December 4, 06

NEWS / Doing Business In The USA: Selecting The Form Of Business Enterprise In The U.S.

I. Forms of Business Entities in the U.S.

An investor from outside the United States may choose among a variety of company structures to do business in the U.S. The main forms are:

* Corporation: either a U.S. subsidiary or a U.S. branch of a non-U.S. corporation.

* Limited Liability Company (LLC).

* Partnership: general, limited or limited liability partnership.

A "joint venture," typically characterized by two or more non-affiliates joining forces to establish a business venture, can take the form of either a corporation, a limited liability company or a partnership.

A single individual investor or a husband and wife team has another alternative, establishing a "sole proprietorship."

II. Main Considerations in the Choice of Entity

The most important factors to consider in selecting the form of business entity are the following, each of which will be discussed below under the entity concerned.

* Limited liability (that is, to what extent can the personal liability of the investing owners for the debts, taxes and other liabilities of the new U.S. entity be limited so that the creditor has recourse only to the assets of the U.S. entity?)

* Management and control

* Capital and credit requirements

* Tax considerations

* Difficulty or ease of organization and operation

* Transferability of ownership

* Continuity of existence

III. Corporations

The corporation is the most common form of business entity in the U.S. utilized by foreign investors. It can take two forms:

1. Establishment of a new corporation in the U.S. (or acquisition of an existing corporation in the U.S.). If the non-U.S. owner of the new U.S. corporation is another company, the U.S. corporation is said to be a subsidiary.

2. Establishment of a branch in the U.S. of a non-U.S. company. In this case, it is the non-U.S. company that is doing business in the U.S., and no new legal entity is formed from a company law standpoint. The branch would, however, become a taxpayer from the U.S. tax standpoint.

3.1 Nature

A U.S. corporation is a legal entity created under the laws of one of the 50 states of the U.S. and has a juridical existence separate from the persons who own, control, manage and operate it. The corporation enters into contracts and acquires, holds and transfers property in its corporate name; it is ordinarily a separate taxpayer and it is liable for its debts and other liabilities; and it can institute suit and be sued in its own name. It issues shares of capital stock to the persons who contribute the money or other business assets (that is, equity or ownership investment capital), which the corporation then utilizes to conduct its business. The stockholders are entitled to any dividends the corporation may pay and to receive all the corporation??™s assets (after all creditors have been paid) if the corporation is liquidated.

3.2 Limitation of Liability

The main reason most businesses operate in the form of a corporation is to limit the personal liability of the owners for the debts, taxes and other liabilities of the business. Ordinarily, the stockholders of a corporation are not personally liable for the liabilities of the corporation, and their liability is thus usually limited to the amount of equity capital that they have invested in the corporation in exchange for their shares of stock.

Exceptions. In certain instances, although uncommon, the owners of a corporation might be held liable for the corporation??™s liabilities. This is called "piercing the corporate veil." This may occur, for example, if there is a failure to observe corporate formalities or maintain the separate existence of the corporation, or if the corporation is capitalized with too little equity capital (owner??™s money) as compared to debt capital (borrowed money), also known as "thin capitalization," under circumstances amounting to fraud or other improprieties in dealing with creditors. Also, there are some special laws that might hold certain individuals liable for specified corporation debts??”for example, in some cases an officer obligated to withhold federal income tax from employees??™ wages may be liable to the U.S. tax authorities if the taxes are not withheld and paid as required.

3.3 Other Principal Characteristics

3.3.1 Management power of a corporation is typically centralized in a Board of Directors who establish company policy and are elected by the stockholder(s). The Board of Directors, in turn, appoints the officers of the corporation who run its day-to-day operations.

3.3.2 Ownership of a corporation, represented by shares of capital stock, is ordinarily freely transferable, subject to any agreements among the stockholders. However, the manner in which shares of stock may be advertised for sale or eventually issued or transferred to the general public is governed by federal and state securities laws. (See "Financing in the United States," page 55.)

