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An Introduction to the forms of business entities
While there are many different forms of business entities, there
are four main types in the United States:
1. Sole Proprietorship
2. General Partnership
3. Limited Liability Company
4. Business Corporation
Sole Proprietorships
Sole Proprietorships are the simplest form of
business type. They are inexpensive to form, easy to dissolve
and generally have no tax aspects, since profits and losses of
the business are simply part of the owner's personal income and
the company is disregarded for tax purposes. However, since legally
the company is nothing more than an individual using a trade name,
there is no limit to the owner's liability for the company's obligations.
There are virtually no formalities to be observed by the company
beyond basic bookkeeping. On the death of the owner, the company
immediately ceases to exist.
Partnerships
A Partnership is relatively inexpensive to form,
and can be as simple or complex in structure and administration
as the partners want it to be. Partnerships are formed by two
or more persons (persons being people, corporations, other partnerships,
LLCs, trusts or others) who make an agreement to share profits
and losses. General partnerships are not incorporated entities,
and therefore each partner has what is called joint and several
liabilities to the partnership. In plain English, this means any
particular partner can be made to pay the entire debts of the
partnership, regardless of the allocation of profits and losses,
or capital contributions made into the partnership. Taxation is
more complex, but the partnership itself pays no taxes; it is
only required to file an informational return to the government
to report what the profits and losses of the partnership were
and how these were allocated to the partners. A partnership ceases
to exist when certain criteria are met, such as the death or bankruptcy
of a partner; or if they decide to end the partnership.
Corporations
A corporation is more complex than partnerships
or sole proprietorships, in that a new legal person is created.
A corporation is an entity that is separate from its owners, so
that regardless of what happens to shareholders, the corporation
continues until it is legally dissolved. Depending on state law,
a corporation can be owned by just one person and have just one
director and officer. The owner(s) of a corporation are known
as shareholders. The shareholders elect directors to set the policies
of the corporation and represent their interests. The directors
appoint the officers of the corporation to manage day to day operations.
Corporations are legally required to follow more formalities than
any of the other entities, including annual meetings of the shareholders
and directors, as well as board approval of most significant acts
by the corporation. Because a corporation is separate from its
shareholders, for example, even if one person is the sole shareholder/director/officer,
that person cannot just take company funds for him/herself without
documenting the reason and entering a board resolution into the
corporate records. Taxation of corporations is much more complex
than sole proprietorships or partnerships: depending on the number
of, residency of and type of shareholders, a corporation can elect
to be treated for tax purposes as a if it were a partnership (an
S corporation) and therefore not pay taxes itself, or it can be
treated as a taxable entity (a C corporation).
Limited Liability Companies (LLCs)
An LLC is a hybrid of corporations and partnerships,
combining the features of both. LLCs are extremely flexible, and
can be used for a very wide range of businesses. The members (equivalent
to shareholders or partners) can, but need not, have limited liability;
can, but need not have, managers (equivalent to directors and
officers) and can elect to be taxed either as corporations, or
as partners (if they have two or more members) or be disregarded
for tax purposes like a sole proprietorship. Like partnerships,
LLCs can be as simple or complex as the members’ desire.
Depending on state law, an LLC can have the same limited liability
for members as a corporation, or have some members with limited
liability and some without limited liability (like a limited partnership),
or even have no limited liability for any members (like a general
partnership). Unlike corporations, some States require that their
LLCs designate a date in the future at which the LLC will automatically
dissolve. Some States also require that if a member dies, goes
bankrupt or meets some other calamity the remaining members of
the company must either dissolve or vote to continue.
US companies can be established in most if not
all US states and based on there being no US trade they are subject
to zero corporate tax; however certain states do levy a state
or franchise tax.
Operational Case study
A non- US client decides he wishes to establish
a US LLC for a trading operation worldwide, outside of the United
States. The client buys and sells fruit and vegetables worldwide.
In this regard the US LLC is incorporated in a US State renowned
for such activity. (It is prudent to be creative and establish
an LLC in a state that is known for dealing with certain commodities.)
The client has sourced clients in Germany and
is seeking a supplier to provide the goods. At this time, the
client has found a supplier of the goods required in China and
agrees a certain price to acquire the goods and signs the relevant
contract on behalf of the LLC.
At the same time, the client has agreed a price
with the German Company the buy the goods from them and the German
company also accepts they have to pay import duty on importation
within Germany and signs the relevant contract on behalf of the
LLC.
The goods are shipped from China to the order
of the US LLC to a port of the client’s choice for example
the United Kingdom. On arrival, the goods are trans-shipped without
being imported and the documentation from China is replaced with
new documents reflecting the US LLC and if needs be the origin
can be changed on the shipping documents from China to UK, even
though the goods have not been imported.
The goods arrive in German, are inspected and
the German Company pays the US LLC the relevant monies relating
to the contract and supporting invoice that has accompanied the
goods.
The US LLC in turn pays China the amount due
under their respective invoice and contract.
The payment terms of such trading activity is
sometimes supported by a Letter of Credit, which is issued by
the German company to the US LLC for say USD 100’000 and
then transferred on to China for USD 80’000. The Letter
of Credit indicates that there are certain monies that have been
blocked and will be released once the goods have arrived and acceptable
documentation has been accepted by the German company’s
bankers.
The profit that the US LLC has made can be transferred
to wherever the client wishes.
The US LLC is fiscally transparent for tax purposes.
For further information on the utilization of business entities
in the US.A. please contact an office
most convenient and appropriate to you.
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