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A General Note on Business Entities

The United States of America consists of fifty states, the District of Columbia, various territories and possessions such as the Commonwealth of Puerto Rico, American Samoa, Guam, the United States Virgin Islands, and the Northern Marianas Islands and an assortment of largely uninhabited islands in the Pacific Ocean and the Caribbean Sea. Each of the fifty states retains and maintains a range of sovereign characteristics and powers under the federal constitution. The District of Columbia (the federal district in which the national capital, Washington, is located), and the five territories named above also exercise some more limited sovereign powers and have their own systems of courts. One practical impact of this arrangement in which the individual states retain some degree of sovereignty under the federal constitution is that corporations and other types of business entities are established under state law and not under federal law. The named territories and the District of Columbia also exercise the power to charter and regulate business entities. As a result of this system, no federal business entities exist or are created under federal law except in the case of certain entities which carry out essentially governmental functions that have been created by an act of the federal Congress and are owned by the federal government such as the Federal Deposit Insurance Corporation which regulates and insures banks. In short, there is no such entity as “a US corporation or company.” Instead, all commercial corporations and companies are organized under state or territorial law.

Each of the states has its own laws governing business entities. Although there are differences between entities created under the laws of different states, there are great similarities between them and, with few exceptions, they all follow certain basic patterns. Accordingly, the Multilaw Corporate and Commercial Group has prepared this short general note on business entities in the United States of America with the intention of providing a reader with a sense of the nature of such entities that focusses on their general similarities and not on the precise differences between entities that are created and organized under the laws of different states. For example, while a corporation formed under Hawaiian law is different in some details than one formed more than 5,000 miles away under Maine law, the general characteristics of both are very similar.

During their years of legal practice in varied and different states, the US lawyers in Multilaw’s Corporate and Commercial Group have noticed that the questions asked about US business entities by foreign lawyers tend to have many similar characteristics – and many similar answers – and they concluded that it might be helpful to their clients, potential clients and lawyers in other countries to prepare this general note to try to answer some of those commonly occurring questions.

A General Note on Business Entities


1. What are the most common forms of business entities in the US used in international commerce?

The most common forms used in international commerce are corporations and limited liability companies. Limited liability companies or LLC’s are a more recent development than traditional corporations, but all fifty states now have both of these forms. Other common forms include limited partnerships, business trusts, general partnerships and sole proprietorships, but these other forms tend to be more applicable to domestic than international commerce.


2. Are special types of corporations needed for certain businesses?

Yes. For example, insurance companies and banks are normally incorporated under special laws relating to those regulated industries.


3. What are the principal sources of the laws authorizing the entity forms?

The corporation and limited liability laws of each state adopted by its state legislature.


4. Do the entities possess a separate legal personality?

Yes.


5. Is there a maximum period of existence?

No.


6. What is the governing body?

In corporations, the governing body is the board of directors elected by the shareholders. In limited liability companies, the governing body is either the members or the managers as determined by the entity’s limited liability company agreement commonly referred to as an Operating Agreement. Each limited liability company adopts such an agreement which deals with its internal operations and governance. In corporations, many of such issues are determined by the corporation statute of the state of incorporation and not by an agreement adopted by the shareholders. Accordingly, LLC’s have some more flexibility in choosing precisely how they will be governed internally than corporations.
7. Do the shareholders or members have liability protection?

Yes. Subject to veil piercing in limited instances, their exposure is normally limited to the amount invested by them in their shares or membership interests or to any unpaid commitment a shareholder or member made to buy shares or membership interests.
8. Can a corporation or LLC in one state do business in another state?

Yes. Each state provides for corporations or companies of another state to be registered or “qualified” to do business in it. Such registration normally exposes the entity to the jurisdiction of the courts of a state in which it is qualified and often to taxation by that state as well.
9. Can a corporation or LLC be involved in an international or interstate restructuring such as a merger or an interest exchange?

Yes.
10. Can a corporation or LLC be listed on an exchange or be publicly held?

Yes, if it has taken the appropriate steps for its securities to be registered appropriately under the federal and state securities laws and regulations.
11. Can a corporation or LLC be used for non-profit or charitable purposes?

Normally such an entity would be formed under special non-profit entity statutes.
12. How long does it take to form a corporation or LLC? How are they formed?

Normally, they can be formed on a same day basis by the filing of a certificate of incorporation or articles of incorporation for a corporation in the designated official office in the applicable state or by the filing of a certificate of formation for an LLC in the designated official office in the applicable state. In some states they can be formed with official evidence of the formation issued on a one hour basis. Notarization is not required and the “register” is maintained by the applicable state government and not by a semi-private body such as the Chamber of Commerce. The filing fees vary from state to state and official certificates evidencing formation can normally be obtained within 24 hours. A detailed description of the anticipated business is not normally required for incorporation or formation unless the entity will be involved in a regulated industry such as power generation. Typically only one incorporator or organizer is required and such organizer or incorporator need not be a resident of the state or the US.
13. How many directors are required for a corporation or managers for an LLC?

