What it is the appropriate legal entity?
Benefits and disadvantages
How to form one
A general description of what the federal government constitutes as a corporation, partnership and limited liability partnership, follows respectively. The process of forming a commercial enterprise however, is subject to specific regulations according to the state in which a business is to be registered. This information may be found at the Secretary of State websites of individual states. For example, the California Secretary of State business portal may be found at: http://www.ss.ca.gov/business/business.htm
Corporation: C or S
A standard corporation is formed by incorporators, who file Articles of Incorporation and then pays necessary fees to the Secretary of State. A corporation is considered to be a legal entity or person separate from its individual shareholders, and thus files its own corporate tax forms and pays its own income taxes as any other individual might do. The shareholders, as partial owners of the corporation, then receive taxable dividends of the corporation’s profit. As a legal person, corporations benefit from some of the same rights as living persons, which include right to counsel, due process and equal protection, as well as freedom of speech. Corporations benefit from the fact that as an individual entity, shareholders are not liable for the corporation’s loss or profit beyond their respective invested amount. Additionally, as a separate legal entity, corporations may exist indefinitely, irrespective of change in shareholders, officers, or board of directors. Corporations are, however, subject to double-taxation. Both the income of corporation is taxed, as well as the dividends received by the individual shareholders. Losses however, may not be reported by individual shareholders.
S Corporations operate in much the same manner as standard C corporations, however in this case profit and loss is passed through the corporation, to the shareholders, who report financial profit and loss on their own income tax forms. In order for a regular corporation to be eligible for S status, there must be no more than 75 shareholders, all of whom must be either US Citizens or permanent resident aliens. There must also be only one class of stock issued, and a maximum of 25% of the corporation’s income can be from passive investment such as real estate.
Partnership:
A partnership is an unincorporated nongovernmental organization through which members carry out a trade, service, or other money making business, dividing all subsequent profits. Every member commits a capital investment to the partnership, in turn sharing in the profit and loss of the jointly owned business. Unlike a corporation, a partnership is not double taxed. Thus, a partnership does not pay income tax as an entity separate from the partners to whom it belongs. The partnership is, however, responsible for filing forms for annual return of income, social security and medicare tax, income tax withholding, as well as federal unemployment and depositing employment taxes. All profits and losses of the enterprise are passed through the partnership and onto the partners as their own income. Each partner must include his share of the partnership’s income or loss on his individual tax return. Thus, the individual partners are liable for the success or failure of a partnership. Additionally, a partnership has a specified termination date, and may also dissolve with the withdrawal of a partner.
LLC:
A relatively new business entity, the limited liability company (LLC) functions as a general partnership and corporation combined. Like a corporation, an LLC is considered separate from its members, who are generally not personally liable for its debts. Profits and losses are, however, passed through the LLC directly to its shareholding members. An LLC may be advantageous due to the flexibility afforded. It may be taxed as a partnership or a corporation. Partners may allocate shares with respect to contributions other than capital investment. Additionally, unlike S corporations, LLCs may be owned by foreign persons and corporations, they may consist of more then 75 shareholders, and may issue various classes of stock.
Forming a Branch or Subsidiary:
Foreign companies wishing to do business in the US may elect to form a branch or a subsidiary. Both a branch and a subsidiary may be filed as a c corporation, partnership, or limited liability partnership. A subsidiary is a legal entity, separate from the foreign parent company, which owns at least 50% of it. A branch indicates merely an extension of the parent company, located in the US. Thus, in the case of a branch, the parent company may be subject to US tax laws concerning business conducted in the US. Generally, both branches and subsidiaries of a foreign corporation or partnership are treated as foreign persons. However this does not exempt either the branch or the subsidiary from applicable US tax laws.