Issues Relating To Organizational Forms And Taxation. U.S.A. NEW YORK Alston & Bird LLP

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1 Issues Relating To Organizational Forms And Taxation U.S.A. NEW YORK Alston & Bird LLP CONTACT INFORMATION Stephanie Denkowicz/ William Ruehl/ Edward Tanenbaum Alston & Bird LLP 90 Park Avenue New York, New York / / Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (eg., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. *Management and tax issues often inform the advantages and disadvantages of each entity. These relevant issues are addressed in Answers to Questions 3 and 13, respectively, and thus do not appear in the responses to Question 1. For-profit Corporation (FP Corp). Advantages. Ownership interests are freely transferable. No limitation on the number or types of shareholders. Flexibility of financing available through the sale of securities to investors. Shareholders have limited liability for debts or judgments against Corp. Disadvantages. Formalities are required to operate. Qualification is required for doing business in other states. Regular government reporting is required. Stock transfers are subject to securities regulation. New York (NY) FP Corps can file with the IRS and state as an S-Corporation for tax purposes. Non-for-Profit Corporation. (NFP Corp). Advantages. Directors and officers are rarely personally responsible for the NFP Corp s debts and liabilities. Some nonprofits are eligible to receive public and private grants, making it easier to get operating capital. With 501(c)(3) NFPs, donations made by individuals to the NFP Corp are tax-deductible. Disadvantages.

2 Available only for non-profit ventures. NFP Corps must keep records and report meeting minutes. NFPs formed for charitable purposes may be required to register with the NY State Attorney General. Limited Liability Company (LLC). Advantages. All members are subject to limited liability. Disadvantages. Qualification is required for doing business in other states. Reporting to the government is required. Interests are not freely transferable and may be subject to securities law regulation. Publication of formation required. Registered Limited Liability Partnership (LLP). Advantages. LLP partner is only personally liable for his own or his employee s negligence. Form is also available to NY registered foreign LLPs. Disadvantages. Consent of partners needed for formal business conduct. A contributor to an LLP is not entitled to return of his contribution except as stated in the partnership agreement. Only available for professional services in NY (e.g. lawyers, doctors, architects). No limited partners. Limited Partnership (LP). Advantages. All limited partners have limited liability. No limit exists on the number or types of partners. Disadvantages. General partners have unlimited liability. Transfer of interests may be subject to securities law regulation. General Partnership (GP). Advantages. GPs are informal; that is, meetings are informal and government reporting is not required. Disadvantages. Partners have unlimited liability for the business. Interest is not transferable. The entities most likely of interest to foreign investors are FP Corps and LLCs. 2. Are there attributes of the form that you consider unique to your jurisdiction? FP Corp. No attributes of this form are unique to NY. NFP Corp. No attributes of this form are unique to NY. LLC. NY imposes a publication requirement upon formation of the LLC which requires that the members of the LLC publish a notice in newspapers in the geographic region of formation. LLP. LLPs can only be formed for professional services in NY. LP. No attributes of this form are unique to NY. GP. No attributes of this form are unique to NY. 3. Describe the management and governance structure for each organizational form. FP Corp. Owned by shareholders. Managed by a board of directors that is elected by the shareholders, and by officers who are appointed by the board. A corporation must have certificate of incorporation (filed with the NY Department of State) and bylaws, both of which documents must contain certain provisions required by NY law. These governing documents provide for governance matters such as how and when directors will be elected, which officers the corporation will be required or permitted to have, and when and how