3.3.3 A corporation enjoys continuity of life and perpetual existence, unless otherwise specified in its constitutive documents. The status of a corporation does not change when there are changes in its stockholders. The insolvency, incapacity or death of a stockholder does not cause the dissolution of the corporation.

3.4 Formation of a Corporation

In the U.S., a corporation (or other privately owned legal entity) is formed under the laws of one of the 50 states, and each state has its own laws. The general structure of these laws is substantially similar from state to state, although there are differences in the details that can sometimes become important.

Three of the states most favored by foreign investors for establishing a new corporation in the U.S. are California, Delaware and New York. This is because of the flexibility of their statutes and the guidance possible as a result of the many court decisions interpreting the laws in these states. Another reason, in the case of California and New York, is their importance as commercial centers in the U.S.

The state corporation laws are comprehensive and cover all matters relating to the internal operations of a corporation, such as the minimum number of stockholders, powers of directors, number and designation of officers, and minimum capitalization. Nevertheless, the corporation laws are usually phrased in sufficiently general and permissive language to allow the corporations to act with a minimum of government interference.

The process of organizing a new corporation in the U.S., compared with many countries, is speedy, relatively informal and not expensive. The organizational process can typically be completed in two to five days. The following outlines the typical incorporation process in California, Delaware or New York.

3.5 Certificate of Incorporation

Incorporation is accomplished by preparing and filing a Certificate of Incorporation with the appropriate state governmental authority, usually the Office of the Secretary of State of the particular state. (In some states, this document is called the "Articles of Incorporation." Informally it is sometimes called the "charter" of the corporation.) Usually the investor??™s U.S. lawyer prepares the Certificate of Incorporation in consultation with the investor and also serves as an "incorporator," which is a formal and temporary role that is adopted in order to obtain the official filing of the Certificate with the state.

The Certificate of Incorporation usually must cover, among other things, the following:

3.5.1 The Corporation??™s Name. The name selected must not be confusingly similar to an existing registered company nor already pre-empted by someone else??™s trademark. It is usually advisable to have a U.S. lawyer do a computer check of the records of names to check on name clearance, avoiding thereby other potential future problems. A name can be important from both a business image standpoint and for communicating to the public what the business has to offer. One should consider a name that is at least partially arbitrary, nondescriptive or different, so that a trademark or service mark can be obtained. (For more information on the importance of the company name, see "Intellectual Property," page 73.)

Each state also has certain other requirements applicable to company names. For a corporation, words such as "corporation," "incorporation," "limited," or their abbreviations must usually be included. Also, in most states some words are not allowed in a name (such as "bank," "finance" or "insurance) unless the approval of the appropriate state regulatory authority is obtained.

3.5.2 Purpose. Historically, the corporation??™s purposes had to be stated in specific detail. Today, however, California, Delaware and New York, like most states, allow the purpose to be stated in general language??”such as "to engage in any lawful act or activity for which corporations may be organized"??”under the corporation law, subject to obtaining any required consents or approvals for any acts or activities that are specifically required.

3.5.3 Capitalization. The authorized number of shares of capital stock and their description must be included in the Certificate of Incorporation. Each corporation must have at least one class of voting "common stock," which is the basic ordinary type of capital stock. There can also be "preferred stock," which would have certain preferences over the common, such as in the payment of dividends or upon the liquidation of the company. There can also be different classes of preferred and different classes of common, and series within classes??”each with its own special voting and other rights and characteristics??”all of which must be specified in the Certificate of Incorporation.

The simplest and most typical initial equity capitalization is to have one class of "common stock." There is no minimum capitalization amount in California, Delaware or New York, so one could start a corporation with a nominal capital of, for example, U.S.$1000, which could be deposited into the initial bank account of the corporation. Additional capital could be added later to the extent desired. The original Certificate of Incorporation can be structured so that additional capital payments will not require any amendment to the Certificate.

Each class of stock must either have a designated "par value" (that is nominal base value) or state that it is without par value. The amount paid for a share of such stock must be at least the amount of any designated par value. It is common today to specify a very low par value per share, such as one U.S. dollar. Any amount in excess of the par value that is paid for a share is then treated in the financial statements as "additional paid-in capital."

