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Foreign partnership establishing US entity seeks answer to entity structure and tax implications.

West Chester, PA |

Dutch partnership wishes to create US entity for fashion business. US LLC seems to be most preferable based on ability to have foreign person or foreign organization ownership. Is it better to have our Dutch partnership own the US LLC, or would it be better to have the two partners own the US LLC. One partner is Dutch citizen. Other partner is resident green card holder. When filing tax calims for the LLC, how would these two structures have implications both on the company, and the two partners (one residing in US one residing in NL).

Thank you all for all of you advice. I found it all very helpful. We have decided we will form an LLC in Delaware with our Dutch entity owning the US LLC. If our business venture grows we will explore the options of turning our Dutch partnership into limited liability, and also having a US S corporation owning the LLC as a safe guard. Mr Heine's explanation shifting of expenses and profits was very insightful and is something we will seek professional advice on. Again, thanks for all sharing your experience and expertise.

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Attorney answers 5

Posted

A limited liability company is the most flexible form of organization for both tax and business purposes. Most likely that would be a smart choice. Much of the issue depends on how this is taxed in the Netherlands. I presently have a Dutch client that is a partnership that owns the US LLC as a solely owned member. US federal and state tax returns are filed and the income passes through to the Dutch entity. If the individual partners were to own the entity, then the partners would both have to file US tax returns. The green card holder would file a resident 1040, and the Dutch resident would file a nonresident 1040. I do not know how this would be treated in the Netherlands and whether there would be tax on the US source income.

Normally, having the entity own the LLC membership interests simplifies the tax reporting. This issue is going to require not only the advice of a US tax and business attorney, but also your current business attorney in the Netherlands.

I hope this helps!

Ron Cappuccio
www.TaxEsq.com
856 665-2121

Asker

Posted

Thank you very much for taking the time to answer my questions and give me advice. It is much appreciated.

Posted

The legal, corporate and tax repercussions are numerous. This is something you should plan in advance. There is very information that you can obtain here on Avvo. In addition, even after having selected a particular corporate structure you need to work with a CPA and international tax attorney to help you navigate the intricacies of US law. The selection of the most appropriate structure is a false problem. There is wrong or correct answer. Any structure can work, but you need to understand the various components of the US tax system to select the most appropriate one. If you select to form this company personally or through your foreign holding are decision that must be taken after a careful analysis of the financials of all the individuals and/or entities involved. Feel free to visit our website as we are specialized in cross border legal and tax work. Best.

This reply is offered for educational purpose only. You should seek the advice of an attorney. The response given is not intended to create, nor does it create an ongoing duty to respond to questions. The response does not form an attorney-client relationship, nor is it intended to be anything other than an educated opinion of the author. It should not be relied upon as legal advice. The response given is based upon the limited facts provided by the undisclosed individual asking the question. To the extent additional or different facts exist, the response might possibly change. Attorney is licensed to practice law only in the State of New York. Responses are based solely on New York Law unless stated otherwise. Pursuant to Internal Revenue Service guidance, be advised that any federal tax advice contained in this written or electronic communication is not intended or written to be used and it cannot be used by any person or entity for the purpose of (i) avoiding any tax penalties that may be imposed by the Internal Revenue Service or any other U.S. Federal taxing authority or agency or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Hillary Johns

Hillary Johns

Posted

Concur. You could certainly do it both ways but what's best for you and your partner and the Dutch partnership really would require an in depth factual analysis and a discussion as to the tax implications of each structure. Avvo is a good place to start the questions although an in depth consultation with a skilled lawyer is really the best course of action. Call Mr. Melchionna.

Asker

Posted

Thank you very much for taking the time to answer my questions and give me advice. It is much appreciated.

Luca Cristiano Maria Melchionna

Luca Cristiano Maria Melchionna

Posted

You are very welcome.

Posted

Hi,

I agree with my colleagues here. While we have many clients similarly situated each case is different and will require a careful and thoughtful analysis way beyond what is appropriate for this type of forum.

I do agree that having the LLC be owned by the foreign entity will likely be the cleanest way to approach it however.

You are welcome to contact me for further clarification.

