Deciding on the appropriate U.S. business structure for your international business is an important decision. The type of business you choose will determine your legal obligations, tax liabilities, the amount of paperwork required, your personal liability, and the amount of money your business will be able raise. This is the second article in a series on business structures. This article will focus on U.S. partnerships and will explain what a partnership is, including the different types, the advantages and disadvantages of forming a partnership, and how to form a partnership if you’re a foreign business.
Setting Up A U.S. Business For International Startups Part 1: The Sole Proprietorship is the first article in this series.
Of course you do not have to set up a U.S. business to do business in the United States. Foreigners can do business in the U.S. through their established foreign business; however, foreigners can also come into the U.S. and set up a U.S. business like any U.S. citizen or resident. There are no special requirements or complications involved in creating a U.S. business entity as a foreigner. Although the requirements and process of setting up a business is not different for foreigners, they do need to comply with U.S. immigration requirements, including visa and work permit requirements, to come into the U.S. and may face additional challenges opening a bank account.
What is a partnership?
A partnership is a business where two or more people share ownership. Each partner contributes to all aspects of the business, including money, property, labor, and/or skill. Each partner also shares in the profits and losses of the business. Partnership agreements are not required, but are recommended to protect all parties involved. There are three types of partnerships:
In a general partnership, profits, liability, and management duties are divided equally among the partners. If an unequal distribution is agreed upon, the percentages should be assigned to each partner and documented in a partnership agreement.
A limited partnership is more complex than a general partnership because it allows partners (usually only certain partners) to have limited liability. This limited liability generally comes with limited input in the management of the partnership as well. These limits are determined by and laid out as percentages in a partnership agreement.
A joint venture is a general partnership that is set up for a limited period of time or for a single project. A joint venture can become an ongoing partnership, if the partners continue the venture, by filing it as such.
What are the advantages and disadvantages of forming a partnership?
Although there are advantages and disadvantages to each type of business structures, they should be weighed based on their significance and effect on your specific business. We strongly suggest that you seek the advice of an attorney, especially foreigners who are less familiar with U.S. business and law, when deciding which business entity is most appropriate for your business. A review of your tax requirements, under the different structures, with an experienced accounting firm familiar with global tax issues is also advantageous when making this decision.
Advantages:
- Easy and inexpensive to form
- Partners share the financial commitment
- Can include partnership incentives for employees
Disadvantages:
- Partners share joint and individual liability
- Disagreements among partners can arise and cause problems
- Partners share profits
What should be included in a partnership agreement?
While you are not required to have a partnership agreement, it is highly recommended that you have a partnership agreement. A partnership agreement is ultimately the best way to protect yourself and the business. Your partnership agreement should include how business decisions will be made, how profits will be divided, how disputes will be resolved, and how to change ownership. Some of the important elements of a partnership agreement include:
- The breakdown of ownership as a percentage for each partner;
- The way in which profits and losses will be allocated among partners;
- Who can bind the partnership (to contracts, purchases, etc.);
- A description of the agreed upon decision making process (who, how, and when decision are made);
- A description of the dispute resolution process to be used;
- A description of dissolution process.
How do you form a partnership?
State law governs the structure and establishment of businesses in the U.S. Because of this, the requirements and processes vary among states. Unlike a sole proprietorship, to form a partnership, you do have to complete some or all of following important steps, depending on your state requirements. Remember, you may be able to change your business structure in the future.
1. Choose a business name: Make sure your name is not already taken by another partnership in your state (do a trademark check) and does not include words that are restricted by your state. Your business name will be automatically registered with the state when you register your business.
2. Create a Partnership Agreement: You should strongly consider having an attorney draft this agreement and each member may want to hire their own attorney to review the agreement before signing it.
3. Register your partnership: This is done with the state, generally through the Secretary of State’s Office.
4. Obtain licenses and permits: Once you have registered your business, you are required to obtain all necessary business licenses and permits. License and permit regulations vary by industry, state, and locality.
5. Register for taxes: Most companies need to register with the IRS, register with state and local revenue agencies, and obtain a tax ID number. For federal tax purposes, a partnership must file an “annual information return” to report the business’ income, deductions, gains, and losses, but the partnership itself does not pay income tax. The partners include their respective share of the partnership’s income or loss on their personal tax returns.
Like a sole proprietorship, a partnership is particularly fitting for small businesses. Although many businesses that start small and intend to grow quickly will choose to just form a corporation from the beginning. This strategic decision should be made with an understanding of business structures and with the future of your company in mind. If you have international offices with employees and business teams focused on foreign markets, Globig is a must for saving valuable time and money, and for managing risk. If you have international offices with employees and business teams focused on foreign markets, the Globig platform is a must for saving valuable time and money, and for managing risk.
Related Articles and Content You Might Like:
Setting Up A US Business Part 1: The Sole Proprietorship
How To Save On Startup Legal Costs In The US
About Globig
If you have international offices with employees and business teams focused on foreign markets, the Globig platform is a must for saving valuable time and money, and for managing risk.
