Starting a business in a foreign country can be a profitable venture for a variety of reasons, but it can also be a complicated process. One of the most important steps investors need to take is to decide what type of business structure they want to pursue. This can greatly affect the investor’s finances or business success. There are multiple common structures to choose, but they each have advantages and disadvantages.
Limited Liability Company (LLC)
LLCs are common business structures for foreign investors because they are not taxed as a business and can be owned by an individual or a group of owners, including corporations. They have a relatively low start-up cost and less paperwork to start than other businesses
An LLC does not receive income tax, which is one of its biggest advantages. Instead, profits and losses show up on the personal tax returns of the LLC’s owners. At the same time, owners do not have personal liability in the business, meaning personal assets cannot be liquidated or otherwise affected if the LLC is in debt.
There are a few drawbacks, one of the biggest being self-employment tax. Although an LLC does not receive tax on its profit, owners are subject to self-employment taxes. An LLC might also be required to dissolve if any of the owners leave.
A partnership is a business owned by two or more people who make company decisions. There are various types of partnerships, but in any structure, owners should draft a partnership agreement since they must run the business together.
Like an LLC, partnerships do not receive income tax and owners pay personal taxes instead. Partnerships are also fairly inexpensive and easy to start. Another huge advantage is that partners can bring varying resources and skills to the business to aid its growth.
Some of the biggest disadvantages to partnerships are that owners can be held liable for their partners’ actions, not just their own, and profit is shared evenly regardless of contribution. If one partner is contributing less but receiving the same share of profit, this can cause conflict and animosity.
A C-corporation, sometimes simply called a corporation, is a fairly different business structure from LLCs or partnerships. The corporation itself is owned by shareholders, is legally liable for debts and is subject to federal, state and sometimes even local income taxes.
Because the corporation is liable, there is no risk of personal liability or loss of assets. Owners will only have to pay taxes on their salary or income while the corporation’s taxes are filed separately. Its profit can also increase rapidly through stocks that shareholders purchase.
The downsides of a corporation are that they are very expensive and time-consuming to begin. They can also face double taxation since they can owe both federal and state tax.
How to choose
The structure an investor chooses will be based heavily on his or her goals. Investors should weigh pros and cons against each other and look at which structures best fit his or her business plans. It is advisable to seek the legal advice of a skilled business law attorney who is experienced in foreign business. They can help with business start-up, foreign issues, and best practices for making investments within the United States.