For example, the Certificate of Incorporation might specify that the company is authorized to issue up to 100 shares of common stock, $1 par value per share. The company might then actually issue to the initial stockholder any number of shares up to the authorized 100 for whatever amount is agreed upon between the corporation (represented by its director(s)) and the stockholder, provided that the amount paid in equals at least the par value.

3.5.4 Designation of Registered Agent or Address for Copies of Service of Process. California and Delaware require a corporation to maintain a registered office in the state for receipt of service. Both states also require a registered agent to be named at that address. In Delaware, the agent may be an individual or any type of entity qualified to do business in the State, but in California it must be either an individual, a corporation or a limited partnership registered in California that is acting in the capacity of registered agent.

New York does not require the designation of a registered office and registered agent. However, the Certificate of Incorporation for a New York corporation must specify the address in or out of New York to which the Secretary of State of New York may send a copy of any service of process (such as in a lawsuit), which may be served by a claimant on the Secretary of State. Alternatively, a registered agent in New York may be designated for receipt of service of process. In addition, if incorporating in New York, the county in New York in which the office of the corporation is to be located must be specified in the Certificate.

3.5.5 Other Provisions. There are other provisions that may be voluntarily added to the Certificate if desired, such as a provision limiting the personal liability of directors to the corporation or its stockholders for certain damages for any breach of duty in their capacity as directors.

Upon filing the Certificate of Incorporation with the Office of the Secretary of State together with payment of the filing fee and acceptance by such Office, the corporation??™s existence as a legal entity begins.

3.6 By-Laws

The "by-laws" are an internal corporate document that lays down the basic rules for the internal functioning of the corporation. They are required by state law, and they must conform to the various provisions of state corporation law. The by-laws typically cover such topics as the establishment and functioning of the Board of Directors, the officers and their duties, procedures for regular and special meetings of the stockholders and of the Board of Directors, establishment of the fiscal year, procedures for transfers of stock and other matters of basic corporate governance. The incorporator typically adopts the initial by-laws after consultation with the initial investor(s). The by-laws may be subsequently amended by the stockholders or, to the extent authorized, by the Board of Directors.

3.7 Board of Directors

The incorporator also appoints the initial Board of Directors of the corporation, again typically after consultation with the initial investor(s). The minimum number of directors is typically three. However, in Delaware and New York, the corporation may even have only one director (if desired), regardless of the number of stockholders. In California, if there is only one stockholder, the corporation may have one director (if desired), and if there are only two stockholders, the corporation may have two directors. Otherwise, the minimum number of directors is three.

Directors must be individuals, and there is no requirement that any director be a U.S. citizen or resident. Meetings of the directors may be held in or outside the U.S. There is also no requirement that either the stockholders, employees or representatives of labor be represented on the Board. The stockholders are free to appoint whomever they wish to the Board and also to remove them with or without cause, as provided in accordance with the applicable state corporation law and the by-laws. Directors usually serve until the next annual meeting of stockholders, at which time the stockholders elect (or re-elect) the Board of Directors for the ensuing year. The concept of allowing directors to vote by proxy at meetings or to have alternate directors is not generally recognized in the U.S. However, directors may participate in a meeting by means of conference telephone or other communications equipment, at which time all directors present can be heard. They can also take corporate action by means of a signed unanimous written consent.

3.8 Organizational Meetings of Directors

Upon the appointment of the initial Board of Directors, the directors hold an organizational meeting. Typical actions at this meeting include:

3.8.1 Appointment of Officers. Common officer positions may include: the President, one or more Vice Presidents, a Treasurer and a Secretary. Ordinarily, there should at least be a President and a Secretary who are not the same person. Other officer positions might be one or more Assistant Vice Presidents, Assistant Treasurers or Secretaries. The position of Director-General or Managing Director, often found in other countries, is not ordinarily used in the U.S. There is no requirement that an officer be a citizen or resident of the U.S. Officers may be removed and replaced at any time at the discretion of the Board of Directors. Typically, officers are newly appointed or re-appointed at each annual meeting of directors.

