[ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 494
priority for dividends or preference in a liquidation – and may also restrict certain other rights, such as voting. Many private corporations also, or alternatively, elect to place transfer and ownership restrictions on their shares in a separate stockholders’ agreement. Corporations may also raise capital by taking on debt. Many public corporations issue bonds to investors in addition to other traditional means of borrowing, while private corporations often issue preferred stock, sometimes in combination with traditional lending arrangements. Personal liability: One very attractive aspect of a corporation is the limited liability of the stockholders. Generally, stockholders are exposed to liability only up to the amount of their investment in the corporation. Directors can potentially be personally liable to the stockholders for violations of certain fiduciary duties, but a corporation may include in its certificate of incorporation a provision that eliminates or limits the personal liability of directors for monetary damages for breaches of the duty of care. Moreover, many corporations carry directors and officers (D&O) liability insurance covering certain actions taken by directors and officers and will also indemnify their directors and officers for certain non- fraudulent behavior. If a private corporation is merely an alter-ego of a single owner, courts may “pierce the corporate veil” and hold that individual liable for the corporation’s debts and obligations. Tax treatment : U.S. domestic corporations generally are subject to U.S. federal income tax on their worldwide income regardless of source, but generally may claim a foreign tax credit or deduction for taxes imposed by non-U.S. jurisdictions. The U.S. also has detailed controlled foreign corporation rules under which income earned through foreign subsidiaries may be taxed. In addition,
legislation enacted in 2017 has made a number of changes to the U.S. federal income tax rules applicable to U.S. domestic corporations to move the U.S. towards a modified territorial system of taxation. To accomplish this, U.S. domestic corporations are entitled to claim a deduction equal to the foreign source portion of any dividend received from certain 10% owned foreign corporations. For this purpose, a U.S. corporation is considered domestic if it is formed under U.S. law or the law of any U.S. state. Thus, a corporation organized under state law will be treated as domestic, and subject to tax on its worldwide income, regardless of whether its place of management and control is outside the U.S. One potential drawback to a corporation is that it is subject to so- called “double taxation.” A U.S. corporation will pay state and federal corporate income tax on its income at the corporate level. Moreover, individual stockholders will also pay personal state and federal income tax on any income from dividends distributed. For tax years beginning after December 31, 2017, however, the U.S. federal corporate income tax rate is reduced from a top rate of 35% to 21%, significantly reducing the impact of corporate double taxation. On August 16, 2022, the U.S. adopted the Inflation Reduction Act of 2022, which, in addition to other tax and spending measures, imposes a new 15% corporate minimum tax on the adjusted financial statement income of certain large corporations. This new tax is effective for tax years beginning after December 31, 2022. A corporation (other than an S-corporation, regulated investment company or real estate investment trust) will be subject to this minimum tax for a particular tax year if the average annual adjusted financial statement income for the three-tax-year period ending with such tax year exceeds $1 billion. A special rule will apply to members of a foreign-
ILN Corporate Group – Establishing a Business Entity Series
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