Business Law

Organizational and legal forms of business in the USA

Today in the United States there are the following basic organizational and legal forms of companies:
individual private firms,
partnership,
corporations,
Limited Liability Company (LLC).
Each form of property has its own internal structure and legal status, sizes and spheres of activity, characteristic of it. All forms of ownership have their advantages and disadvantages, and the choice of each of them assumes both a degree of risk to the owners and their own benefits.

The US corporate law has a two-tier structure. Appropriate laws are adopted at the federal and state levels. If the state has not adopted its law, then federal legislation is in force.

Uniform enterprises

As in most other countries of the world, an individual can conduct his business in the form of a sole proprietorship (Sole proprietorship). The responsibility of the entrepreneur is unlimited. A legal action may be taken against all his property. This form is chosen for small enterprises. Its drawback lies in the limited financial capacity. Uniform enterprises operate in the field of retail and small wholesale trade, provide services at the local level. As sole proprietors, stock brokers often operate. Execution of any formalities for the registration of a sole company is not required. The only official document is the tax return. Financial entries are optional. Maintaining them is necessary, first of all, for tax purposes: business expenses are qualified by legislation differently than personal expenses. To engage in certain activities, licenses are required from the administrative authorities of the State.

General partnership

The General Partnership or simply a partnership functions on the basis of the partnership law and the partnership agreement, if any. Legislative norms governing the activities of partnerships are of a dispositive nature. They are applied by courts in the event that entrepreneurs, having formed a partnership, have not concluded a written contract, or if it is not complete enough. Partners have equal rights to management and property partnerships, unless otherwise specified in the agreement between them. When establishing a partnership, a new legal entity is not formally formed. At the same time, partnerships have the features of an independent business enterprise. They have the right to be entered in the register of business enterprises and enter into relations with third parties as a separate company, etc. As in sole enterprises, the partnership entrepreneurs bear unlimited liability for the obligations of the partnership. Responsibility is of a joint nature. This means that third parties can file a property claim against one of the partners, who will redirect it after deducting its share to another partner. When one of the partners leaves or when a new partner joins, the partnership usually ceases to exist, i.e. it must be re-registered. Entrepreneurial activity may not be interrupted.

A common partnership is governed by the Uniform Partnership Act, adopted in 1914 and operating in 44 states (out of 50). Partnership in the US does not pay taxes, t. taxes are paid from the incomes of its members of entrepreneurs. Partnerships, however, draw up tax returns. Then each partner is sent a special form K1, which establishes its share in the profits and losses of the partnership. It is submitted to the tax authorities in conjunction with the declaration of individual income. The tax is levied not only on the funds that have been put at the disposal of partners, but also on the reinvested part of the partners’ income.

Limited Partnership

The main feature of a limited partnership is the presence of two categories of partners — partners with full and limited liability. Partners with limited liability are responsible for the obligations of the partnership only within the limits of their contribution. Usually partners conduct partnerships with full responsibility, and partners with limited liability play the passive role of investors. The number of participants in partnerships is usually limited. Partnerships are a convenient form of combining highly qualified professionals to engage in professional activities in the field of legal and financial services, medicine, etc. Usually these are small and medium-sized enterprises. However, there are cases when very large enterprises operated as partnerships. In particular, many leading audit firms are registered as partnerships, including those that are among the «big six» auditing companies.

Both physical and legal entities can act as partners. In the United States, partnerships are governed by the Uniform Limited Partnership Act, adopted in 1916 and operating in 47 states, as well as the Revised Uniform Limited Partnership Act (1978). A partnership requires at least one full and one limited partner. The establishment of partnerships requires some formal formalities: the partners must send a signed certificate to the state secretariat that contains information about the partnership’s activities, its members, the capital structure, etc. From a tax point of view, the position of limited partnerships is analogous to common partnerships.

In general, partnerships as an organizational form of business play a much larger role in the US than our Russian analogue — partnerships. Very widely partnerships are used in international business and offshore schemes. In connection with the tax reform of 1986, the benefits that the partnership in the United States had with respect to corporations decreased significantly. This is due to the fact that corporations that have the status of small / small corporation /, were exempt from taxes on corporations.