Best regards,
Frank
Natoli-Lapin, LLC
(see Disclaimer)

The law firm of Natoli-Lapin, LLC (Home of Lantern Legal Services) offers our flat-rate legal services in the areas of business law and intellectual property to entrepreneurs, small-to-medium size businesses, independent inventors and artists across the nation and abroad. Feel free to call for a free phone consultation; your inquiries are always welcome: CONTACT: 866-871-8655 Support@LanternLegal.com DISCLAIMER: this is not intended to be specific legal advice and should not be relied upon as such. No attorney-client relationship is formed on the basis of this posting.

Asker

Posted

Thank you very much for taking the time to answer my questions and give me advice. It is much appreciated.

Posted

It looks like you have gotten some good information here; you'll need more than short Avvo answers to get the solution. That said, you are wise to gather as much information as possible so that you can best interact and manage your US and NL legal advisors.

I would add that you may wish to explore a multi-entity approach with this particular venture. With two (or even three) legal entities in the US and NL, you might get more profits through tax advantages.

For example, companies in the NL generally pay lower tax rates that US companies. This means that with two companies, the US company could limit its US income by paying for services rendered by the NL company, thus shifting profits to NL (where company taxes may be lower) and shifting costs to the US company (where the company deductions give more value).

I'll try to boil it down a little more. Let's assume that: (1) you manage the company in the NL, and (2) the company gets $100k of sales profits in the US.

In the single US entity option:

- The US company pays 40% in US income tax ($40k) on the 100k profits;
- You and your so-owner split the after-tax profit, which is $30k each for a total of $60k after taxes.

However, in the multi-entity approach:

- The US company can pay the NL company a $42,862 management fee;
- The US company will deduct that $42,862 expense from its sales income (leaving $57,138 in total income);
- The US company will pay 40% on $57,138 income ($22,855);
- The NL company will pay 20% NL income tax on that $42,862 management fee ($8,572); and
- The NL company will bring home $34,290 after taxes;
- The US company gets $34,280 after taxes; and
- The combined income is $68,570.

Thus, the multi-entity makes both businesses together a little richer: about $8,570 richer.

A couple caveats:

1. This is an estimate of tax liabilities that leaves out some very important details and rounds the numbers!

2. You'll need to keep your eye on an issue called transfer pricing, which basically means you can't abusively shift profits and costs based on tax rates.

3. You may also want to explore offshoring the profits in the NL, if you want to reinvest them there with a tax deferral to get additional tax savings.

I hope this overly-simplified description helps explain the potential benefits of a multi-entity structure. I'd be happy to discuss further over email or telephone with a complimentary consultation!

Todd M. Heine
www.totalmobilitylaw.com

Total Mobility Law is an international law firm that lets companies do global business with the knowledge and confidence they need to comply in any country. Our answers on this site do not constitute legal advice, nor do they establish an attorney-client relationship. The only thing that can do that is a signed Engagement Letter and Fee Agreement, which you can get by contacting us through www.totalmobilitylaw.com.

Luca Cristiano Maria Melchionna

Luca Cristiano Maria Melchionna

Posted

Excellent answer.

Hillary Johns

Hillary Johns

Posted

Yes

Asker

Posted

Thank you very much for taking the time to answer my questions and give me advice. It is much appreciated.

Posted

No, no no no no Stop, do NOT take that advice.

Ok, here's the pragmatic answer.. You don't want a US company Well, at least not for a couple of years. Here's why.

The single most important reason to use a LLC or other structure is to limit liability. And for a start up business, that is even more important. If you hit a rough patch (and in your chosen industry it is likely) you could be sued by unpaid vendors. creditors. . . basically everybody. And, as a US LLC with US assetts You Would Be a Sitting Duck.

But, as a Dutch corporate form, it would be much harder to sue or collect in a successful suit. They would have physical distance, venue, hague treaty issues to contend with just to get you into a lawsuit. If you want to negotiate with a vendor from a position of strength, tell him he has to translate his legal papers into another language. I guarantee he will settle.

So, to circle back. DO NOT make a US entity. But, if you feel you must, make two. The first can be any corporate form you like. S corp works nicely. Have all of the stock owned by an llc. and all of the llc owned by the dutch partnership.. All contracts are to be signed by the llc naming the scorp as a beneficiary party. This will give you the ability to get out of a disastrous situation should the concern start to fail. In the event of failure, bankrupt the llc in a liquidating chapter 11 so you maintain controll. and no independant trustee. Then, re-write the executory agreements more favorably and the scopr will emerge squeaky clean and newly profitable.