3 meetings of shareholders and directors will be held. There is no residency restriction. Directors must be at least 18 years old. New York does not require listing of directors in the certificate of incorporation. NFP Corp. Has no shareholders. May have members, but is not required to do so. Managed by a board of directors that is elected either by the members or by the existing board, and by officers appointed by the board. LLC. No limit exists on the number or types of members. LLC is owned by its members. Managed either by its members or by managers who are appointed by the members. An LLC must have articles of organization that are filed with the NY Department of State. The members will also execute an operating agreement that defines the rights, duties and liabilities of the members, and managers if applicable. LLP. Each general partner has an equal right to manage and control the LLP. All general partners have authority to bind the LLP. LP. All general partners have the right to manage. The contributions of a limited partner may be cash, other property or services. Must file a certificate of limited partnership with the NY Department of State, which will identify the general partners. Governance is pursuant to a limited partnership agreement, which identifies the limited partners and specifies respective rights and duties. GP. All partners have the right to manage and act on behalf of GP. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? New York does not have a provision specifying where directors or owners must reside for an LLC, LP, GP, or FP Corp or NFP Corp. However, if a FP Corp elects S-Corporation status for tax purposes, it cannot have any foreign investors. 5. Describe the extent to which management and owners are exposed to liability. FP Corp. Shareholders of a FP Corp have limited liability for the FP Corp's debts and obligations. As a result, their losses cannot exceed the amount which they contributed to the corporation as dues or payment for shares. Officers and directors may be personally liable for financial harm caused to the corporation due to their breach of various duties. FP Corps may indemnify their officers and directors. NFP Corp. Officers or directors who vote for certain corporate actions may be liable. NFP Corps may indemnify their officers and directors. LLC. All members have limited liability. LLC may indemnify its officers and directors, if any. LLP. General partners are personally liable only if they or person they supervise commits wrongful act.

4 LP. All general partners have personal liability, limited partners personally liable only if they participate in control of business, which can occur under rare circumstances. GP. All general partners have personal liability. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? FP Corp. (i) Ownership represented by shares of stock; (ii) stock is transferable, subject to any agreement to the contrary among the shareholders; (iii) no minimum number of shares or shareholders. NFP Corp. There is no ownership; control is vested in members or board of directors. LLC. (i) Ownership is represented as membership interest. (ii) A member s interest in profits from the LLC is transferable, but a member s ownership interest is not transferable unless authorized by the LLC Operating Agreement or by the consent of at least a majority of the members. (iii) No minimum number of members. LLP. (i) Ownership is represented as partnership interests; (ii) limited liability partnership interests are transferable, (iii) No minimum number of partners. LP. (i) Limited partners have limited partnership interests; (ii) limited partnership interests are transferable if the limited partnership agreement permits it or the other partners consent; (iii) there must be at least one general partner and one limited partner. GP. (i) Ownership represented by partnership interests; (ii) partnership interests are not transferable without consent of other partners; (iii) there must be at least two partners. 7. Is there a minimum capitalization? No, there is no minimum capital required for a FP Corp, NFP Corp, LLC, LLP, LP or GP. 8. Is there a security that can be issued to the public? FP Corp. Securities can be issued. NFP Corp. Stock and shares are prohibited. LLC. Generally, securities can be issued. LLP. Securities can be issued. LP. Securities can be issued. GP. Securities generally cannot be issued. 9. Can the form incur debt, or grant security for debt?

