A foreign business seeking to enter the United States market faces many business and legal hurdles notwithstanding that it may have a better mouse trap or service to sell. In what form should it enter the U.S. Market? Should it establish a direct branch operation? Should it form a separate legal subsidiary? If so, should that subsidiary be a corporation or a limited liability company? Should it enter into a joint venture with an existing U.S. partner or a foreign partner? There are many options. How will those choices affect the foreign company’s business risk, legal risk, tax cost and repatriation of profits? This blog entry seeks to provide a general discussion of some of the choice of U.S. entity questions and the related business and tax issues.
Foreign businesses entering the U.S. marketplace have four principal forms of conducting business: (1) a sole proprietorship (direct entry into the U.S. market by an individual); (2) a partnership (two or more individuals or entities operating together) either a general partnership or a limited partnership; (3) a corporation (a separate legal entity with limited liability); and (4) a limited liability company (taxed either as a partnership or a corporation).
All of those options implicate a number of U.S. legal concepts, typical among them being: (i) general corporate business and transaction laws; (ii) U.S., state and local tax laws; and (iii) jurisdiction, general liability and insolvency laws. For example, a sole proprietorship or a general partnership may cause the individual proprietor or general partners to be “present” in the U.S. for tax, liability and jurisdiction purposes, thereby subjecting their non-U.S. assets to potential taxation and liability in the U.S. The use of a U.S. corporation or limited liability company can operate to insulate the foreign owner from certain jurisdictional and liability claims in the U.S. For U.S. tax purposes, the U.S. corporation, itself, would be the U.S. taxpayer and not its foreign owner or parent. In the case of a limited liability company taxed as a corporation (and not as a partnership, either of which is an option under U.S. tax law), the limited liability company would be the U.S. taxpayer; if, however, the limited liability company elects to be taxed as a partnership under U.S. tax law, its members would be treated as being “present” in the U.S. for tax purposes.
The foreign business entering the U.S. marketplace should consider those factors, among many others, in establishing its U.S. business structure. Once in the U.S., the foreign business will seek to repatriate its earnings to the home country. The ability to do so at minimum tax cost will be governed not only by the laws of the U.S. and home country, but by the existence of any treaty, compact or protocol governing distributions to the home country. Look to the next blog entry for a discussion on the impact of treaties on distributions to the home country.