Normally, only one is required, and there is no residency requirement.
14. Does the incorporator or organizer have to appear or be present in the state of incorporation or formation?

No.
15. Is there a minimum share capital payment requirement for incorporation of a corporation or formation of an LLC?

No.
16. What information is publicly available about an entity?

The basic formation document such as the certificate of formation of an LLC or the articles of incorporation of a corporation are publicly available in the state of formation. The bylaws of a corporation or the operating agreement of an LLC are not publicly accessible. While many states require an annual report, such annual reports normally only identify the officers and directors and do not provide any financial information or reveal the identity of shareholders or members. Shareholder or member information is not publicly accessible although this may change in the next few years. Most liens are matters of public record, but they are not always recorded or filed in the state in which the entity is organized which makes it important to obtain legal advice regarding lien searching.
17. Who picks the directors of a corporation? Who picks the managers of an LLC? Who picks the officers of a corporation? Who picks the officers of an LLC?

The directors of a corporation are elected by the shareholders. The officers of a corporation are elected by the directors. The managers (if any) of an LLC are selected in accordance with the LLC’s operating agreement. The officers (if any) of an LLC are selected in accordance with the LLC’s operation agreement.
18. Are there non-executive directors?

Executive functions in corporations are performed by the officers. A director may be an officer, but a director does not need to be an officer. An officer may be a director, but an officer does not need to be a director. In an LLC, such roles are determined by the operating agreement and there is a good deal of flexibility available.
19. Are there accounting requirements relating to the financial statements of an entity?

The general principle is that an entity should keep good and accurate books and records but these financial statements are not publicly filed unless the entity’s securities are listed or publicly traded or the entity is engaged in a regulated business. There is no requirement that an auditor be appointed or that financial statements be audited or published unless the entity’s securities are listed or publicly traded or the entity is engaged in a regulated business.


20. What are ownership interests called?

Shares in the case of a corporation. Membership interests or shares (or such other term as may be designated by the Operating Agreement) in the case of an LLC.
21. Can different classes of ownership interest be issued?

Yes, there is a great deal of variety possible including, without limitation, various types of preference and common shares and interests, redeemable shares and interests, and convertible shares and interests, etc.
22. Can ownership interests and shares be privately transferred or do such transfers have to be publicly noted?

They can be transferred entirely privately. There is no public register and there is normally no transfer tax or stamp requirement in most jurisdictions.
23. Can shares be repurchased by the issuing entity? Can new shares be issued?

Yes, subject to any prohibition in its organizational documents. In general, entities have a good deal of flexibility with respect to increasing and reducing their capital.
24. Can the shareholders of a corporation or members of an LLC enter into a shareholders’ agreement?

Yes, shareholders of corporations may enter into a shareholders’ agreement. In the case of limited liability companies, each LLC has the functional equivalent of a shareholders’ agreement in the form of its operating agreement.
25. How much does it cost to maintain an entity in good standing annually exclusive of legal fees?

This is dependent on the charges imposed by the state of incorporation. A typical foreign owned subsidiary pays less than $1,000 per year in most states.
26. How is the state in which the entity is to be formed selected?

Bearing in mind item 8 above relating to the ability of entities to register in other states, the simplest approach is to either form the entity in the state in which it will be headquartered or in a state (such as Delaware) which has a well-developed and respected business entity law. This is a topic which any non-US person contemplating the formation of an entity in the US should discuss in detail with US counsel, paying particular attention to questions of state and local taxation in the US.
27. How do you decide whether to form a corporation or form an LLC?

This is a topic which any non-US person contemplating the formation of an entity in the US should discuss in detail with US counsel and its home country counsel, paying particular attention to questions of federal, state and local taxation in both in the US and in the person’s home country.

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Gerald Sumida
Carlsmith Ball LLP
Hawaii, USA


Bret Madole
Carrington, Coleman, Blumenthal & Sloman LLP
Texas, USA


Hope Krebs
Duane Morris LLP
Pennsylvania, USA


Thomas Schmuhl
Duane Morris LLP
Pennsylvania, USA


Jan De Beer
Frost Brown Todd LLC
Ohio, USA


Jorge Hernandez-Toraño
Holland & Knight
Florida, USA


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Lathrop GPM
Minnesota, USA


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Miller Nash LLP
Oregon, USA


Anthony Nasharr
Polsinelli
Illinois, USA