For a non-US resident forming a new company, it is critical to understand the differences between the types of US business entities. Business entities are always formed under state law instead of federal law. Because each state makes its own laws, the specific rules and requirements are different from state to state. A business entity is automatically entitled to do business in the state where it is formed, but in order to do business in another state, they must register to do business there. The definition of “doing business in a state,” like so many things, is different from one state to another, but there are common themes to be aware of.
Each state has its own register of names. When creating a new company, the proposed name of the company is only checked in that state. Therefore, a company name is only protected in the state where it is incorporated and in any state in which it is registered to do business.
There are two main types of US business entities: the “business corporation” and the “limited liability company (LLC).”
Limited Liability Company (LLC)
|Shareholders completely insulated from liability if the corporation stays in compliance||Members are insulated if they are not managing the company as well, and follow proper procedure to separate personal and business matters|
|Resident- and non-resident-owned corporations pay the same tax rate, although foreign-controlled corporations have to file extra information on their tax returns||LLCs are fiscally-transparent by default, which can be a problem for non-resident-owned companies. An LLC can choose to be taxed as a corporation, but if they are planning to do this could just form a corporation instead.If the company will not be used to do business in the US, then an LLC is the better entity type.|
|Tax treaties were usually designed with corporations in mind, so many foreign-owned US companies are corporations.||The treatment of distributions from LLCs to foreign owners may be hazy, so be careful of doing business in the US using an LLC|
|Shareholders are the owners. The shareholders elect the directors, who govern the corporation and set policies and goals, and review the activities and progress of the company. Directors appoint the officers, who run the corporation on a day to day basis. Only officers can bind the company and sign contracts.||Members own the LLC, and control everything. The Members create an Operating Agreement, which can be as long or short as the Members want, and which sets out all the rules of the company. The Members can appoint Managers to run the company on a day to day basis. If there are many Members, appointing Managers is a wise thing in order to control the structure (and spending) of the LLC.|