Business Planning No. 1: Forming a Company in U.S.?
Be Aware of Legal Ramifications

Genta Hataoka
Attorney and Counselor at Law
Investment Analyst
Law Office of Walter Wm. Hofheinz
© 2000 Genta Hataoka

I. Introduction

In Japan people say it's so easy to form a corporation in the U.S. at low cost.

Some form a corporation in U.S. for many reasons: To start up an internet company, bar & restaurant, tax shelter, holding real estates, investment company, etc. without giving enough thought to consequences of having established and the need to maintain a business entity in the U.S.

It may cost less to form a business entity in U.S., but that certainly should not be translated to "Operating a company is easier in U.S. than in Japan."

Once you form a company in U.S., it is a U.S. company. You are subject to the U.S. laws, regulations, and rules. You are expected to act like a U.S. company. Failure to do so may cost you more than you ever imagined.

II. Considerations for selecting a right business entity in U.S.

1. Liability
2. Management
3. Duration
4. Capital Formation
5. Transferability
6. Income Tax Treatment

This article considers the first of these items.

1. Liability

• Potential liability for business operations is a major consideration for selecting the right business entity.
• One needs to know one's purpose for forming an entity to achieve the goal of choosing the correct business entity.

Consider the followings:

• What is the size of potential damage claim?
• What are your assets potentially subject to the claims of creditors?
• How much can you limit the potential liability through use of the chosen entity?

If the liability is founded on contract, you may be able to limit your liability to the corporation itself. However, many entities doing business with you
will require a personal guarantee in additional to the underlying corporate liability, which makes the guarantor personally liable.

In addition, personal liability may depends on what type of law gives rise to the liability. Under certain circumstances, you may be liable personally regardless of whether you have created a limited liability entity such as a corporation. For example, certain types of copyright infringement may give rise to both personal and entity liability, as do certain failures to tax required actions under the tax codes.

You should also consider whether an entity other than a regular business corporation is preferable to accomplish your objectives. Some entities which should be considered include:

1. Sole proprietorship: appropriate for a simple business, sole equity contribution, low risk of personal liability arising from business operations
2. Partnership: appropriate to achieve flexibility in management, pass through taxation, general management by equity owner
3. Limited Partnership: appropriate to achieve separation of management rights from equity interests, limited transferability of interests
4. Corporation: appropriate to achieve consolidated management, continuity of existence, transferability of equity, separate taxation from equity owners
5. Limited Liability Company - appropriate to achieve complete separation of management and equity, limited transferability of equity interests, pass through taxation

A final non-legal factor might be the type of image you wish to create, which will be most useful when talking to a commercial bank, investment bankers, business representatives, etc.

III. Formalities required

Observing required formalities is essential to enjoy the benefit of doing business as a corporation. Failure to observe required formalities can expose principals to potential liability. The basic formalities involving corporate records which should be maintained require maintenance of the corporate records in a minute book. Such consolidated records accomplish the following:

• The ability to produce necessary documentation when necessary in the event of questions regarding the certain corporate actions
• The maintenance of a mutual understanding among shareholders, directors, and and equity interest holders, through documentation of all important corporate decisions

As a basic checklist, you should consider whether you have the following documents in your minute book:

• Charter from state of incorporation
• Articles of Incorporation
• Bylaws
• Minutes for organizational meeting of shareholders and directors, properly executed
• Minutes for an annual meeting of shareholders and directors, properly executed, with record of proper notice or waiver of notice for each person entitled to notice
• Share ledger reflecting issuance and transfer of shares, with current accurate shareholder list

Of course, the minute book must be updated regularly, at least annually, an preferably each time an action requiring a formal record is taken.