[ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 523
ending with such tax year exceeds $1 billion. A special rule will apply to members of a foreign- parented multinational group, under which the average annual adjusted financial statement income for a corporation has to equal or exceed $100 million, if the adjusted financial statement income of all members of the group (as adjusted) exceeds $1 billion. Some corporations, if they meet the qualifications, will opt for “S - corporation” filing status (a term referring to an election to be treated as an S-corporation under federal and state tax law, although certain states (e.g., New Jersey and New York) require a separate election to be taxed as an S-corporation at the state level). All profits (and losses) “pass through” an S -corporation and individual stockholders pay tax only at the personal income level, so long as the corporation maintains its S-corporation status. To maintain such status, there can be no more than 1 class of stock (with limited exceptions) and no more than 100 stockholders, and all stockholders must be U.S. citizens and natural persons, or certain qualified trusts. S-corporations are rarely useful in the international context. 1.4 The General Partnership A general partnership is any association of two or more individuals or business entities who carry on a business for profit. The general partnership can be a very flexible structure, easily tailored to the needs of the partners via a partnership agreement. Moreover, general partnerships enjoy partnership taxation and are not taxed at the entity level. It is important, however, to consider some of the drawbacks of the general partnership before pursuing this type of entity. Governance : A general partnership is owned and controlled by the partners, who have wide latitude to organize partnership governance in the partnership agreement. In Delaware, for
example, a partnership agreement will control in almost every situation unless the agreement conflicts with explicit statutory requirements. For large partnerships, these agreements can become very complex and will occasionally result in gridlock between partners. In general, a partner is an agent of the partnership, and owes the partnership basic fiduciary duties of care and loyalty. If any partner disassociates from the partnership, the partnership will automatically dissolve unless the partnership votes to continue business. Capitalization : A partnership raises capital through equity contributions by the partners and by taking on debt. Partners may also be able to transfer their economic interest in the partnership to an outside party, such as a creditor, but with few exceptions partnership interests are not publicly traded in capital markets. Personal liability: The major drawback to a general partnership is that each partner is jointly and severally liable for the obligations of the partnership. The only exception to this rule is if a partner joins a partnership after the obligation was incurred by the partnership. Tax treatment: The partnership generally pays no income tax as an entity (the partnership may be liable for income tax liabilities asserted on audit, however). Instead, partners pay individual income tax on their distributive shares of partnership income (regardless of whether such income is distributed). This is known as “pass - through” taxation and is one of the most desirable aspects of forming a partnership. Partnerships are typically taxed at the state level in the same way as they are taxed at the federal level – income, loss and tax liability flow through to the owners. Following the Tax Cuts and Jobs Act of 2017, individual taxpayers may only claim a federal deduction of up to $10,000
ILN Corporate Group – Establishing a Business Entity Series
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