Thus, the tax situation of partnerships and small corporations has almost equalized. The only remaining tax advantage of partnerships is that the number of their members in the US is unlimited. A small corporation can not have more than 35 members. In addition, its shareholder can not be a foreigner, and a partner in the partnership can, and this is very characteristic. The partnership has also been pushed aside by such a relatively new form of business as a limited liability company, which will be discussed below. A more detailed comparative analysis …

Corporations

The most widespread and universal form of business is the corporation (Corporation). The distinctive features of the corporation are as follows:

a / The corporation is an independent subject of civil law, leading independent of its members existence;
b / The existence of a corporation can not be terminated except by the decision of the court or the members of the corporation itself, adopted on the basis of the statute and laws;
c / For the obligations of the corporation the exclusive responsibility is borne by the corporation within the property belonging to it;
d / The corporation is subject to double taxation, as its income is taxed twice — both the company’s profits and the shareholders’ income that they receive after its distribution

Capital corporations are formed by subscribing to their shares. Corporations can issue shares of various types. The main ones are «ordinary» and preferred / preferential / shares. Dividend on ordinary shares depends on the profitability of the enterprise, and on preference shares it is fixed at a fixed level. Preference shares do not give voting rights at general meetings of shareholders. Corporations, subject to compliance with the procedure required by law, have the right to sell their shares on the open market.

The order of creation and the basic principles of the functioning of corporations in the US is determined at the level of state legislation. In most cases, the principles of state legislation are based on the principles adopted in 1946 at the federal level of the Model Business Corporation Act. It was adopted entirely in 20 states and with minor changes — in 10 states. Subsequently, it was amended, resulting in the amended Provisional Model of Business Corporations / Revised Model Business Corporation Act /. Some of the states do not adhere to the Model Law at all. Such states include, for example, New York, Delaware, Massachusetts, California.

Legislation in most states provides for the existence of commercial / for-profit / and non-profit / non-profit / corporations. Non-profit corporations have no right to issue shares and distribute income in favor of their members.

An American corporation may have the status of «closed» / closely held /. Closed are corporations whose shares belong to several or one person. Shares of such corporations can not be sold on the open market. The procedure for their sale is determined by the charter and usually requires the consent of the majority of shareholders. Shareholders take a direct part in the management of the corporation.

In accordance with the laws of most states, the corporation may be local / domestic / and «foreign» / foreign. Interestingly, foreign companies are considered to be corporations registered in another state. Actually foreign corporations, which conduct business in the USA, have a special status — «alien corporation». Local are all corporations registered under the state corporations law of that state.

The federal tax system provides tax incentives for «small corporations» / Small Corporation /. Tax benefits to small corporations are to free their income from income tax. The profit of a small corporation is distributed among shareholders and is credited to their taxable income. Like partnerships, small corporations in the US are not exposed to the negative effect of double taxation.

The main stages of the creation of an American corporation (under the federal law) are:

1/. Preparation and signing of the founding agreement. In the founding agreement, the parties determine the basic principles of the functioning of the company, the composition of shareholders, the obligations of the parties and liability for obligations arising in connection with the status of the company «being registered»;
2 /. Submission of the application for the name of the corporation to the Secretary of State;
3 /. Development and submission of the statute to the secretary of the corporation / Articles of Association /;
4/. Verification of documents by the Secretary of State. The Secretary of State issues the Certificate of Incorporation / Certificate of Incorporation /.

Closed Corporation (Close Corporation)

This type of corporation is often suitable for individuals who want to create a company on their own or in a small group of people, most of whom will participate in management and own shares. Although laws relating to closed corporations vary from state to state, shareholders of closed corporations may act as a partnership, avoiding the multitude of formalities required from open corporations.

Open corporations (General Corporations)

This type of corporation is designed for business people creating a corporation in which there will be more than thirty shareholders, or which will offer shares to open subscription on a significant scale.

S corporation (S Corporation)

After the adoption of the Tax Reform Act of 1986, S corporations have become a very attractive type of enterprise in terms of taxation. In accordance with various requirements, in order to acquire the status of an S-corporation, the election must take place in the form 2553 IRS (financial inspection). In general, the S-corporation takes income into account as if the owners were «Partners». Losses of the corporation are also transferred by the corporation to its shareholders. The status of a small corporation is granted subject to the following conditions:

— the corporation must be American (domestic);
— it can not have more than 35 shareholders;
— shareholders should be, as a rule, private individuals;
— shareholders of small corporations may be exclusively residents of the United States;
— only one type of shares is allowed.

Limited Liability Company (LLC)

Intermediate or hybrid forms of business organization are limited liability companies — Limited Liability Company (LLC), which have recently received legislative justification in several US states.