Good luck

Frank A. Natoli

Frank A. Natoli

Posted

Michael, in many cases such a client will not have an option to choose NOT to form a US entity. I would be somewhat reserved about offering such an enthusiastic and conclusive response without knowing more. I mean, in general, I do not disagree with anything you said but it is clearly not so cut and dry in my opinion. It is also not appropriate to make statements like "don't take that advice" and "stop, no no no." That is not professional and will be considered insulting to your colleagues here. We do not have to agree, but how we show our disagreement makes all the difference. Best, Frank

Todd Matthew Heine

Todd Matthew Heine

Posted

Way to spot another issue, Michael. Thou doth protest too much, perhaps: As your fifth paragraph suggests, the multi-entity approach can be used as a sword and a shield (as the tired metaphor goes). Sword: With two entities, the business can pick and choose how it contracts with US (or any country) vendors and customers, setting choice of law and forum (and thus language) as is best. Cross-border service of process on businesses in the US (the Hague Michael noted) is routine these days; it would at most be a minor hurdle. While the threat of foreign jurisdiction might communicate power upon threats of litigation, it may also create the image of an unreasonable, uncompromising, and paranoid potential partner at initial negotiations. And, don't forget the tax benefits of a good transfer pricing strategy. Shield: If the NL company is operating in the US, it will likely be subject to a lawsuit in US court for its US activities. The distance would be hard on the defendant NL company, not the potential plaintiff. The Hague treaty is a non-issue: serving process on a business in NL is pretty easy. Doomsday scenarios aside (that is our speciality as lawyers, after all!), the asker must in any case carefully consider the tax, liability, compliance, and practical issues of transnational business.

Luca Cristiano Maria Melchionna

Luca Cristiano Maria Melchionna

Posted

Mr Farrell, I see your point. Your point is that of a domestic litigator. However, companies willing to do business in the US do not need always to run away, hide and take advantage of the system. This is not the idea of attracting foreign investments. This is not the reality of financial centers like NYC. This is not what we have learned in law school. This is also exactly the opposite of what we want to represent to our clients: we want to give our potential clients the idea that this market is stable and rich, and we will not suggest them to run away. Transactional attorneys do general excellent job. They are able to structure activities in a way that are sound and litigation-proof. Think about arbitration or mediation clauses. Typical in the international setting. Moreover, there is not only one solution. There are many that can fit for that client and for his/her needs. International law is so complicated that I would take into consideration the points of colleague with knowledge and expertise in the field.

Michael Thomas Farrell

Michael Thomas Farrell

Posted

Gentlemen, upon reading my comment again, I must apologize for my tenor. I did not set out to offend, but, can clearly see that offense was the inevitable effect of my wording. For that, I apologize. My hope had been, given the forum, to shed some of the traditional lawyerly reserve in favor of a more direct response. Oh, and as to Mr. Melchionna, the reason litigators don't always :give our potential clients the idea that this market is stable and rich" is because we are advocates not sales people. I don't frankly care what you "learned" in your law school, but, I learned throughout my career to give my clients the unvarnished truth whether it attracts foreign investment or not. And, while I am just a country mouse by comparison to a "financial center" like New York, the reality out here in the sticks is the same as it is in NYC. You tell your client what will benefit him, not the ffinancial center of NYC. You absolutely adopt strategies that best use the system. And if the best thing for the client is to run and hide, you advise him to do it. I work for my client's interest only within the rules and ethical standards. I assume you will continue looking down your nose at me regardless. But, in my opinioin, every client domestic and foriegn is better off hiring an attorney who cares a bit less about attracting investment and a bit more about taking every legally available advantage on the client's behalf

Luca Cristiano Maria Melchionna

Luca Cristiano Maria Melchionna

Posted

Thanks Mr. Farrell for your response and for the time spent in reading my comment to your post. I refrain to respond not because of lack of arguments but only because I think that my reply will not serve the aim of this community. I wish you the best in your professional career.

Asker

Posted

I see this post has caused a little unrest. I appreciate all of your comments and have found all comments very useful. This post certainly did make me think on alternatives. I appreciate you all taking the time to answer my questions and give me advice. It is much appreciated.

Michael Charles Doland

Michael Charles Doland

Posted

Dear Asker: This interchange between experienced professionals is the best insight as to what law really is - not a "correct answer" but rather: The best argument for A is ... The best argument for B is ..." Best wishes for your US venture.

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