3.8.2 Acceptance of Capital Stock Subscriptions from the Initial Stockholder(s). The Board of Directors is vested with the authority to issue shares of stock. At the initial meeting of the Board, it typically receives and accepts the subscription for stock submitted to it by the initial stockholder(s) and authorizes the issuance of the shares of stock and a stock certificate evidencing same in exchange for the consideration paid for such shares. The consideration may consist of cash, property or services??”whatever the Board of Directors deems acceptable??”so long as it is at least equal in value to the par value of the shares.

In California, Delaware and New York there is no minimum number of stockholders. One is sufficient. The stockholder(s) may be individuals or other corporations. Ordinarily, they may be U.S. nationals or foreign nationals. In a few limited fields??”such as aviation, communications, power supply, shipping, and certain mining, banking and insurance operations??”there are some laws that limit the extent of foreign participation. (These are discussed in "U.S. Regulation of Foreign Investment," page 43.)

3.8.3 Authorization for Opening a Bank Account. The opening of the initial bank account of the corporation, and the designation of those persons who will be authorized to transact business with the account, will require a resolution adopted by the Board of Directors, usually done at the organizational meeting of the Board. Typically, the selected bank will have certain forms of resolutions that it will want the Board to specifically adopt, although certain modifications to the bank forms can sometimes be made if desired.

3.9 Books, Records and Accounts

3.9.1 Corporate Minute Book. It is very important??”particularly for purposes of demonstrating the separate legal existence of the corporation??”to maintain a formal corporate minute book in which all meetings of the stockholders and directors and the resolutions adopted by them are recorded in writing and preserved. This book is normally maintained by the corporation??™s Secretary or by its legal counsel. Meetings of stockholders and directors should be regularly held, and at least one annual meeting of each is required by state law.

3.9.2 Stock Record Book. All issuances, redemptions and transfers of shares of stock should be recorded in a stock record book. Such transactions are usually evidenced by certificates of stock representing the number of shares involved.

3.9.3 Corporate Seal. Although usually not required by law, a corporate seal is still sometimes used and some third parties that the corporation may deal with from time to time, such as banks, may request its use.

The corporation??™s legal counsel will usually arrange for the printing of the foregoing books and creation of the corporate seal as part of their services.

3.9.4 Federal Tax Identification Number. One of the first steps that must be taken by a new company is to obtain a federal tax identification number (also known as an "employer identification number) from the U.S. Internal Revenue Service. The lawyer organizing the corporation will prepare the form necessary for obtaining this number and will also know how to obtain the number on an expedited basis.

3.9.5 Accounts and Other Records. A company in the U.S. is generally free to keep whatever documents and records for the day-to-day running of the business that it desires. However, as a practical matter, and for purposes of handling any audits by federal, state and local tax authorities, the company should keep formal books of account, normal files of invoices and receipts, and normal business records. The company should engage an accountant to assist it in these matters and in the filing of required tax returns. Depending on the size of the operation, it may find it appropriate to use an outside firm of independent certified public accountants.

3.10 Opening of Bank Accounts

The company should explore suitable banking relationships for a variety of purposes, including checking accounts, possible capital requirements in the future and international trade transactions. To open a checking account??”which should be done promptly upon organization in order to deposit the stock subscription amounts paid by the initial stockholder(s) and receive and disburse other funds??”the company will have to deliver to the bank certified copies of the resolutions of the Board of Directors (or other governing body in the case of a limited liability company or partnership) authorizing the account and its signatories, cards with specimen signatures of the signatories in the form supplied by the bank, the federal tax identification number of the company, and certain information about the stockholders (or members or partners) as required by the bank to authenticate the propriety of the company and its owners and their respective businesses. Due to increasingly strict U.S. federal laws that compel banks to "know their customers," banks now require substantial information regarding the key persons involved in any company seeking to establish a bank account.

3.11 Tax Returns

The corporation will have to file periodic tax returns and reports in its state of incorporation and in any other state in which it does business, as well as federal and, if applicable, local income tax returns. There is usually at least a minimum annual state tax or franchise fee to pay, regardless of actual income, the amount of which varies from state to state.

