USA Law and Practice Contributed by: Kai Liekefett, Derek Zaba, Ram Sachs and Evan Grosch, Sidley Austin
Sidley Austin 787 Seventh Avenue New York New York 10019 USA Tel: +1 212 839 8744 Email: kliekefett@sidley.com Web: www.sidley.com/en/services/shareholder-activism- and-corporate-defense
1. Types of Company, Share Classes and Shareholdings 1.1 Types of Company The dominant state of incorporation for United States (US)-domiciled companies is Delaware. The prima- ry forms for business entities under Delaware law include C corporations (“C Corps”), S corporations (“S Corps”), limited liability companies (LLCs), limited partnerships (LPs), general partnerships (GPs) and limited liability partnerships (LLPs). Publicly traded companies are typically C Corps. The primary features of a C Corp include limited liability, a lack of pass-through tax treatment, management by a board of directors, governance via corporate by-laws, perpetual existence, stock issuance and additional corporate formalities. An S Corp is similar to a C Corp, but an S Corp may only be formed under certain conditions. To be regis- • consist of shareholders who are US citizens, per- manent residents, certain trusts, estates or exempt organisations; • issue only one class of shares; and • derive no more than 25% of its income from pas- sive sources. Despite these restrictions, an S Corp can be a more attractive option compared to a C Corp due to its pass-through tax treatment, which lowers the taxation burden on investors. tered as an S Corp, an entity must: • have 100 or fewer shareholders;
LLCs, LPs, GPs and LLPs are typically used by private entities. They are more versatile than publicly traded companies and have fewer corporate formalities. Tax treatment may vary – these entities generally receive pass-through tax treatment but may elect to be taxed as a corporation, depending on the specific company and the tax implications at play. Investors’ choice of entity depends on a variety of factors, including tax treatment, corporate formalities, liability concerns and more. This guide will focus pri- marily on Delaware-based publicly traded companies, namely C Corps. Practice may vary for companies incorporated in other states and for private compa- nies. 1.2 Types of Company Used by Foreign Investors Foreign investors typically use the same entity forms as domestic investors, with one notable exception. Generally, a foreign investor who is not a resident of the US may not invest in an S Corp. The choice of cor- porate entity depends on factors like the nature and size of the investment, tax considerations, regulatory requirements and the investor’s financial goals. 1.3 Types or Classes of Shares and General Shareholders’ Rights The main classes of shares issued by Delaware cor- porations are common and preferred shares. Com- mon shares typically give stockholders standard vot- ing rights for corporate actions requiring stockholder approval. Preferred stockholders, on the other hand, are frequently granted no or only limited voting pow-
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