Business Enterprises with Foreign Partners
June 29, 2009 By Harrington Law Associates, PLLC
This memorandum was prepared for a client who owns a US company and who was considering a joint venture in the State of Florida with a non-US individual. The venture entailed acquisition of US real property for the purpose of lease or resell. Because the legal and business concepts discussed are of general application, and because foreign investment in US real estate is of the moment, the key points of the memorandum are set forth herein for public benefit.
June 24, 2009
Note that the best course of action with respect to many of these issues—probably most, in fact—must be determined by carefully considering the specific circumstances of each party involved and/or each acquisition. Therefore, please do not consider the following information as legal advice for your particular transaction(s). Rather, this memorandum is meant to provide guidance in terms of the steps involved and the important issues to address.
I. Entities & Liability
You have several options with respect to formation of the entity or entities that will actually make the acquisitions, and each option has its particular advantages/disadvantages.
a. Ongoing Concern. The parties can form an American company to make the acquisitions, and provide for the terms of their arrangement in the company’s operating agreement. This approach is fairly common, straight-forward, and cost-effective. One disadvantage might be that a newly formed company may have difficulty obtaining financing from a lending institution. Over time, of course, the company will build up credit-worthiness. Also, liability to creditors and parties suing the company would potentially attach to all of the company’s assets. By way of illustration, imagine the company owns ten (10) properties. In the event a dispute arises with a third-party over one of the properties, there is the chance that damages will not be limited strictly to the one property in question. Rather, the third-party might potentially attach the company’s other assets, such as the other nine properties.
b. Separate Ventures. In order to limit liability, you may prefer to create a separate entity for each acquisition. By that means creditors and suing parties will be limited to the assets available in each separate acquisition. Such an approach would traditionally be accomplished through the use of separate trusts. Nowadays, limited liability companies, which are inexpensive and simple to form, can be used for the same purpose.
c. Subsidiary or Division. Where brand recognition or creditworthiness is important, considering creating a wholly-owned subsidiary or new division of your existing company. In this scenario, the parties would be partners in the new company or division, which would operate under the umbrella of the established company. This method can also be useful in satisfying laws against foreign ownership, etc. The downside is liability exposure.
II. Partner Contributions;Funds for Acquisitions
Depending upon what structure you use, you have the following possibilities.
a. The funds could be held in the company’s bank account.
b. The funds could be held by the investor until needed for individual purchases.
c. The funds could be escrowed with a third party, who would be given instructions regarding the release of funds.
III. Taxation
Under the US tax code, foreign investors are liable for US taxes on any profits made by ventures within the US even if the investor (i) does not reside in the US, and (ii) is not a US citizen. In the case of a US citizen living abroad, the tax liability is even more onerous in some respects. There may be means of limiting the tax liability through the use of holding companies, off-shore accounts, etc. However, such matters are quite complex and must be discussed on a one-to-one basis. This firm has a certain level of expertise in these matters, and we also collaborate with international tax accountants.
As a final note, please be aware that there are a myriad of important provisions that must be included in whatever agreement the parties establish between them (i.e. joint venture agreement, operating agreement, corporate charter, escrow instructions, etc.). There is no shortage of disputes arising between foreign parties, and the party with the legitimate complaint is almost always the one to suffer the consequences of not having a written agreement prepared by a competent international lawyer. The reason for this involves the cost and delay involved in international litigation, as well as other factors such as political/judicial corruption, etc. I cannot over-emphasis the importance of a well-written agreement in such ventures, one which considers such things as choice of law, choice of forum, arbitration, asset protection, etc.
ABOUT THE AUTHOR: Jeffrey Harrington, Esq. Harrington Law Associates
Jeffrey Harrington graduated from a top-tier university in Southern California, which he attended on a merit scholarship. Jeffrey concentrated his legal studies on corporate law and international business transactions. Through his academic achievement, he was awarded a coveted and extremely competitive clerkship with Clifford Chance in Barcelona, Spain. Jeffrey also studied international law in France and Argentina as part of his degree program. After finishing his juris doctorate, Jeffrey moved to South Florida and worked for an international manufacturing company, where his duties included drafting/reviewing contracts, import/export, labor law, compliance, collections, and disputes. Also, before making the move to Palm Beach County, Jeffrey worked as an in-house advisor for a real estate brokerage firm handling transactions, joint ventures, investor matters, developer matters, and disputes.