In addition, any U.S. corporation that (i) has at least one foreign stockholder with a direct or indirect 25% or more ownership (by vote or value) at any time during its taxable year; and (ii) has reportable transactions (as described below) is required to file an annual report on Form 5472 with its U.S. federal income tax return. This report contains information relating to the filing corporation and its direct and indirect 25% or more foreign stockholders. It also covers certain transactions with its direct and indirect foreign stockholders, and with other persons related to such stockholders and the filing corporation by direct or indirect 50% or more ownership. Reportable transactions generally include sales and purchases of inventory and other tangible and intangible property; rents and royalties; commissions, interest and insurance premiums paid and received; and amounts loaned and borrowed.

3.12 Qualifications to Do Business in Other States

The incorporation of a corporation in a particular state (such as California, Delaware or New York) only allows it to do business in that state. If the corporation desires to do business in one or more other states of the U.S., it must file an application to do business as a "foreign corporation" in such other state(s). In this case, "foreign" means incorporated in another jurisdiction, whether it be in another state of the U.S. or in a foreign country. Legal counsel can advise on what constitutes "doing business" for purposes of having to qualify to do business under the corporation laws in a particular state or for purposes of having to file tax returns and be subject to taxes in a state. The corporate law test of "doing business" and the tax law test are not identical and, depending on the level of contacts with the state concerned, the results under each test could be different.

An application to do business in another state requires payment of a filing fee and the designation of a local resident to serve as an agent for service of legal process. The corporation will thereafter have to file tax returns in such state. A failure to qualify in another state when required to do so would subject the corporation to being unable to enforce its contractual and other rights in such state and also possibly subject it to penalties.

3.13 "Close" Corporations

A "close corporation" is essentially a regular corporation with few stockholders. In the corporation laws of some states, there is a separate chapter on "close corporations," which allows these companies to enjoy more flexibility in the way they structure their management. For example, in some instances it is possible to dispense with a board of directors and have the corporation managed directly by the stockholders. Other provisions of these "close corporation" chapters cover such aspects as methods for resolving disputes or deadlock among the stockholders.

3.14 The Non-U.S. Company Operating as a Branch in the U.S.

A non-U.S. company may establish a branch in a particular state in the U.S. in the same manner as that described in the above paragraph, 3.12, "Qualifications to Do Business in Other States." In effect, the non-U.S. company becomes the company that is qualified to do business in the state concerned. In general, the non-U.S. company establishing the branch is permitted to conduct the same types of activities under the same conditions as a subsidiary company that is incorporated under the laws of the state concerned.

From the standpoint of the liability of the non-U.S. company concerned, the branch in the U.S. subjects the non-U.S company to claims, possible lawsuits and direct liability in the U.S. for the acts and business of the branch. In contrast, when the non-U.S. company establishes a subsidiary corporation in the U.S., the subsidiary can serve in most instances to insulate the non-U.S. parent from liability for the subsidiary??™s acts and business. For this reason, most foreign investors prefer to do business in the U.S. through a U.S. corporation rather than through a U.S. branch of a non-U.S. company.

Tax considerations are also an important factor to consider in deciding whether to operate in the U.S. in the form of a subsidiary or a branch. See Section VIII, "Tax Considerations," page 18.

IV. Limited Liability Companies

4.1 Nature

A limited liability company (LLC) is an unincorporated legal entity formed under the laws of one of the 50 states in the U.S. The applicable state law is typically contained in a separate statute, often called a "Limited Liability Company Act." The LLC, like a corporation, has a juridical existence separate from the persons who own, control, manage and operate it. Its owners are called "members" (rather than "stockholders). Some states require an LLC to have two or more members; but others, including California, Delaware and New York, allow even one person alone to own an LLC. There is no limit to the number of members an LLC may have.

