USA Law and Practice Contributed by: Olesya Bakar, William “Bill” Jackson, Daniel E. Levisohn and Steven D. Lear, Holland & Knight LLP
LLLPS In certain jurisdictions, including Delaware, an LP may file with the secretary of state or similar body (the “secretary of state”) to become an LLLP. This status provides the general partner with the same protection against the liabilities of the LP that is afforded to its limited partners. Caution should be taken to ascertain whether the jurisdiction of formation authorises LLL - Ps, and whether each jurisdiction in which the LLLP conducts its business recognises LLLP status (and the limitation of liability) for an LLLP formed elsewhere. General Partnerships Although prevalent historically, general partnerships are now less common because each partner is a gen - eral partner with joint and several unlimited personal liability for the obligations and liabilities of the part - nership. LLPs While general partnerships do not register with any secretary of state, many states permit the partnership to register to become a limited liability partnership (LLP), which limits the liability of each general part - ner to that of a limited partner. Where there is shared management by the partners and an LLC cannot be used, an LLP may be a desirable form of JV entity, provided it is authorised in the jurisdiction of formation and recognised in all other jurisdictions in which the JV conducts business. Corporations Corporations are less common JV entities due to dou - ble taxation – a corporation, other than a subchapter S-Corp, is subject to income tax on its income, and its shareholders are taxed on distributions paid to them by the corporation. Certain corporate formalities must be followed in order to shield the shareholders from the liabilities of the corporation, including adopting by-laws, appointing directors and officers and holding and documenting annual shareholders’ and directors’ meetings. Corporations are also more rigid structures than LLCs with respect to capital calls and distribu - tions. Additionally, the officers and directors of a cor - poration owe a fiduciary duty to the corporation and its shareholders that cannot be waived or limited, as may be permitted by state laws for LLCs and partnerships. One advantage of corporations (including S-Corps) is
bers and managers of an LLC are not personally liable for its liabilities. LLCs are flexible and allow wide lati - tude to the venturers to define their JV relationship. There are no restrictions on the types of owners: they can be natural persons or any type of entity. Gov - ernance, economics and risk sharing can be tailored to the vVenturers’ needs. Unless they elect to be taxed as a corporation, LLCs are pass-through enti - ties taxed as partnerships for income tax purposes. This means the venturers are allocated their shares of the income, gain or loss of the LLC with no tax at the LLC level, thus avoiding the double taxation that is typical for corporations. In cross-border transac - tions, caution should be taken before using an LLC, as certain non-US tax laws do recognise or treat an LLC as a partnership, instead viewing it as a corpora - tion subject to double taxation. With current corpo - rate rates at 21% and Internal Revenue Code (IRC) Section 199A, which, subject to certain exceptions, allows non-corporate venturers in an LLC, partnership or S corporation (S-Corp) to deduct up to 20% of their qualified business income from their taxable income, a tax advisor needs to determine whether a particular JV would save taxes as an LLC (or partnership) versus as a corporation. LPs LPs are another relatively common type of entity for many of the same reasons that LLCs are favoured. They provide limited liability to the limited partners, allow flexibility in defining the partners’ relationship and, unless they elect otherwise, have pass-through taxation. LPs often are used in lieu of an LLC for non- US tax purposes where there are non-US partners from certain jurisdictions. LPs require at least one general partner, each of whom has unlimited personal liability for the obligations of the partnership. This con - cern is commonly addressed by: • having a general partner that is an LLC or a corpo - ration that is a single-purpose entity (SPE) with no assets, other than its interest in, and possibly any fees or distributions it receives from, the LP; and • giving the general partner no economic interest (if permitted in the jurisdiction of formation) or a nominal economic interest (0.1% to 1%) in the LP – alternatively, in many jurisdictions, an LP may elect to be a limited liability limited partnership (LLLP).
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