For businesses starting up in the United States, there is no restriction on operating as a branch of a foreign company; however, since the enactment of the Branch Profits Tax (see the Taxation section below), many foreign enterprises conduct their activities in the United States through a U.S. corporation. A foreign company may need to register with the particular state in which it intends to do business and may need to obtain a business registration or tax identification number to commence operations.
Similar to the branch of a foreign company, an individual can operate a business directly in the United States through a sole proprietorship. An individual that wishes to operate under a business name may need to register with the particular state in which it intends to do business and may need to obtain a business registration or tax identification number to commence operations.
A common form of doing business is through a corporation. A corporation is a separate legal body that is organized under the laws of a state within the United States. The legal provisions afforded a corporation vary depending on the laws of the state in which it is incorporated. Generally, a corporation organized in the United States provides limited liability to its shareholders, acts independently in all legal matters, and operates its business through the direction of a board appointed by its shareholders. Shares are generally transferable, subject to the terms of the corporation’s articles of incorporation. Distributions are made at the discretion of the corporation’s board and are not subject to legal limitations, although they may have tax consequences to either the corporation or its shareholders. A corporation terminates its existence when it is liquidated.
The partnership is also a popular form of doing business in the United States. It is similar to a joint venture where two or more parties agree to share in a common business enterprise. The terms of the partnership are generally very flexible and are defined by the partnership agreement. A partnership can operate as a separate body for business purposes, but to do so it may need to obtain a business registration or tax identification number. The basic form of a partnership is the general partnership (“GP”), where all parties share in the legal liability, profits, losses, etc. of the partnership. All states allow a partnership to be a limited partnership (“LP”), where one partner is a general partner with unlimited liability and oversight of the business and the other partner(s) has limited liability in exchange for reduced ability to manage the business. Some states also allow a limited liability partnership (“LLP”), where all partners have limited liability.
A limited liability company (“LLC”) is a form of entity that allows for flexibility in its tax treatment. Accordingly, the LLC is a very common form of business for foreigners starting business in the United States. The legal provisions of an LLC vary depending on the state in which it is formed. Generally, all members in an LLC have limited liability to the same extent as a corporation. However, absent an election to the contrary, an LLC with more than one member is commonly treated as a partnership for U.S. federal income tax purposes. An LLC is not required to have more than one member. As LLCs do not pay taxes in the United States (the members of the LLC are attributed their share of the income and pay tax on it), some foreign jurisdictions struggle to classify them as corporations, partnerships or other entities. Some also challenge whether they are US residents for treaty purposes (because they do not pay US taxes). Before using a LLC in a cross-border context, investors should confirm how the LLC will be treated in the foreign jurisdiction.
Trusts can be formed for a variety of reasons in the United States, and their tax consequences can vary as well. Typically trusts are used to hold investments in business operations, rather than operate businesses themselves.