The LLC is a relatively recent creation of the laws of every state in the U.S. In a short time, it has become a very popular ownership vehicle. It responds to the desires of businessmen to have a legal entity that can provide both (1) limited liability (which a corporation provides but a partnership usually does not), and (2) the flexibility of a partnership-type operation. Limited liability is valuable because all of the members are typically liable only to the extent of their capital contribution regardless of the extent of their management participation (subject to the same type of exceptions noted in 3.2 above). In effect, the LLC is a hybrid between a corporation and a partnership.

4.2. Organizational Documents

Formation of an LLC involves the preparation of two principal documents: (1) a Certificate of Formation (sometimes called "Articles of Organization); and (2) a Limited Liability Company Agreement (sometimes called an "Operating Agreement).

The Certificate of Formation contains the name of the company (which ordinarily must include the initials "LLC) and certain other information as required by the limited liability company law of the state concerned. It most states, it can be brief, and the purpose of the company can usually be stated in general language. However, in some states, certain features of the company that may be desired by the members??”such as a provision that the company shall be managed by a "manager" rather than by the members??”must be included in the formation certificate. The certificate must be filed with the state office of the relevant Secretary of State. The company??™s existence commences on the date of filing.

The Limited Liability Company Agreement (LLC Agreement) is entered into by the member(s) themselves. It is used instead of corporate by-laws and also contains matters typically covered by stockholders??™ or partners??™ agreements.

Elements ordinarily covered by an LLC Agreement include:

* Management of the LLC. State LLC laws typically allow the members of an LLC to structure the LLC??™s management along the model of a corporation, a partnership or a variation in between. Will the LLC be managed by the members themselves, by some kind of managing board or by an individual manager? What officers, if any, will the LLC have? What will be the respective duties of, and protections for, the managers and officers, both in terms of the business and in terms of their fiduciary and other obligations to the members? What decisions will require approval of the members, and what percentage vote will be required for approval of certain major actions, including, for example, any special agreements between the LLC and any of its members?

* Contributions to the LLC. How much and what kind of property will each member contribute, whether by way of equity capital or loan, and how will it be valued? When can they be required to make additional contributions to the capital of the LLC?

* Profits and losses. How will they be shared by the members? When and how can distributions be made to the members?

* Ownership interests. Rather than shares of stock, each member owns a percentage membership interest in an LLC. This percentage interest should be specified in the LLC Agreement itself. Member ownership certificates (like a stock certificate, furnishing evidence of ownership) are not typically issued to LLC members, although they can be, if desired.

* Tax matters. What elections will the LLC make as to tax treatment and who decides? At this time, the law affords flexibility to select either a "corporate" or "pass-through" (partnership-like) form of tax treatment. (See Section VIII, "Tax Considerations," page 18).

* Transfers of ownership. What transfers will be permitted, and under what terms and conditions?

* Dispute resolution. Consider including alternative dispute resolution mechanisms in the LLC Agreement such as arbitration, possibly preceded by consultations between the chief executive officers of the members, and mediation.

If all the members are commonly-owned affiliates, or if there is only one member, the LLC Agreement can be a fairly routine document. However, if the members are previously unaffiliated and their relationship is more like a joint venture between otherwise independent persons, the LLC Agreement can become highly negotiated and very complex, covering all the important anticipated relationships and issues between the parties.

Most states have provisions that govern the operation of LLCs (so-called "default provisions) in the event the LLC Agreement does not cover certain issues or if the agreement has not yet been adopted. It is particularly critical for investors to create an LLC Agreement that covers the issues important to them and to be certain that any applicable default provisions in the state statute do not conflict with their objectives.

V. Partnerships

A partnership is formed by a contract, which is known as a "partnership agreement," between two or more persons. A partner may be an individual or any type of entity, U.S. or foreign. The partnership is formed under the laws of one of the states in the U.S. These state laws tend to be quite similar to one another, but there are differences as to details, and care is required in structuring the partnership agreement, both in terms of the specifics as to what is agreed upon as well as the federal and state tax aspects. Although an oral agreement would be valid if it contained all of the required elements under the laws of the state concerned, it is highly desirable to have a written partnership agreement, particularly one prepared by a U.S. attorney with appropriate partnership law advice and tax law input.