5 Yes, under New York corporate law, a FP Corp, NFP Corp, LLC, LLP, LP, and GP may lawfully incur debt and grant security for debt. 10. What is the duration of the form? Can it be renewed? FP Corp. The life-span of the business is perpetual; or for a designated period stipulated in the Certificate of Incorporation. NFP Corp. The life-span of the business is perpetual; or for a designated period stipulated in the Certificate of Incorporation. LLC. The life-span of the business may be for a designated period stipulated in the Articles of Organization; or until a dissolution event occurs and the company takes no action to continue. LLP. Upon the occurrence of events specified in the LLP agreement. LP. The life-span of the business is for a designated period stipulated in the Certificate of Limited Partnership; or until a dissolution event occurs, subject to any right to continue that may be stated in the partnership agreement. GP. The life-span of the business is for a designated period stipulated in the partnership agreement; or until a dissolution event occurs. 11. Describe the process, customary time period and approximate cost of establishing the form. FP Corp. A Certificate of Incorporation must be filed (signed by at least one incorporator) with the Department of State. Cost is approximately $ Standard filing time is about 3 to 4 weeks. Expedited filing time takes 24 hours; however additional fees apply. NFP Corp. One or more persons, called "incorporators," may form a not-for-profit corporation. Incorporators are natural persons who are 18 or older. A Certificate of Incorporation must be filed (signed by at least one incorporator) with the Department of State. Registration with the Attorney General s Charities Bureau is required for some NFP Corps. LLC. Articles of Organization (signed by one or more organizers) and a Certificate of Publication must be filed with the Department of State. The State filing fee is $225, plus an additional $50 to file two affidavits of publication. It usually takes one to two days from the time of order for the Secretary of State to file the document and issue a filing receipt. LLC must also publish notice of formation in local newspapers, which can cost upwards of $1000. LLP. Registration costs $ A registered limited liability partnership (RLLP) must file an LLP Statement within 60 days prior to the 5th anniversary of the effective date of its registration or notice of registration, and every 5 years thereafter as required by the Partnership Law. The fee for filing the LLP Statement for a RLLP is $20. Registering can be done on a same-day basis.

6 LP. Filing by the general partner by executing a partnership agreement and filing a Certificate of Limited Partnership pursuant to Section of the Revised Limited Partnership Act. Filing can be done on a same-day basis. GP. No state filing or organizational meeting of the partners is required to form a general partnership in NY. A Certificate of Assumed Name (following an agreement of the partners) with the clerk of the county/ies in which the business is conducted must be filed. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No. 13. For what taxes is the form liable? FP Corp. a) Federal Income Tax - Income subject to double taxation, once at the FP Corp level and once at the shareholder level. Income is taxable at corporate rates, which, at the highest Federal marginal rate level, are currently about the same as the individual highest marginal rate level. Note - S-Corporations are not exempt from corporate income taxation in NY. NY does not recognize S-Corporation status. Consequently, a NY S- Corporation having income from NY City sources will be taxed as a corporation for NY City tax purposes and has to pay NY City's General Corporation Tax. b) Corporation Franchise Tax Based on the greater of: (1) allocated entire net income, 7.1% (6.5% for qualified NY manufacturers); or (2) allocated capital, 0.15% (maximum tax, $350,000 for NY manufacturers/$10 million for all others); or (3) 1.5% of minimum taxable income; or (4) minimum flat rate (varies from $25 to $5,000 depending on NY receipts). c) Sales and Use Tax Imposed on the sale of tangible personal property and certain enumerated services. State rate equals 4% plus an additional 3/8% imposed in the Metropolitan Commuter Transportation District (MCTD). Local rates imposed in addition to state vary by county from.5% to 4.5%. The combined state and NY City rate equals 8 7/8% (4% state + 3/8% MCTD + 4.5% city). d) Property Tax Imposed by local government on real property only. Personal property is not subject to tax at the state or local level. Rates are determined annually depending upon budgetary needs. e) Unemployment Insurance Tax Imposed on employers that pay remuneration of $300 or more in any calendar quarter. The standard rate is 5.4% but the rate can vary from.9% to 8.9% depending upon the employer's experience rating. f) Real Estate Transfer Tax Imposed by the state on each conveyance of an interest in real property where the consideration exceeds $500. The rate of tax is $2 for each $500 of consideration or value. Additional 1% tax imposed on conveyances of interests in residential real property when the consideration for the entire conveyance is $1 million or more. g) Real Property Transfer Tax Imposed by the City on conveyances of real property situated in whole or in part within NY City when the consideration for the property exceeds $25,000. The tax rate varies from 1% to 2.625% depending on the type of property and amount of consideration. h) Numerous other taxes may be imposed depending on the type of business and transactions conducted, including, but not limited to, motor fuels tax, alcoholic beverage

