Legal structure

Organize your Export-Import Business

Any person starting an export-import business has to select one of the following organizational structures:sole proprietorships, partnerships, limited liability company and corporation. The selection of a suitable organization for your business depends on a number of factors. This includes but not limited to the ease and cost of formation, capital requirements, level flexibility needed to run the business, issues relating to personal liability and government restrictions. Each form (structure) has its own advantages and disadvantages.

Sole Proprietorships: Simple to run and limited set up costs. It is the most common form of business organization in the United States. This form of business organization has several advantages:

  • Easy to create, no formalities and no need for governmental approval. (some local governments may require procurement of a business license);
  • Owner owns the business and thus receives all the profits;
  • Owner makes all management decisions;
  • Easy to transfer, sell or terminate the business and no approval is necessary by associates or shareholders as in the case of partnerships or corporations, respectively.

Sole proprietorships have, however, certain disadvantages:

  • Access to capital is limited since no other parties are involved in the ownership of the business;
  • The sole proprietor is personally responsible for the debts of the business i.e., for business contracts and other actions committed in the name of the business (by employees etc.).

Salient Points on Sole Proprietorship

  • If you establish the EIT business under a trade name (other than your own name), you may be required to file a business certificate with the appropriate city or county;
  • Sole proprietorships are liable for self-employment tax.
  • Taxes are filed under the individual owner’s tax return since there is no separation between personal and business assets. EIT losses can be used to offset other income from the sole proprietor.

Partnerships

  1. General Partnership:  A partnership is a voluntary association of two or more persons for carrying on a business as co-owners for a profit. Person includes individuals (natural persons), partnerships, corporations and other associations. Even though it is not legally required, it is advisable to have a written partnership agreement that clearly sets out the partnership name, business purpose and location, the amount of contribution made by each partner, each partner’s  responsibilities, length of the agreement, allocation of profits and losses, disbursement of expenses, partnership’s authority to borrow money, sign contracts etc., drawing of profits or salaries, expansion and dissolution of partnership, contributions to retirement fund etc. Each partner has the right to use partnership property for partnership purposes only, has a right to share in profits and participate in management.

This form of business organization has several advantages:

  • Easy to establish as in the case of sole proprietorship;
  • Benefits of access to larger pool of resources: capital and credit, expertise, experience thus contributing to a strong and competitive organization;
  • Partnerships have no tax liability. A partner’s profit or loss from the partnership is included in each partner’s income tax return.

 Sole proprietorships have, however, certain disadvantages:

  • General partners are personally liable for the debts of the partnership. Liability is joint (partners equally responsible for the debts) and several (entire debt can be collected from just one partner).
  • A partnership ends upon the death, or withdrawal of a partner from the agreement (unless provided in the partnership agreement).
  • Conflicts/ disagreements between or among partners often affect the success of the business.
  1. Limited Partnership:  This is a special form of partnership which consists of at least one general partner (investor and manager) and one or more limited (investor) partners. The general partner is personally liable for the debts and obligations of the limited partnership whereas the limited partner is only responsible to the extent of his/her capital contribution. Limited partners cannot bind the partnership in any contract due to the limited nature of their interest.

It has to comply with certain statutory requirements, certificate of limited partnership must be executed and signed by the parties. This and other pertinent information must be filed with the state and appropriate county.

In most other areas such as taxes, business effect on death or departure of owner (partner), transferability of interests (consent of all partners), they are identical to general partnerships.

Salient Points on Partnership

  • Partnerships are considered as legal entities only in limited cases: bankruptcy proceedings, suits in federal courts etc.
  • In cases where limited partners become involved in marketing and other management decisions, they are considered general partners.

Corporations:  Export-import businesses are established as corporations due to the advantage of limited liability of shareholders. A corporation exists as a separate entity apart from its owners. It can own assets, sign contracts, pay taxes, sue or be sued in its own name. Major advantages include:

  • Free transferability of shares
  • Perpetual existence
  • Ability to raise capital by selling shares in the corporation (In EIT, many businesses are owned by a few people (friends, family members) who manage the firm on a day to day basis and do not sell shares to the public i.e., private corporations.

Corporations have, however, certain disadvantages:

  • The process of incorporation can be time consuming and expensive. Certificate of incorporation must be signed and filed with the secretary of state. Board of directors establishes policy and elects officers to implement these policies (officers are accountable to the board).
  • Corporations are subject to double taxation. Tax is imposed on profits earned by the company and later, on income when distributed to shareholders  

S Corporations:   If a company elects to be an S corporation, it has the best advantages of a corporation and a partnership. Similar to a corporation, it offers the benefits of limited liability but still permits the owner to pay taxes as an individual, thereby avoiding double taxation. One advantage of paying taxes at the level of the individual shareholder is that export–import companies’ losses could be used to offset shareholders’ taxable income from other sources. It is also beneficial when the corporation makes a profit and when a shareholder falls within a lower–income tax bracket than the corporation.

One major disadvantage  of this form of ownership is that it is subject to a number of preconditions: the corporation must be a domestic entity (must be incorporated in the US), cannot be member of another organization, shareholders must be individuals or estates, cannot have more than one class of stock, cannot have more than 100 shareholders etc. It must file form 2553 with the IRS within the first 75 days of its fiscal year to be eligible for this status (for the current year).

Salient Points on Corporations

  • Corporations must main a separate identity from that of their owners: separate bank accounts etc. Otherwise, the corporate identity may be disregarded.
  • Conducting intrastate business (with another state) may require filing the necessary forms in that state (unless it is an isolated transaction, or done via independent agents).
  • You have to incorporate your business

Limited  Liability Companies:   This form of ownership has the advantages of limited liability and no restrictions on the number of owners or their nationalities (as in the case of S corporations). It is taxed as a partnership, and, unlike limited partnerships, it does not grant limited liability on the condition that the members refrain from active participation in the management of the company.

LLCs provide the advantages  of :

  • Limited liability;
  • Management structure (participation in management without being subject to personal liability), and
  • Partnership tax status.