My partner in Germany wants to start new business together , LLC or S- corporation. He wants 50 /50 share ?
He is not American citizen and it looks like all taxes and responsibilities will be on me .
What should I do ?
I am setting the practice area to corporate and incorporation to highlight your question before the right audience. I suggest that you use the Find A Lawyer feature to set up a consultation with local counsel to go over your options. If you are having basic questions like this, you really should go over your business plan with someone knowledgeable in your area of business.
This is a general response that should not be considered legal advice. No attorney-client relationship has been formed. Please speak with an attorney in more detail about your specific situation.
I can't fully comment on the tax or international implications of this question, but keep in mind an LLC is governed by an Operating Agreement. Depending on your state, there will be default rules for how an LLC operates. For instance, in NY, I believe voting power is determined by profit share interest (unless it's governed by managers). Assuming the state you set up your LLC operates the same way, 51% of profit interest by default, would give you voting supremacy. On the other hand, LLC Operating Agreements (at least in NY) permit you to structure the agreement nearly any way that you wish.
S corps are generally governed by who has control of the "Board" which is usually determined by ownership of stock. Then again ... you can have both parties (you and your partner) sign a Shareholder Agreement which can stipulate certain things.
What's more important is that you figure out what you are trying to achieve. Does your partner just want to be passive and have no input? Or just veto power? Or veto power over important decisions? What if your partner wants to be bought out? What happens if you reach an impasse during decisions. This kind of stuff should be addressed somehow in the drafting of your s/h agreement (S corp) or Operating Agreement (LLC) to protect the parties, and ensure whoever is doing most of the mgmt has enough authority to conduct business at least on a day to day affairs.
Any information offered is for general education purposes to assist readers with an overall understanding, and is not intended as specific legal advice. Each situation is different, requiring individual consultation and sometimes research before actual legal advice can be dispensed. No attorney-client relationship is created through the exchange of such information. Prior results do not guarantee future outcomes.
First of all, non-U.S. citizens may NOT be shareholders of S-corporations. So that leaves you with an LLC.
The reason 50/50 isn't ideal is if you guys can't decide on something really important. If that happens, then the answer is usually to liquidate and wind-up the business. This is harsh, but a reality for small businesses.
Whether you own 50/50 or 51/49 (or sometimes people find a third party neutral person who will own 2% and each partner will own 49/49 to resolve a deadlock), is totally a business decision. The nice thing about flow-through taxation is that in general (with certain exceptions) each party will be responsible for their own share of the taxation in the jurisdiction where they file their own personal taxes.
Keep in mind that it sounds like you are about to start a major project. You need a lawyer. Things go south with business partners ALL THE TIME and without a good partnership agreement and operating agreement a]nd bylaws you could really get screwed by your partner, by your regulators, and by the regulators.
For example, most people forming entities on their own don't properly document their initial capital contributions which leads to a world of problems.
In no particular order, I have a few comments on your question. First, it is untrue that "all taxes will be on you." Your "partner" will receive an allocation of his proportionate share of the business income or profits. Second, the issue of the best form of organization needs examination. As my colleagues have indicated, S corporation is not available because your "partner" is a nonresident non-citizen. That probably leaves LLC or corporation. Because of his status as a German, he may prefer taxation as a corporation rather than a partnership. Third, the issue of managerial control, which may or may not mirror equity ownership, needs to be discussed, as will issues like admitting additional "partners," incurring debt, buying and selling assets, withdrawal, transferability of interests, death and disability. You should consult with an experienced Business Attorney to properly structure and organize your business.
The foregoing discussion does not establish an attorney-client relationship, is qualified by the limited facts presented above, and should not be relied upon as legal advice. To obtain definitive legal advice upon which one can rely necessitates retaining an attorney who is qualified in this particular area of the law.
LLC makes the most sense with a foreign national owner involved. There are many ways to deal with control over decision-making and how profits are distributed, and the two do not have to be the same percentage. For instance, you could have 50-50 ownership with 50-50 profit distribution, but have an operating agreement that makes you the managing member of the LLC in full control of its operations and no way to be removed from that position except under conditions you put in the agreement (such as "for cause" reasons, like self-dealing, etc.); alternatively, you can have 51% ownership but still split profits/distributions 50-50. The operating agreement sets forth all the terms and conditions and obligations of the owners, as well as how to deal with selling or transferring ownership interest or withdrawing from the company, and what rights each has to force those actions or be forced to allow them. You will want the agreement to address issues like the death, divorce or personal bankruptcy of an owner, and the rights of heirs, ex-spouses with marital rights, and creditors who are assigned rights to assets in court or through bankruptcy. Will you have set capital contributions, and the right/obligation to demand future capital contributions to make up shortfalls in the event of cash flow problems or paying off debts of the LLC, including tax liabilities? These are just a few of the subjects a good operating agreement will address. Not having one, and not clearly delineating each owner's rights and obligations to the LLC, is a recipe for disaster. Obviously, you need a lawyer. i hope you know this investor/partner, and he's not just some random emailer who discovered you on the internet. There are countless scam of foreign-based criminals trolling for US-based patsies who will "go into business" by accepting some large foreign bank check that seems totally legitimate, opening a local bank account to deposit the check, then withdrawing all or most of the funds before the foreign bank declines payment on the forged/insufficient funds instrument, leaving you personally liable to the local bank. It can take 30 or more days before you know the check was bad. The scam also can involve a smaller up-front check that clears, in order to hook you into believing everything is on the up and up, then they hit you later with the fraudulent one. I only mention this because I have had clients come to me after-the-fact having been victims of this fraud. Hopefully you have fully vetted this overseas investor. If the deal sounds too good to be true, then assume it is.
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