Introduction to Types of Companies in the US

Introduction to US Companies

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There are few restrictions on who can own and manage a US company. The US government has imposed trade sanctions on various countries, and residents and companies from those countries are prohibited from buying or owning US assets, including US companies. Outside of these sanctions, citizens, companies and government are allowed to set up and use US entities.

There are two main types of entities used for business purposes: the business corporation and the limited liability company (LLC). The corporation is a sui generis entity, legally separate and distinct from its shareholders, and a creature (and legal citizen) of the State of its incorporation. As a statutory person, it can only be terminated by an action of the State of its incorporation. This means that it pays its own taxes to the state and federal governments like any other American company, and is the liable person if there is litigation against the company in the US. Therefore, with a US subsidiary, the parent company does not file US income tax returns and is not directly liable in the US courts for actions of the subsidiary - AS LONG AS THE PARENT AND SUBSIDIARY FOLLOW PROPER FORMALITIES.

The other entity is the limited liability company, which is essentially derived from partnership law with corporate characteristics. As such, it is not truly separated from its owners (the "members") and can be terminated by any number of occurrences without action by its State of origin. The LLC is a much newer innovation, and many aspects are still being determined by the courts and the tax authorities.

Summary of Features - Business Corporation

• There are no residency or citizenship requirements to be a shareholder (owner) or director (except that North Koreans, Iranians and Cubans are not allowed to buy US assets, including US companies. Other international sanctions may apply as well.
• Liability of shareholders limited to amount of capital invested.
• The business corporation is the preferred entity to use for non-residents trading in the United States.
• A completely separate entity from its owners.
• Governed by by-laws, which are largely determined by the laws of the jurisdiction. Many formal procedures must be followed to conform to the corporate statutes.
• Administered by Directors (who are elected by the shareholders for specified terms), and managed by Officers (who are appointed by Directors). Directors are empowered to determine the value of non-cash contributions in exchange for stock in the corporation.
• A citizen of the jurisdiction in which it is formed, and must follow the corporation laws of that jurisdiction.
• Can own shares of other corporations and be a member of limited liability companies, in the same or other jurisdictions.
• Shareholders in a "C" corporation can be US or non-US resident individuals, corporations, LLCs, trusts (domestic or foreign) or other entities. Directors must be natural persons, and are (within limits) personally liable for the actions of the corporation.
• "C" corporations are must file an annual federal tax return and are liable for taxation on their worldwide income.
• A corporation with a non-resident cannot be an "S" corporation.
• "C" corporations are US-tax resident, and can apply for tax treaty benefits to avoid double-taxation using the extensive US tax treaty network.

Summary of Features - Limited Liability Companies (LLCs)

• There are no citizenship or residency requirements to own or manage a US LLC.
• LLCs are not recommended for non-residents who are doing business in the United States, but are an excellent vehicle for trading exclusively outside the US.
• Can be a member of other LLCs or shareholder in other corporations.
• Members can be US or non-US resident individuals, corporations, LLCs, trusts (domestic or foreign) or other entities.
• Managers can be US or non-US resident individuals or corporations, but the laws o fthe different jurisdictions may restrict other types of entities from being designated as managers.
• Enjoys flow-through taxation at the Federal level. Some States tax LLCs as corporations, but New York LLCs, Delaware LLCs, Nevada LLCs and Wyoming LLCs all use flat annual fees instead.