The partnership agreement should generally cover at least the following basic issues:

* Contributions to the partnership??”how much and what kind of property will each partner contribute, and how will it be valued? When can they be called upon to make additional contributions to capital?

* Management of the partnership and the manner of decision-making by the partners.

* Profits and losses??”how will they be divided among the partners? When and how may they be withdrawn?

* Compensation??”will certain partners be compensated for their services to the partnership or for making capital available to the partnership, and how will they be compensated?

* Ownership interest changes??”how will they be handled?

A partnership ordinarily is characterized by limited life. Unless the partnership agreement provides otherwise, a partnership usually terminates when any partner dies or withdraws from the partnership. This is in contrast to a corporation, which ordinarily is characterized by perpetual existence. Moreover, under the laws of most states, the bankruptcy of a partner or of the partnership itself will cause the dissolution of the partnership, regardless of what the partnership agreement may provide.

There are three principal types of partnerships: general, limited and limited liability.

5.1 General Partnerships

A general partnership is an association of two or more general partners who operate a business for profit. All general partners are normally active in the operation of the business, and their rights and obligations are contained in their partnership agreement.

All general partners have unlimited personal liability for debts, taxes and other claims against the partnership. If the partnership??™s assets are not sufficient to pay creditors, the creditors can satisfy their claims out of the individual partners??™ personal assets. This is a major difference between partnerships and corporations or limited liability companies. Also, if a partner fails to pay their personal debts, the partnership??™s business may be disrupted if the partner??™s creditors seek to satisfy their claims out of the partner??™s interest in the partnership by seeking what is called a "charging order" against partnership assets.

Each general partner is considered an agent for the partnership and, in terms of dealing with third parties, can ordinarily do anything necessary to operate the business, such as hire employees, borrow money or enter into contracts on behalf of the partnership.

5.2 Limited Partnerships

A limited partnership must have at least one general partner, who is responsible for overseeing the day-to-day operations of the partnership and who has personal liability for the debts and other obligations of the partnership. Often in a limited partnership, a corporation or limited liability company serves as the sole general partner. In addition, a limited partnership must have one or more limited partners. A limited partner may not actively participate in the operation of the business; their name may not appear in the name of the partnership; and they may not enter into contracts on behalf of the partnership.

The liability of limited partners (unlike general partners) is limited to the amount of their capital contribution to the partnership, and if the partnership??™s assets are insufficient to meet the claims of creditors, the limited partners are not personally liable. However, if a limited partner were to violate any of the restrictions on being active in the business, they could become personally liable.

The capital contributed by limited partners must generally consist of cash or property. Unlike the case of a general partner, limited partners cannot contribute services. Limited partners can share in partnership profits to whatever extent is specified in the partnership agreement.

In general, limited partnerships are more regulated than general partnerships. For example, a written limited partnership agreement is usually mandatory. Also, there are usually increased state law requirements as to publishing information about the partnership. A limited partnership must ordinarily file and record with the state concerned, and publish a formal certificate giving information about the partners, their capital contributions, the special limited liability concerned, and other pertinent information in an authorized newspaper.

5.3 Limited Liability Partnerships (LLP)

Recently, many states have adopted new laws that provide for the formation of limited liability partnerships. This type of legal entity is usually designed for use by professions such as accounting firms and law firms. In general, a limited liability partnership is similar to a general partnership, except that a partner of such a partnership is not personally liable as to third parties, unless such partner supervised or had personal involvement in the matter giving rise to the particular liability concerned.

VI. Joint Ventures

A joint venture is usually organized as a special type of partnership with a specific purpose or project of limited duration. Each partner or "joint venturer" may contribute capital, products and expertise in varying proportions, depending on their resources and skills and the desired sharing of profit and risk. The main advantage of the joint venture form is the lack of formality required and its flexibility in allowing the parties to spread the financial risks and to benefit from an enterprise that has greater strength than either of them could have provided alone.

