FORMS OF DOING BUSINESS IN THE UNITED STATES

The following is a general overview of the most common forms of doing business in the United States.  It highlights some of the advantages and disadvantages of each type of entity and is intended to be only a general introduction to the options available.

SOLE PROPRIETORSHIP

This is a form of operation that works if there is just one owner.  The sole proprietor may employ others, raise capital by borrowing, enter into contracts that bind him personally.  The principal advantages of this form of doing business are administrative simplicity and autonomy.  The principal disadvantage of this form of doing business is potential limitless liability. 

CORPORATION

A princIpal advantage of doing business as a corporation is that the shareholders of a corporation are insulated in most instances from personal liability on the obligations of the corporation.  In addition, the corporation has a perpetual existence so the withdrawal or death of any of the shareholders does not terminate the corporation.  Ownership of shares of a corporation are transferred relatively easily and the statutory law and case law governing corporations are well developed and thus are relatively predictable.  The principal disadvantages of this form of business entity is that formal record keeping and reporting requirements are extensive and that most corporations in the US are subject to ‘double taxation’ such that the income of the corporation is taxed at the corporate level and then the distributions of earnings to the shareholders triggers a second income tax at the shareholder level. 

GENERAL PARTNERSHIP

A general partnership is a combination of two or more individuals by written or oral agreement for the purpose of engaging in ongoing business activities.  Tax consequences of the general partnerships’ activities are passed through to the individual partners, with no taxation of the partnership entity itself.  The primary advantage of general partnerships is that they permit great flexibility in allocation of rights and burdens among the participants.  The primary disadvantage is that a partner in a general partnership is jointly and severally liable for all partnership obligations to the full extent of each partner’s business and personal assets.

LIMITED PARTNERSHIP

A limited partnership is a partnership created by written or oral agreement, which provides for at least one general partner who is responsible for managing the partnership and at least one limited partner who is usually a passive investor.  The principal advantage of a limited partnership is that it can combine the flexibility of a general partnership with the limited liability of a corporation.  Tax consequences are passed through to the individual partners according to the partnership agreement with no taxation at the entity level.  Limited partners are not responsible for the partnership debts and liabilities beyond the amount of their investments.  The main disadvantage of this type of business entity is that the limited partners are restricted in the involvement they may have in the day-to-day management of the business enterprise.   Limited partnership interests are generally considered to be securities and therefore the offer and sale of those interests are subject to the requirements of state and federal securities laws.

LIMITED LIABILITY COMPANY

An LLC is an unincorporated entity organized under state law which combines certain advantages of partnership, such as single-level taxation, with a corporation, such as limited liability to members.   One disadvantage of LLCs is that because this form of entity is relatively new, there is not a well developed body of statutory or case law dealing with LLCs and thus legal developments in this area may be somewhat less predictable.  In addition, investors are typically not as comfortable with this form of organization as they are with corporations.

BRANCH OF A FOREIGN ENTITY

A foreign corporation also has the ability to do business in the US without forming a separate new entity.  In California, the filing of a qualification to transact business in California as a foreign corporation is required.  The principal advantage of transacting business in the US as just a branch of the foreign entity is that the organizational expenses are kept to a minimum because no new entity is required.  The disadvantages are that your company is exposing its non-US assets to claims arising out of activities of the US branch office and the application of a branch profits tax as well as other unfavorable tax implications.   One caveat here, a foreign corporation can actually create a ‘branch’ office without any intent to do so through the hiring of a local sales agent if the agreement is not drafted to avoid such an effect.

JOINT VENTURE

A joint venture is not a specific type of legal entity but is merely a generic term used to indicate the existence of a working relationship between parties who join together in a common enterprise.  The word ‘partnership’ is used expansively within high technology companies today---often without understanding of the legal ramifications of this concept.  If precautions are not taken in detailing and memorializing the relationship in writing, a general partnership in legal terms may be created inadvertently.  The result of a legal classification as a general partnership is that each partner company would be held liable for the financial obligations and liabilities of the other and may be subjecting itself to taxation issues that could easily be avoided with proper legal advisement and document drafting.

If the foreign business does not require substantial assistance from the US ‘partner’, but rather requires assistance in a narrowly defined area or only requires assistance for a short period of time, then the strategy would most likely be to enter into a specific, limited contract with the US company to provide the services required. 

If, however, the foreign business requires more substantial services and desires to establish a longer-term relationship with the US business, the more appropriate strategy may be to form a joint venture entity to conduct the business.  There are two primary approaches for a foreign business to organize a joint venture entity with a US corporation.  The first approach is for the foreign business to organize a US subsidiary corporation and then that US subsidiary corporation would, in turn, form a partnership with the United States based company ‘partner.’  The second approach is to form a US corporation owned jointly by the foreign business and the United States based company ‘partner.’  A foreign business that uses either of these two approaches, and, in fact, maintains an arms-length relationship with the joint venture would generally achieve its goal of insulation from liabilities arising from the business of the joint venture.  In addition, with some exceptions, the foreign business would generally not be subject to the jurisdiction of the US courts.