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Date: December 2006
Prepared by:
Stefan-M. Tiessen, Partner
Smith, Gambrell & Russell, LLP
Suite 3100, Promenade II,
1230 Peachtree Street, N.E.
Atlanta, GA 30309-3592
E-Mail: stiessen@sgrlaw.com
Introduction
This summary contains an overview of many of the forms of business organizations available in the United States. Please not that, due to the federal system in the United States, the forms of business organizations available and the rules regulation these forms may vary from state to state. In addition, both federal and state tax treatment should be taken into account in selecting the form of business regulation. In deciding which form to utilize , one should consult with an attorney and weigh the advantages and disadvantages of each particular form. Typically, the most important factors in making such a decision are liability and tax consequences.
Legal Forms of Business Organizations
In General
A number of business forms are available to carry on business in the United States. The following briefly outlines the basic choices among the forms of business organizations available for use in the United States in general. Although each state in the U.S. has adopted its own laws and regulations governing the formation and operation of the various forms of business entities, the fundamental laws do not vary significantly from state to state. The effect of choosing one form over another, however, may be significant. Tax and liability considerations are usually the most important factors in determining the most appropriate form of business entity, as tax and liability consequences vary according to the type of entity. No matter what form is chosen, establishing a business in the U.S. is comparatively quick and inexpensive. The decision whether to utilize a particular form should be made in consultation with an attorney. The following business forms are the most commonly used:
Sole Proprietorship
The sole proprietorship is the most basic business form. In a sole proprietorship, the business and its owner are the same legal person, i.e. one person owns all the assets of the business and is solely liable for all the debts of the business. In other words, there is no limited liability insulating the owner from his business. The regulation of sole proprietorships is minimal. In certain circumstances additional licenses may be required, for example, a restaurant selling alcohol to its consumers will be required to obtain a liquor license.

Advantages: Simplicity is the greatest advantage of a sole proprietorship. They require no legal action and are consequently easy to start. There are generally no formal requirements for operating in this form, other than registering the true name of the business owner if the business is conducted under a trade name. Management of the business is left solely to the owner. Especially very small businesses with no initial capital benefit from the initial savings.

Disadvantages: The owner is personally liable for the debts and obligations of the business to the full extent of his personal property and assets. The capital of the business is limited to the cash and credit of the owner.

Tax Considerations: The proprietorship itself is not a taxable entity. The sole proprietor reports items of income and expense of the business on his personal tax return. The sole proprietor’s business and personal income tax returns can be combined and business losses are easily deducted from personal income.
Partnerships
In General
A partnership, as the name implies, is a business entity in which two or more co-owners join efforts. In many aspects, the general partnership is a counterpart to the sole proprietorship.
General Partnership
In General: A general partnership is a contractual association of two or more persons or entities to operate a common enterprise and to share in the management, as well as in the profits and losses of the enterprise. Basically, a general partnership is a proprietorship with more than one owner. A written agreement among partners is not mandatory but is often desirable. The partnership agreement generally includes provisions governing the sharing of profits and losses, duties of the partners, and prescribes ways for joining and leaving the partnership.

Advantages: As with a proprietorship, flexibility and simplicity of formation and operation are the significant advantages of a general partnership. In addition, the combined capital and credit of each partner is available for the partnership. Tax consequences are "passed through" to the partners. A partnership may specially allocate items of income, loss, deduction or credit to different partners, subject to certain restrictions. One partner may be authorized to act on behalf of the partnership.

Disadvantages: Each partner is jointly and severally liable for all debts and obligations of the partnership. Thus, the partners have unlimited liability and should the partnership’s funds not suffice to cover the liabilities of the partnership, creditors can reach the personal assets of the partners. Further, each partner may be bound by the acts of each of his partners. The ability of a partner to sell or transfer his interest in the partnership is often restricted.

Tax Considerations: A partnership is not treated as a separate legal entity for U.S. income tax purposes and is, therefore, not itself subject to tax, although it must file an information return reflecting the receipts and expenditures of the business. Instead, the partners are taxed directly on their proportionate share of the income earned by the partnership (and are entitled to use their proportionate share of partnership losses to offset other income) whether or not that income is actually distributed to the partners. Special allocations of items of income and expense to partners may not be given effect for tax purposes unless those allocations comply with complex regulations which generally require that tax consequences relate to actual economic consequences. Partnerships are generally required to withhold U.S. tax from distributions to foreign partners.

