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Which company formation is the best for an import/export business?

Asked by: Rosemary - 8 January, 2013 Hello,

My two friends and I are thinking of doing an import/export business between China and US. They are both Chinese citizen, and I'm an US citizen and live in CA. My questions are:
1) Which company formation is the best for this type of business? Is LLC the only option since S-Corp requires all owners to be US citizen/residents?
2) If so, which state would be best to register our company?
3) Do my friends need to file taxes if our business makes a profit even though they are not US citizen?

Thanks a lot,
Answered by: Wray Rives - 9 January, 2013 Rosemary,

First your options for a legal entity are LLC or C-Corporation. You are correct that S-Corp is not an option if you have non-US residents as shareholders. That means that for your LLC the options for US federal tax purposes are to be taxed as a partnership or corporation. Since S-Corp is not an option, then a C-corp will only be taxed as a corporation for federal tax purposes.

Generally all partners in a partnership, including non-residents, are subject to US tax on their earnings from the partnership. A corporation is taxed separately from its owners, so any US tax liability for the non-resident owners will depend on their individual tax situation and they will not automatically be subject to US tax just because they have an ownership interest in a US corporation. That also does not mean they automatically are not subject to US tax either as there could be other factors that affect their tax situation.

There are a number of factors to determine the best state to register your company in. Regardless of where you form your business, generally you will be required to register in any state where the business physically conducts its business or has employees and potentially owners. If you as one of the owners will be actively involved in the business, then you will have to register in your home state. That means your home state could be the best state to register in; however, you may want to discuss your particular situation with an attorney or tax professional to be sure you consider all the options.


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