” is something else in U.S.). Initials: Ltd.
—Germany: Aktiongesellschaft. Initials: A.G.
2. Limited liability company (LLC)
From the ordinary corporation in the preceding section, we begin to slide further into forms of doing business that are designed to be owned and administered by a single, or small number, of individuals, and who may be thought of as hybrids: something that in certain respects resembles a corporation, in other ways resembles an individual operating his or her own business.
Most American states have versions of the limited liability company, where the name is followed by the initials, “LLC.” This is not to be confused with the British “limited company,” which is similar to the U.S. corporation.
The limited liability company may be preferred to the regular corporation, for reasons that include a less formal management process and fewer costs.
Approximate counterparts of the corporation in various countries include:
–Spain and almost all of Latin America: Sociedad de responsabilidad limitada. Initials: S. de R.L.
—France: societe de responsabilite limitee. Initials: S. de R.L.
—Germany: Gesellschaft mit beschrankter Haftung. Initials: G.m.b.H.
3. Limited partnership
Now we go even further down the scale of hybridization to the “limited partnership,” where the name of the company is usually followed by the initials, “L.P.”
This company is usually composed of a general partner, which is exposed to general liability for all debts and obligations of the company, and the “limited partners,” who, like the shareholders of the corporation, will not answer for the debts of the company, except to the extent of the capital they have invested.
4. Tax planning
The Internal Revenue Service has promulgated criteria under which it will regard a company as something other than a distinct legal entity for tax purposes, for the purposes of treating the shareholders or owners as the real owners of the enterprise, in which case the taxable income, gains, and losses will NOT be taxed at the corporate level, but rather “passed through” to the owners. In most cases, limited partnerships and similar entities, such as the “master limited partnership,s” meet these criteria, but other forms of doing business may do so as well.
This is not to say that these “pass-throughs” are distinct companies created by the Internal Revenue Code. They remain state-created entities. Keep this in mind if you hear of companies being called “S” or “C” corporations. Those are purely tax-motivated names.
“Passing through” taxable income or loss may be favorable for several reasons, including those arising from lower individual tax rates, to the fact that wealthy individuals usually like losses they can recognize on their own individual return.
The SIGNET Law Firm
We are dedicated to helping foreign business invest and operate in the United States successfully. As part of our services, we specialize in helping our clients procure the E-1 and E-2 visas, which enable them to live in the U.S. while they manage and operate their businesses.
Thank you.
We hope you have found this information useful. If you would like to speak with us, we are available.