Copyright Harrington Law Associates, PLLC
More information about Harrington Law Associates, PLLC
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
Note that the best course of action with respect to many of these issues—probably most, in fact—must be determined by carefully considering the specific circumstances of each party involved and/or each acquisition. Therefore, please do not consider the following information as legal advice for your particular transaction(s). Rather, this memorandum is meant to provide guidance in terms of the steps involved and the important issues to address.
I. Entities & Liability
You have several options with respect to formation of the entity or entities that will actually make the acquisitions, and each option has its particular advantages/disadvantages.
a. Ongoing Concern. The parties can form an American company to make the acquisitions, and provide for the terms of their arrangement in the company’s operating agreement. This approach is fairly common, straight-forward, and cost-effective. One disadvantage might be that a newly formed company may have difficulty obtaining financing from a lending institution. Over time, of course, the company will build up credit-worthiness. Also, liability to creditors and parties suing the company would potentially attach to all of the company’s assets. By way of illustration, imagine the company owns ten (10) properties. In the event a dispute arises with a third-party over one of the properties, there is the chance that damages will not be limited strictly to the one property in question. Rather, the third-party might potentially attach the company’s other assets, such as the other nine properties.
b. Separate Ventures. In order to limit liability, you may prefer to create a separate entity for each acquisition. By that means creditors and suing parties will be limited to the assets available in each separate acquisition. Such an approach would traditionally be accomplished through the use of separate trusts. Nowadays, limited liability companies, which are inexpensive and simple to form, can be used for the same purpose.
c. Subsidiary or Division. Where brand recognition or creditworthiness is important, considering creating a wholly-owned subsidiary or new division of your existing company. In this scenario, the parties would be partners in the new company or division, which would operate under the umbrella of the established company. This method can also be useful in satisfying laws against foreign ownership, etc. The downside is liability exposure.
II. Partner Contributions;Funds for Acquisitions
Depending upon what structure you use, you have the following possibilities.
a. The funds could be held in the company’s bank account.
b. The funds could be held by the investor until needed for individual purchases.
c. The funds could be escrowed with a third party, who would be given instructions regarding the release of funds.
III. Taxation
Under the US tax code, foreign investors are liable for US taxes on any profits made by ventures within the US even if the investor (i) does not reside in the US, and (ii) is not a US citizen. In the case of a US citizen living abroad, the tax liability is even more onerous in some respects. There may be means of limiting the tax liability through the use of holding companies, off-shore accounts, etc. However, such matters are quite complex and must be discussed on a one-to-one basis. This firm has a certain level of expertise in these matters, and we also collaborate with international tax accountants.
As a final note, please be aware that there are a myriad of important provisions that must be included in whatever agreement the parties establish between them (i.e. joint venture agreement, operating agreement, corporate charter, escrow instructions, etc.). There is no shortage of disputes arising between foreign parties, and the party with the legitimate complaint is almost always the one to suffer the consequences of not having a written agreement prepared by a competent international lawyer. The reason for this involves the cost and delay involved in international litigation, as well as other factors such as political/judicial corruption, etc. I cannot over-emphasis the importance of a well-written agreement in such ventures, one which considers such things as choice of law, choice of forum, arbitration, asset protection, etc.
ABOUT THE AUTHOR: Jeffrey Harrington, Esq. Harrington Law Associates
Jeffrey Harrington graduated from a top-tier university in Southern California, which he attended on a merit scholarship. Jeffrey concentrated his legal studies on corporate law and international business transactions. Through his academic achievement, he was awarded a coveted and extremely competitive clerkship with Clifford Chance in Barcelona, Spain. Jeffrey also studied international law in France and Argentina as part of his degree program. After finishing his juris doctorate, Jeffrey moved to South Florida and worked for an international manufacturing company, where his duties included drafting/reviewing contracts, import/export, labor law, compliance, collections, and disputes. Also, before making the move to Palm Beach County, Jeffrey worked as an in-house advisor for a real estate brokerage firm handling transactions, joint ventures, investor matters, developer matters, and disputes.
Copyright Harrington Law Associates, PLLC
More information about Harrington Law Associates, PLLC
View all articles published by Harrington Law Associates, PLLC
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