7 tax, environmental tax, stock transfer tax, mortgage recording tax, hotel occupancy tax and commercial rent tax. NFP Corp. Nonprofits can apply for both federal and state tax-exempt status. A NFP Corp is generally exempt from federal income taxes except for any NFP Corp engaging in certain political or legislative activities or if the NFP Corp has unrelated income. With some exceptions, NFP Corps must pay sales/ use tax on their purchases and collect sales tax on their sales. LLC. a) Federal Income Tax Under the check-the-box election procedure, LLC with 2 or more members can elect to be an association (corporation) or a partnership for federal income tax purposes; LLC with 1 member can elect to be an association (corporation) or elect to be disregarded as an entity separate from its owners (in effect, to be treated as a sole proprietorship or a branch for federal tax purposes). Tax filings and inheritance tax at individual member level (unless taxed as a corporation) are required. If treated as a corporation, the same tax results exist as with a FP Corp. If treated as a partnership, then the partnership pays no tax; rather, each of its partners pays its pro rata share of tax on their pro rate share of income and further distributions to the partners are generally tax free. b) Corporation Franchise Tax The election made for U.S. federal income tax purposes applies for NY franchise tax. An LLC electing treatment as a corporation is subject to the tax. An LLC electing treatment as a partnership is not subject to tax, but is a "flow-through entity"; its members must report the income, losses and tax attributes of the LLC on their individual or corporate returns and pay any tax due. c) LLCs are liable for all other state and local taxes listed above that apply to a FP Corp. GP, LP and LLP. a) Federal Income Tax Taxed as a partnership as described above in the case of an LLC which is treated as a partnership. b) Corporation Franchise Tax Partnerships are not subject to the Corporation Franchise Tax. Partnerships are "flow-through entities" for tax purposes; individual partners must report the income, losses and tax attributes of the partnership on their NY individual income tax returns and pay tax. Corporate partners are subject to the franchise tax and must report partnership income, losses and tax attributes on their returns and pay tax. c) Partnerships are liable for all other state and local taxes listed above that apply to a FP Corp. 14. What is the tax treatment of payments to foreign owners? FP Corp. a) Federal Income Tax All foreign persons are subject to tax at 30% on dividends paid by a US corporation to foreign shareholders unless tax treaties reduce or eliminate US tax on foreign income. Dividends paid to US shareholders are also subject to further US tax. An S-Corporation is not available for foreign owners. b) State Taxes Payments from a FP Corp to foreign owners are generally treated as an expense to the paying corporation and will therefore reduce the amount of net income subject to tax for the paying corporation. The foreign owners are not subject to tax on payments assuming they have no nexus with NY (i.e. the foreign owners have

8 no property or employees of their own located in NY.) Mere ownership of stock alone does not subject foreign owners to NY tax. NFP Corp. Members are not taxed. LLC. a) Federal Income Tax If taxed as a corporation, FP Corp rules apply. b) State Taxes Payments to foreign owners from LLCs electing partnership treatment are subject to NY tax. Due to the flow-through nature of these entities, NY deems that the NY members themselves are doing business in NY through the partnership entity. Therefore, the members have nexus and are taxable in NY. Individual members must file an individual income tax return, report the payments from the LLC, along with any expenses, and pay any tax due. Corporate members must file a return and pay the Corporation Franchise Tax. c) Payments to foreign owners from LLCs electing treatment as a corporation are treated as described above under the FP Corp. LLP, LP, GP. a) Federal Income Tax Generally, no tax on distribution to foreign partners ( passthrough taxation ). Advance withholding taxes apply on income earned by foreign partners. b) State Taxes Partnerships are liable for taxes as described under LLC, State Taxes section above. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Federal Income Tax See above answer to Question 14. State Taxes Yes, foreign owners of a corporation doing business in NY avoid the second level of taxation that is imposed on resident owners with regard to payments made to owners/shareholders (assuming the foreign owners have no nexus with New York).