A joint venture agreement between the parties will typically cover their joint contributions of property or services, purpose and duration, methods of management, methods of sharing profits and losses, transferability of ownership interests or restrictions thereon, and means of termination and resolution of disputes. As a kind of temporary partnership, the joint venture is subject to state partnership law, the venturers??™ liability is unlimited, and partnership tax law will apply. Joint ventures are typically formed by two or more corporations or limited liability companies, although any individual or entity may be a joint venturer. In general, there are no special requirements that any of the venturers be U.S. nationals.

It is also possible to incorporate a joint venture or organize it as a limited liability company, in which case it will be governed by applicable state corporation or LLC law and partake of the typical limited liability and tax characteristics of such companies.

VII. Sole Proprietorships

The sole proprietorship is an informal entity established and owned by a single individual (or a husband and wife). The owner is personally liable for the debts and other obligations of the business. As in other businesses, local permits and licenses will ordinarily be required in order to operate. The owner typically serves as manager. The ownership interest can be easily transferred, and the business necessarily terminates upon the death or disability of the owner.

A foreign individual can readily set up a sole proprietorship. However, because all of a sole proprietor??™s personal assets are subject to the debts and other obligations of the business, if the business is of any significant size or has any special liability risks, it is usually considered more desirable to establish a corporation or limited liability company instead.

VIII. Tax Considerations

The U.S. tax laws make a fundamental distinction between "corporate" tax treatment and "partnership" tax treatment. A corporation is a separate tax-paying entity. It pays taxes on its taxable income. When it pays dividends or makes other distributions to its stockholders, each stockholder then must also pay tax on their dividend income. This results in the so-called "double taxation" in "corporate" tax treatment.

In contrast, a partnership ordinarily is not in itself a taxpayer. Rather, the tax obligations of a partnership are "passed-through" to the respective partners who become the only taxpayers. A company with "partnership" tax treatment must file federal and usually state tax returns that are informational only. In these returns the partnership reports each partner??™s share of income or loss, tax credits and so forth. These items are then reported by each partner on their individual tax returns. Accordingly, if a foreign corporation were a partner of a U.S. company with "partnership" tax treatment, the foreign company would become subject to taxes in the U.S. and have to file tax returns in the U.S.

Partnership taxation rules tend to be more complicated than corporate taxation rules. However, partnership taxation has the significant advantage of avoiding the above-described "double taxation" involved in corporate taxation.

A special rule covers so-called "S Corporations." An S Corporation is a regular corporation that elects to be treated as a "pass-through" entity for tax purposes (similar to the tax treatment of a partnership) pursuant to subchapter S of the federal Internal Revenue Code. There are a number of limitations on the eligibility of a corporation to elect S Corporation tax treatment, although recent amendments to the federal tax laws have relaxed some of these limitations. The corporation must be incorporated in the U.S.; it may have only one class of common stock and no preferred stock; and it is subject to certain limitations as to participating in an affiliated group of corporations. Also, there may not be more than 75 stockholders, and no stockholder can be a corporation, a partnership or a nonresident alien individual. (Nevertheless, a nonresident alien might be able to participate in an S Corporation by being a beneficiary of a small business trust that, in turn, elects to be a stockholder of the S Corporation.)

The relatively recent creation of the limited liability company (LLC) form in all states resulted from the increased desire of businessmen to utilize a form of company that enjoys limited liability as to third parties (such as a corporation does), while at the same time enjoying "partnership" tax treatment. The state statutes governing LLCs introduced the opportunity to have limited liability, while at the same time permitting the LLC to be structured with sufficient "partnership-like" characteristics so that the company could qualify for "partnership" tax treatment, in accordance with Internal Revenue Service guidelines.

In 1996, the Internal Revenue Service introduced new regulations (called "check-the-box), which for the first time generally allowed any LLC or partnership to elect either "corporate" or "partnership" tax treatment merely by checking a certain box on a specified tax form. This flexibility has further increased the popularity of LLCs as a form of doing business in the U.S.

For further information on taxes affecting business in the U.S. see "Tax Consequences of Doing Business in the U.S.," page 137. Tax considerations play an important role in the selection of the form of doing business in the U.S., and the advice of tax lawyer specialists is highly recommended.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Article by Marvin Goldman

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