Corporate Law USA
The United States has the world’s largest economy, and it filled with incredible business opportunities. This article outlines some of the basics of United States Corporate Law (Corporate Law USA) that is necessary to consider when planning a business in the United States. It is important to note this document can in no way be considered legal advice. If you want or need legal advice, contact a lawyer or lawyer firm.
The United States has corporate laws at the federal, state, and local levels. All fifty states have their own state and local laws; however, federal law creates minimum standards for trade in company shares and governance rights. These standards are mostly outlined in the Securities Act of 1933 and the Securities and Exchange Act of 1934. The US Constitution allows corporations to incorporate in the state of their choice, regardless of where their headquarters are located. Most major corporations incorporate in the state of Delaware due to their low corporate taxes.
There are many forms of entities in the United States but the four most common ones are listed below:
- Sole Proprietorship- It is the simplest business form. It is a business owned and controlled exclusively by one person. This person is responsible for the business, including all liability and any profit or loss.
- Partnerships- an association of two or more persons (people, corporations, other partnerships, LLC’s, trusts or others) to carry on a business for profit. Similar to a sole proprietorship, these individuals are responsible for the business including liability and any profit or loss.
- Limited Liability Companies- an extremely flexible business structure. It combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. It is not a corporation but instead a legal form of a company that provides limited liability to its owners in many jurisdictions.
- Corporations- Business becomes a separated entity and is chartered by the state in which it is located. A corporation can enter into contracts, pay its own taxes, and be sued. The owner becomes a shareholder and has the option to sell the business if things don’t work out for continued ownership.
A branch office is not a separate legal entity of the parent company. The entire company is considered to be “doing business” in the United States; therefore, the company will often be imposed to taxation on all income earned rather than just the income at the branch office. Foreign businesses do not usually elect branch office unless advised by a US attorney.
Shares and Share Capital
A company limited by shares, whether public or private, must have at least one issued share. Companies may issue different types of shares called “classes” of shares, offering different rights to the shareholders depending on the underlying regulatory rules pertaining to corporate structures, taxation, and capital market rules. Companies can offer preferred or ordinary stock such that preference shareholders shall each receive a cumulative preferred dividend of a certain amount per annum and the ordinary shareholders shall receive everything else.
Liability of Shareholders
A shareholder of a company limited by shares has limited liability. This means that the shareholder is not liable for the acts and omissions of the company. The liability of the shareholder is limited to the nominal value of its share.
Minimum Capital Requirement
In the United States, there is no minimum capital requirement for a corporation or limited liability company.
The US tax law is very complex, and careful tax planning and counseling is necessary for all companies doing business in the US. Companies in the US are subject to separate federal, state, and local taxes. The federal government uses the IRS to collect income tax, capital gains tax, tax on dividends, interest, other passive income and employee payroll taxes. Businesses will also likely have additional tax obligations in the state in which they conduct business.
C Corporations vs S Corporations:
Corporations can choose between filing taxes as a C corporation or an S corporation. An S corporation is considered a “pass-through entity” which means the business itself is not taxed. Instead, income is reported on the owners’ personal tax returns. C corporations are separate taxable entities and they file a tax return and pay taxes at a corporation level. Below are the requirements for filing as an S corporation.
S Corporation Requirements:
- Be a domestic corporation
- Have only allowable shareholders
- Have no more than 100 shareholders
- Have only one class of stock
- Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations)