A lot of our clients are investors and entrepreneurs who are looking for opportunities to set up and grow their businesses in the United States. Some may choose to purchase an existing business, because it offers an already established platform, with its own customer base and reputation in its respective field. However, other clients might prefer to establish a new business of their own. This strategy allows a fresh start. Also, it does not involve the hustle and bustle of searching for a ready-to-be-purchased business that fits all the requirements, and negotiating and executing a business purchase/sale plan. If the foreign investor wants to purchase an existing US business, it will face the question of whether to purchase the business in the name of the investors, to acquire a business with the foreign business entity, or to establish a US subsidiary or affiliated business to conduct the purchase.
Choosing the right type of business enterprise is a challenge that almost all savvy business investors and entrepreneurs have to face. The choice of entity for a particular business depends on many factors. Whichever form of business is chosen may have a great impact on the success of the business. The structure chosen will have an effect on how easy it is to obtain financing, how taxes are paid, how accounting records are kept, whether personal assets are at risk in the venture, the amount of control the "owner" has over the business, and many other aspects of the business. Keep in mind that the initial choice of business organization need not be the final choice. Here are some of the general considerations in making this decision.
Tax reduction is the primary goal of any business planning. Optimizing tax efficiency for the business entity, as well as for the owner, can be very challenging because tax regulations are complicated and forever changing. Taxation is one of the most debated topics during elections. Since the Bush tax cuts, it seems that an annual extension of the “temporary tax relief” has become the new norm. Because of these factors tax planning is difficult, since it is harder to predict what is going to happen next. For foreign investors who have never dealt with the IRS before, it sometimes can seem like a daunting task to try to wrap one’s head around US tax regulations and to try to make a smart move at every step.
Generally speaking, a “C corporation” is special, because it is the only business entity that involves double taxation. This means that the corporation is considered to be a separate legal entity from its owners. Initially, C corporations pay taxes on their annual earnings. Then, when those corporations pay out dividends to their shareholders, the dividends will be taxed as income. All other entities, such as sole proprietorships, S corporations, partnerships, limited partnerships, and limited liability companies (LLCs) allow “pass-through” taxation, which means that only owners or investors will be taxed on the revenues.
However, tax planning involves much more than just avoiding double taxation. For instance, C corporations allow favorable low end rates. The first $50,000 of income earned by a C corporation each year is subject to a 15% tax rate. This is far less than the individual income tax rate applied to most successful business people. Also, the sale of C corporation stocks qualifies as long term capital gain, which is subject at maximum to a 20% tax rate. The sale of interest in a partnership will be taxed at the ordinary personal income tax level. Therefore, C corporations might still make sense for investors who plan to sell their stocks in a few years.
A partnership or sole proprietorship does not provide insolation from personal liabilities the way a C corporation, S corporation, or an LLC might do. If you don’t want to be personally liable for the debts and liabilities that your business venture might incur, perhaps you should look at other options, such as a corporation, LLC, LP, or LLP. However, if you can be sufficiently protected by a professional insurance policy, then the simplicity of sole proprietorship or partnership may be the best option for you, as it can free your business from the costs involved in record keeping, separate tax filing and the reporting requirements of a corporation.
Sometimes the control and ownership rights of a business venture might influence the entity-choice decision, especially when a shareholder majority is worried that it will not be able to have absolute control of business decisions. If your choice of entity is a limited liability company or limited partnership, then an operating agreement needs to in place that specifies all control rights. Sometimes these agreements lead to negotiation and compromises being made among the shareholders. A too-demanding majority that refuses to compromise can create a sour relationship before the business even starts, which can be very undesirable.
Many people think that business planning is a process faced only by new business ventures. In fact, because of the ever-changing nature of business administration, ownership and control; objectives of the business owners; and, more importantly, tax rules and regulations; many mature businesses might need to reconsider their structure and try to maximize the benefits they bring their owners. What seemed like the best choice of structure when setting up the business may no longer make sense several years down the road. Sometimes, a complete conversion to a different structure might be the best option.
Furthermore, when there are multiple business owners involved, the business often has to serve different goals and objectives. It is important to consider the business goals as well as personal goals of all the owners and to structure a business plan that reflects and maximizes everyone’s interests.
Many of our clients are foreigners who intend to seek an appropriate visa, or maybe even green card, to conduct business and have a life and family here in the United States. The structure of the business venture might have an impact on their immigration applications with USCIS. For instance, a foreign family-owned company is seeking to expand its business in the US, and applies for an L-1 visa for an executive of the company to run the new office. The executive has a very important management role in the company and is also a minority shareholder. The company plans to have the foreign company set up in the name of this executive because he/she is trusted with complete control of this US entity. This is a completely legitimate business plan. However, it would not satisfy the L-1 visa requirement, because in order to apply for an L-1, one needs to prove that the new entity is a subsidiary of the company abroad, or that the American company and the foreign company have common control.
The intertwined considerations of immigration law and business planning can become quite complicated, especially when multiple investors and owners are involved, and they all have different goals in terms of immigration options. Our lawyers are in a great position to consult with these clients because of the unique insight they have gained from their experience in both sides of the law. Business planning is a very important step in a successful business venture, and it should not be taken lightly by owners and investors. Each business is unique and should be treated as such. An afternoon of consultation with a competent attorney might save you from that ugly tax bill two years down the road.
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