The choice of business entity for a foreign national establishing a joint venture in the U.S. is essentially between a corporation, a partnership or a limited liability company. A corporation is created when the proper state authorities issue a charter. Its creation and operation are controlled by the law of the state where it is formed. In Florida, for example, detailed legislation governs the formation, operation, and dissolution of corporations. To form a corporation in Florida, it is necessary to file Articles of Incorporation with the Secretary of State. The articles, at the minimum, will contain the name, objective, duration, capital, registered agent and address, directors and incorporator of the firm. The shareholders and directors need not be residents or citizens of the U.S. The bylaws of the corporation prescribe the structure and procedure of the internal government of the corporation. These may not be inconsistent with the law and provisions in the Articles of Incorporation. Most importantly, a corporation is a legal entity separate and apart from its shareholders.
A partnership is defined as an association of two or more persons to carry on a business for profit as co-owners. It is an entity formed by contract between the partners. This contract, subject to applicable state laws, will govern the rights and duties of the partners and the operation of the partnership. Its formation need not be registered with the state authorities, although provisions of the fictitious name statute must be complied with if an assumed name will be utilized. Generally speaking, there is no minimum capital requirement for the formation of either a partnership or corporation.
A Limited Liability Company is composed of beneficial attributes of the corporation and the partnership. To form the LLC, it is necessary to file Articles of Organization with the Department of State in Florida. The Articles will state the period of existence of the LLC, the conditions under which new members can be admitted to the LLC, and the rights that members have upon the death or bankruptcy of a member. The best characteristics of the LLC are that it provides for pass through taxation and limited liability for the members.
The major differences between the three entities can be summarized based upon the following classifications:
- Taxation. The corporation is taxed separately from its shareholders. The corporation pays tax on its income and the shareholders pay tax upon the receipt of dividends on interest from that corporation. In a partnership, income and expenses of the partnership directly pass through to the partners who must file individual tax returns reflecting their share of the operating net profits or losses of their partnership. The LLC does not receive the “double tax” of the corporation unless it chooses to do so upon organization. The LLC is taxed like the partnership, on a pass through basis.
- Limited Liability. In a corporation, the liability of the shareholders for debts incurred by the corporation is limited to the contribution of each shareholder. The partners in a partnership are ultimately liable for all debts incurred by the partnership. The LLC is similar to the corporation in that the liability of its members is limited to their membership contribution.
- Free Transferability of Interest. The transfer of corporate shares may be restricted but not prohibited. The new shareholders will have the same rights as their predecessors. In the partnership, the ability to transfer may be completely prohibited by contract between the parties or the rights of a new partner restricted. The LLC assignment of interests is subject to limitation by remaining member vote or by the LLC agreement. Such assignment is only a transfer of the right to share in the profit and loss of the LLC. Other membership rights are subject to non-assigning members= consent by vote.
- Continuity of Life. Unless otherwise provided in the Articles, a corporation shall have perpetual life. On the other hand, in a partnership, the death or withdrawal of a partner automatically terminates the existence of that partnership unless the partnership contract provides otherwise. Notwithstanding the foregoing, state law authorizes any partner at any time to dissolve the partnership even if in violation of the partnership agreement. The LLC expires when the fixed duration of the LLC as indicated in the articles is reached, when all members consent to terminate the business or when one member ceases to be a member. All of the occurrences ending the LLC is subject to the members consent to terminate the business.
- Centralized Management. The administration of a corporation is generally handled by the Board of Directors and officers of the firm. These may or may not be the shareholders. In the partnership, all partners will be involved in all management decisions of the partnership unless contractually altered. The LLC is run by the managers whose power shall be allocated in proportion to their capital contribution unless otherwise stated in the articles.
- Miscellaneous. The overall operation of a partnership is generally easier than a corporation. This is because there are less statutory formalities to be met such as annual meetings. annual reports and corporate resolutions. On the other hand, it is easier to raise capital in a corporation through the issuance of debt securities, issuance of additional stock, pledge of stock and the shareholders may be protected against creditors by the corporate veil. The LLC must also follow statutory formalities, but provides benefits similar to both the corporation and the partnership.
A foreign national exporter not entering into a joint venture may set up a wholly owned subsidiary (corporation) or branch by registering itself as a foreign entity with the proper authorities.