United States - A General Note on Business Entities

Global Business Entities Guide United States A General Note on Business Entities

The US consists of: 50 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 50 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 (5) territories named above exercise some limited self-governing powers.

One important 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 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 addition, certain limited types of regulated institutions (such as some kinds of banks) can be created under federal law. However, in order to understand business entities in the US, it is critical to note that there is no such business entity as 'a US corporation or company.' Instead, with the limited exceptions noted above, all commercial corporations and companies are organised under state or territorial law.

Each of the states and territories has its own laws governing business entities. Although there are differences between entities created under the laws of different states, there are great similarities among them and, with few exceptions, they all follow certain basic patterns. Accordingly, this short general note on business entities in the US provides a high-level view of the nature of such entities and focusses on their general similarities and not on the precise differences between entities that are created and organised 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. In addition, the questions typically asked about US business entities by foreign lawyers tend to have many similar characteristics – and many similar answers. Accordingly, this general note answers some of the most commonly recurring of those questions, provides a broad overview of business entities in the US, and does not focus on the entities of any particular state or territory. Thus, the questions answered in this US guide vary somewhat from the standard questions answered regarding business entities in the other jurisdictions included in the Global Business Entities Guide Resource Kit.

1 GENERAL PRINCIPLES

What are the main sources of law authorising these entity forms?

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

Do the entities possess a separate legal personality?

Yes.

Is there a maximum period of existence?

No.

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 must adopt 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, LLCs have some more flexibility in choosing precisely how they will be governed internally than corporations.

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.

Can a corporation or LLC formed in one state do business in another state?

Yes. Each state provides for corporations or companies of another state to be registered to do business in it. This registration is commonly referred to as 'qualification.' 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.

Can a corporation or LLC be involved in an international or interstate restructuring such as a merger, conversion, division, or an interest exchange?

Yes, but each state's laws delineate the types of transactions in which entities organised under such laws may engage.

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.

Can a corporation or LLC be used for non-profit or charitable purposes?

Yes, but typically such an entity would be formed under special non-profit entity statutes.

2 INCORPORATION/FORMATION/ORGANIZATION

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 of the applicable state or by the filing of a certificate of formation for an LLC in the designated official office of the applicable state. In some states, they can be formed and receive official evidence of the formation issued on a one-hour basis. Notarisation is not required, and the 'register' is maintained by the applicable state government and not by a private body such as a 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. Typically, only one (1) incorporator or organiser is required, and such organiser or incorporator need not be a resident of the state or the US.

Normally, only one (1) is required, and there is no residency requirement.

Does the incorporator or organiser have to appear or be present in the state of incorporation or formation?

No.

Is there a minimum share capital payment requirement for incorporation of a corporation or formation of an LLC?

No.

3 REGISTERS

What is the title of the applicable corporate or company registry? Is it a governmental agency or body?

Each state and territory maintains a registry for the corporations and companies organised under its laws. Such registries and filing offices are governmental agencies and are typically administered by the applicable state's Department of State under the purview of its Secretary of State.

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 or the certificate of incorporation of a corporation are publicly available in the registry of its state of formation. The bylaws of a corporation or the operating agreement of an LLC are not publicly accessible. While many states require the submission of 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 organised which makes it quite important to obtain legal advice regarding lien searching.

As of the date of preparation of this edition of the Guide, the manner of application of the federal Corporate Transparency Act (the Act) is being considered by the Financial Crimes Enforcement Network of the United States Treasury Department (FinCEN) which is the regulatory body charged with the task of enforcing it. In addition, courts are considering challenges to the constitutionality of the Act and Congress is debating its repeal or material amendment. The text of the Act as adopted requires the non-public disclosure to FinCEN of the beneficial ownership of every corporation or LLC that does not fall within one of 23 specific exemptions. The current version of FinCEN’s implementing regulation limits the Act’s application to entities organized under the laws of a country other than the US that have registered to do business in the US. The ultimate fate of the Act and FinCEN’s regulatory framework for its enforcement is uncertain, and readers of this Guide are advised to check with US counsel regarding its status to be sure that each entity with which they are concerned is in compliance with the Act as it is eventually implemented.

4 GOVERNANCE

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 operating agreement.

What is the difference between an officer and a director of a corporation? Or between an officer and a manager of a limited liability company?

The business and affairs of a corporation are managed by or under the direction of the board of directors of the corporation. The officers of a corporation have such titles and duties as are assigned to them by the bylaws of the corporation and the directors. An LLC is either member managed, or manager managed as provided in its operating agreement and the members or managers have such powers and duties as are vested in them pursuant to the operating agreement of the LLC. If an LLC has officers, they have such titles and duties as are assigned to them by the operating agreement of the LLC.

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.

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 such as insurance or banking.

Is a corporation or LLC permitted to determine its own financial year?

Yes.

Is a corporation or an LLC subject to any statutory or external-auditor obligations?

No, subject to the requirements arising under federal and state securities laws with respect to publicly traded or listed corporations or under requirements applicable to entities conducting business in a regulated industry.

5 OWNERSHIP INTERESTS

What are ownership interests called?

Shares in the case of a corporation. Membership interests or shares (or any such other term as may be designated by the Operating Agreement) in the case of an LLC.

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.

Can there be non-cash payments for ownership interests?

Yes, subject to any restrictions in the entity’s basic organizational document (such as its Certificate of Incorporation in the case of a corporation or its Certificate of Formation in the case of an LLC) or in its operating agreement in the case of an LLC or any restrictions imposed by its governance body in the case of either an LLC or corporation.

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.

Can shares be repurchased by the issuing entity? Can new shares be issued?

Yes, subject to any prohibition or limitation in its organisational documents. In general, entities have a good deal of flexibility with respect to increasing and/or reducing their capital.

Can the shareholders of a corporation or the 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 is required by law to have the functional equivalent of a shareholders' agreement in the form of its operating agreement.

6 COSTS AND TAXES

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.

What are the general corporate tax rates?

The federal corporate income tax rate in effect in 2025 is 21%. State and local tax rates are generally determined by the state and local jurisdictions in which the entity does business, has assets and/or employees. LLC’s may elect to be taxed for federal income tax purposes as corporations or may be treated as “pass-through” entities for such purposes. Many (but not all) states and localities respect this federal election. Questions relating to the taxation of both corporations and LLC’s at the federal, state and local levels are complex and should be discussed in detail with qualified tax counsel.

7 SPECIFIC MATTERS WHICH ARE IMPORTANT OR UNIQUE TO THIS JURISDICTION

How is the state in which the entity is to be formed selected?

Bearing in mind question 9 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 generally 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.

How should the decision be made regarding whether to form a corporation or 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 and the interaction of those tax systems.

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Thomas Schmuhl

Duane Morris LLP

Pennsylvania, USA

Disclaimer:

© 2025, Duane Morris LLP. All rights reserved by Duane Morris LLP as author and the owner of the copyright in this chapter. Duane Morris LLP has granted to Multilaw non-exclusive worldwide license to use and include this chapter in this guide and to sublicense Lexis Nexis, a division of RELX Inc. and its affiliates certain rights to use and distribute this Guide.

The information in the Global Business Entities Guide provides a general overview at the time of publication and is not intended to be a comprehensive review of all legal developments nor should it be taken as opinion or legal advice on the matters covered. It is for general information purposes only and readers should take legal advice from a Multilaw member firm.

Publication Date: 2025