USA Law and Practice Contributed by: Devon M Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
Weil, Gotshal & Manges LLP 2001 M Street, NW Suite 600 Washington, DC 20036 USA
Tel: +1 202 682 7060 Fax: +1 202 857 0940 Email: devon.bodoh@weil.com Web: www.weil.com
1. Corporate Structures, Residence and Tax Treatment 1.1 Corporate Forms and Their Tax Treatment The most commonly used business types in the Unit - ed States of America (USA) include: • sole proprietorships; • partnerships; • limited liability companies (LLCs); and • corporations. Unlike other jurisdictions, the type of business entity selected does not alone determine its US federal tax classification. Under the “check-the-box” regulations, domestic enti - ties may be classified as corporations, partnerships or entities disregarded as separate from their own - ers (referred to as a “disregarded entity”). A business entity with two or more owners is classified either as a corporation or a partnership; and a business entity with only one owner is either classified as a corpora - tion or as a disregarded entity. An entity is classified as a “per se corporation” if it is organised under a US federal statute or a US state statute that describes the entity as incorporated or as a corporation, body corporate or body politic. If an entity does not meet any of these requirements, it is an “eligible entity” and its classification is elective. Default classification rules determine initial classification, which can be changed by filing the appropriate forms with the Internal Reve - nue Service (IRS); by default, a domestic eligible entity is a partnership if it has two or more owners or is a disregarded entity if it has a single owner.
In addition, certain entities (such as corporations and LLCs) can qualify for, and elect to be taxed under, certain specialised tax regimes, such as those govern - ing S corporations, regulated investment companies (RICs) or real estate investment trusts (REITs), pro - vided various requirements are satisfied. Generally, the LLC is the most commonly used entity type. LLCs are hybrid entities created under state law that are neither partnerships nor corporations. From a state law perspective, they offer their members protection from personal liability for the debts of the LLC’s business, much like the liability protection that a corporation offers to its shareholders. From a federal tax standpoint, the IRS treats the LLC as an eligible entity under the “check-the-box” rules, meaning the LLC has flexibility to be classified as either a partner - ship, an association taxable as a corporation (includ - ing as an S corporation, RIC or REIT) or a disregarded entity depending on its business and ownership char - acteristics. 1.2 Use and Taxation of Transparent Business Structures Partnerships and LLCs (that have elected to be taxed as partnerships) are the most commonly used “pass-through” entities in the USA across industries (including private equity and hedge funds). Unlike cor - porations (other than S corporations, RICs or REITs, discussed further below), partnerships are not viewed as “taxpaying” entities. Instead, the partners are, gen - erally speaking, liable for the federal income tax on the income (or loss) derived by the partnership. While the determination of income (or loss) for the year is determined at the entity level (treating it as the com -
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