General partnerships in Georgia: Georgia partnerships are governed by the Uniform Partnership Act of 1914. According to the Act, all partners have an equal right to participate in the business. In other words, each partner has an equal vote in the management of business. Generally, a simple majority is all that is required, but certain decisions, such as changes to the partnership agreement, admission of new partners, the sale of the business, etc., require unanimity. All partners are considered to be agents of the partnership and consequently each partner is fully liable for his fellow partner’s actions. These default provisions of the Act may be changed by entering into a partnership agreement.
Limited Partnership
General: A limited partnership has two different kinds of partners, general and limited partners. The general partners exercise and have unlimited joint and several liability for the entity's debts and obligations. The limited partners, on the other hand, have no personal liability for the debts and obligations of the business (except to the extent of funds contributed by them to the business) and have virtually no powers of management. Under the laws of many states, a limited partner looses limited liability if he participates in the management of the partnership. In contrast to this majority rule, in Georgia, a limited partner does not become liable for the obligations of the limited partnership by participating in the management or control of the business.

The creation and operation of limited partnerships are governed by the various state limited partnership acts. Creation of a limited partnership requires the filing of a certificate with the appropriate state or county official, naming the general partners and disclosing certain other information, and the payment of a nominal fee. Unless otherwise agreed to in the partnership agreement, a loss of general partners dissolves the partnership. Loss of limited partners has no effect on the partnership.

Georgia limited partnerships are governed by the Revised Uniform Limited Partnership Act. It is required, that limited partnerships be registered with the Secretary of State.

Advantages: A limited partnership enjoys most of the advantages of a general partnership, with the additional benefit that individuals who invest as limited partners are insulated from personal liability for the obligations of the partnership. In some states, such as Georgia, limited partners are permitted to participate in the management of the partnership without loosing limited liability.

Disadvantages: A limited partnership is subject to formal statutory requirements not placed on general partnerships. In addition, the general partners retain unlimited liability for the debts and obligations of the partnership. The ability of a general partner to transfer his interest is usually restricted, while a limited partner's interest is usually made transferable by provisions of the limited partnership agreement. Furthermore, limited partnership interests are generally deemed to be "securities," rendering the offer and sale of such interests subject to federal and state securities laws.

Tax Considerations: Like a general partnership, a limited partnership is not treated as a separate taxable entity. For income tax purposes, the general partners of a limited partnership are treated identically to the partners of a general partnership. However, unlike general partners, the limited partners are subject to certain limitations on their ability to utilize partnership losses to offset other income.
Corporations
General: The corporation is the most prevalent form of organization for businesses of any size in the U.S. A corporation is a business, owned by shareholders and registered with the Secretary of State. The formation and operation of a corporation are governed by state statute. The process of incorporation is a more complicated process than starting a partnership. Corporate existence commences with the filing of the Articles of Incorporation, which contain the name of the corporation, a description of the authorized capital stock and certain other identifying information. The business and affairs of a corporation are controlled by its board of directors, who are elected by the holders of the corporation's stock. The board of directors selects the officers of the corporation, who oversee the day-to-day operations of the business. Shares of common stock represent the basic equity in the corporation, although there may be classes of stock with widely varying preferences, limitations and relative rights.

Advantages: The primary advantage of operating in corporate form is the insulation of the corporation's shareholders from personal liability for the debts and obligations of the corporation. The corporation has its own legal identity, separate from its shareholders and it may acquire, own, and sell property, maintain legal actions, and do everything a person can do. Generally, interests of shareholders can be transferred with relative ease. Corporations typically have perpetual duration and their existence is unaffected by the death or withdrawal of a shareholder. Use of the corporate form may facilitate the raising of outside capital, subject to compliance with securities laws. Furthermore, the use of the corporate form may insulate non-U.S. business persons from taxation in their home country of income earned in the U.S. (although that income would probably be taxed when distributed to the businessperson in the form of a dividend) and may facilitate meeting requirements for U.S. immigrant or nonimmigrant visas.

Disadvantages: Utilizing the corporate form involves a considerable amount of formality and paperwork, even in the smallest corporations. Minutes should be kept and annual reports and separate franchise tax returns filed. A registered office and registered agent must be maintained. The corporation may be required to qualify to transact business if it desires to conduct business in a state other than its state of incorporation. Shares of stock are "securities" and as such are subject to federal and state regulation of their offer and sale. Public corporations must comply with burdensome periodic reporting requirements and bear the corresponding increase in record keeping, legal and accounting expenses. Additionally, public corporations may be subject to attempts by third parties to acquire control of the corporation against the will of management.

Tax Considerations: A corporation is a separate taxpaying entity with its own tax rates. Taxes are to be paid on federal and state levels. Federal corporate income tax rates presently range from 15% to 35%. There is an element of double taxation in the corporate form if the corporation pays dividends on its stock. Income to the corporation is taxed at the corporate level and, if dividends are paid to shareholders, such dividends are taxed again as income to the individual shareholders. Dividends paid to foreign shareholders are generally subject to U.S. tax withholding, although the rate of withholding may be reduced from the usual 30 percent level pursuant to the terms of an applicable tax treaty. In many small corporations, double taxation can be avoided by electing "S corporation" (see below) status, which essentially eliminates the entity-level tax and taxes corporate income at individual rates at the shareholder level, similar to the taxation of a partnership.

“S corporations”: “S corporations” combine traits of general partnerships and corporations. The advantage of “S corporations” is that profits are only taxed once when dividends are distributed to the shareholders. Because of the requirement that all shareholders be U.S. citizens or permanent residents to qualify for “S corporation” status, “S corporations” are not viable entities for foreign investors.
Limited Liability Company
General: Another structure for the conduct of business operations in the U.S. is the limited liability company. The limited liability company (LLC) is a form of unincorporated business organization that essentially is a hybrid between a corporation and a partnership. LLCs are very flexible and can be set up to allow entrepreneurs to emulate the governance characteristics of a corporation.

The relationships between the members of a LLC are governed by the operating agreement. The creation and operation of LLCs are governed by each state’s statute which specifically provides for LLCs. While Georgia state law provides some default provisions, custom provisions in the operating agreement can replace them. The LLC is confined to businesses whose interests are not publicly traded. The uses of a LLC range from small start-up businesses to public corporations that otherwise would form a subsidiary to enter into a joint venture to carry out a particularly risky project. Further, the members of the LLC can be other businesses. If not otherwise agreed to, loss of a member dissolves the LLC.

Advantages: The benefits of an LLC stem from its hybrid status. All of its members have limited liability, as in a corporation. Thus, its members enjoy limited liability and the debtors of the LLC cannot reach the member’s personal assets to satisfy the company’s debts. The LLC is treated as a pass-through entity for tax purposes, like a partnership. Unlike a limited partnership, members can and frequently do participate in the management. Also, LLCs are not bound by requirements for management by a board of directors. Another benefit of the LLC structure is that the numerous restrictions on “S-corporations” are not applicable to LLCs. As a result, corporations and non-resident aliens may be members of LLCs without jeopardizing the availability of favorable tax treatment.

Disadvantages: Although numerous states have adopted legislation creating LLCs, not all 50 states have done so. To date, 47 states and the District of Columbia have enacted LLC legislation. The LLC is still a young business concept; the first LLC statute was enacted 1977 in the State of Wyoming, Georgia followed suit in 1992. Therefore, the law continues to develop. As LLCs become more prevalent, the legal environment will become more certain.

Tax Considerations: For U.S. tax purposes, members of the LLC are treated like partners; profits and losses are carried on their individual income tax returns. Therefore, members of an LLC avoid the double taxation of income necessary in corporations. However, certain tax jurisdictions may elect to treat LLCs as a corporate entity and deny pass-through tax treatment to the LLC members.
Limited Liability Partnerships
The LLP is a popular business structure for professional firms, but is largely irrelevant for foreign investors in the United States.

The LLP is defined by general partnership law and LLP statutes. Unlike a limited partnership, all members of the LLP enjoy limited liability. Typically, LLP members retain liability for contract-debts but enjoy limited liability with respect to tort-debts of the business. The formalities and prerequisites for forming a limited liability partnership are far greater than the formalities in forming a limited or general partnership. Like a general partnership, a LLP is not treated as a separate taxable entity.
Branch of a Foreign Corporation
Many foreign corporations choose to do business in the United States simply through a branch office.

Advantages: By operating as a branch office of a non-U.S. corporation, many of the organizational burdens associated with the other forms are avoided.

Disadvantages: Operation as a branch subjects the foreign parent company to liability for the debts of its branch.

Tax Considerations: A foreign corporation with a U.S. branch generally is taxed in the same manner as a U.S. corporation on income derived from the branch's U.S. operations. However, under the normal rules of taxation applicable to U.S. corporations, a U.S. branch of a foreign corporation would have a tax advantage over a foreign owned U.S. corporation conducting the same business operations. That advantage results because the earnings of the U.S. corporation would be subject to taxation in the U.S. at the standard corporate rate and would be further subject to taxation again when distributed to the foreign shareholder as a dividend. Although the U.S. earnings of the U.S. branch of a foreign corporation would also be subject to U.S. taxation at the applicable corporate rate, internal distributions of the after tax profits would not constitute dividends subject to the second layer of tax. To eliminate that disadvantage for foreign-owned U.S. corporations, the U.S. has imposed a branch profits tax under which amounts deemed to be the equivalent of dividend distributions by the branch to its home office are subject to U.S. tax at the 30 percent rate generally applicable to dividends. Like the withholding tax imposed on dividends, the branch profits tax is subject to reduction or elimination pursuant to the terms of applicable tax treaties.
Site Source
Firm Brochure, Legal Considerations for the Foreign Investor in the United States, Smith, Gambrell & Russell, LLP, Atlanta, Georgia, Frankfurt, Germany & Washington, D.C.