Washington state strongly supports foreign investment and trade. The State Legislature has enacted favorable tax provisions in certain industries and all state laws, regulations and incentives apply equally to domestic and foreign operations.

A foreign company operating in Washington can do so as a Corporation, a Limited Liability Company or a General or Limited Partnership. This article explains the characteristics of each of these entities and enumerates their respective advantages and disadvantages. Though this article focuses on Washington state, nearly all of what is said here also applies to the other states as well.

I. Washington Corporation

A subsidiary is a legal entity separate from its foreign parent. The foreign company is therefore not deemed to be doing business here, is not liable for any of the obligations of its U.S. subsidiary and is not subject to U.S. jurisdiction.

The corporation comes into existence upon filing the Articles of Incorporation with the Secretary of State in Olympia, Washington. The Articles contain basic information about the corporation, such as the corporation's name, the names and addresses of the initial Board of Directors, the number of authorized shares, the appointment of a registered agent for receiving official communications, and standard provisions regarding indemnification of officers and directors and limitation of liability. Unlike in some European countries, you will not need to state a corporate purpose on the Articles of Incorporation.

A corporate name has to be chosen, which must contain the word "corporation", "company" "incorporated", "limited", or the abbreviations "corp.", "inc.", "co.", or "ltd." and be distinguishable from the name of any other business entity previously authorized or registered to transact business in Washington State. After filing the Articles of Incorporation, the initial directors or the incorporators should hold an organizational meeting to complete the organization of the corporation. At this meeting you will need to appoint officers and, if necessary, directors, and you will also need to adopt your bylaws. Washington State allows single shareholder corporations.

Unlike in some other countries where a corporation comes into existence only after subscription payments for issued stock are deposited with a bank, a Washington corporation issues its stock in exchange for subscription payments made after the corporation comes into existence. It is therefore not necessary to remit funds for capital to create a subsidiary here. However, capital funds should be paid in before the business is started. Though Washington law does not require a corporation to maintain a minimum amount of capital (unlike most of Europe and Asia), if a court deems the paid-in capital of the corporation to have been too small in relation to the size of its business, the court may rule the corporation had no identity separate from the shareholders and the shareholders may become liable for the corporation's debt.

The corporation's shareholders may also find themselves liable if a court chooses to "pierce the corporate veil" of the parent-subsidiary relationship and treat the subsidiary as if it were a branch or division of the foreign company. If this occurs, the foreign company can be liable for the actions of its U.S. subsidiary. It is therefore critically important for the U.S. subsidiary to observe corporate formalities, such as maintaining a corporate minutes book and creating corporate minutes to authorize and/or memorialize important actions, contracts, or purchases. The foreign company and its domestic subsidiary must also maintain a visible separation between themselves by, among other things appropriately capitalizing the subsidiary, maintaining separate bank accounts, and by having different officers and directors for the foreign corporation and the subsidiary.

Lastly, a corporation must comply with various regulatory and licensing provisions, required by the federal government, the State of Washington, and county and city governments.

II. Limited Liability Company

The Limited Liability Company is by far the most popular type of Washington state business entity. LLCs often combine the best aspects of a partnership (flexibility and a reduced tax rate), along with those of a corporation (limits on liability). Like a corporation, an LLC protects its owners from liabilities that arise from the company's business, so long as the company is properly operated.

Though it is formed with many of the formal requisites of a corporation, the owners of an LLC are relatively free to structure the ownership, management and financial affairs of the company as they wish. To form an LLC, a Certificate of Formation must be filed with the Secretary of State, and an LLC agreement should be drafted defining the rights and responsibilities between the managers and members, and between all parties and the LLC. The LLC is managed by its members unless the Certificate of Formation or membership agreement states otherwise. A single membership LLC is possible. An LLC also must complete all of the regulatory and licensing provisions.

III. General or Limited Partnership

Two or more persons who co-own business for profit that have not formed an LLC or a corporation have a partnership, whether they intended one or not. A partnership is an entity distinct from its partners and thus property acquired in the name of the partnership is partnership property. Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partner's share of the profits. Each partner has equal rights in the management and conduct of the partnership business.

The disadvantage of a general partnership is that each of the partners is jointly and severally liable for the partnership's debts and actions. In a limited partnership, there must be at least one general partner who has full liability, but the remaining limited partners will not be liable beyond the amount of their investment so long as they do not participate in the day to day management of the partnership's business. Commercial real estate projects are often structured as limited partnerships, with the developer serving as the managing general partner und the investors serving as limited partners.

A partnership should always have a partnership agreement. A partnership must also file and register for the appropriate licenses and registrations.

IV. Tax Law Issues

For tax-identity purposes, the corporation is required to pay federal taxes on its income just as an individual would. This means the earnings of the corporation are taxed twice, first on its income, and then on the dividends distributed to the shareholders. The corporation does not receive any tax deductions for dividends paid to shareholders.

This double taxation of corporations creates incentives for business owners to use an S-Corporation (which is only available for resident owners), a partnership or a limited liability company instead of a corporation. The tax treatment of corporations is a federal tax issue and not a state law issue. Thus, the same exact corporate structure can be treated as either a Subchapter C or S corporation depending on the application of the federal tax laws. Profit and loss of an S-corporation pass through the corporation and are reported in the owner's tax return, like in General or Limited Partnerships or Limited Liability Companies, thus avoiding the "double taxation" of regular corporations.

Foreign individuals and corporations cannot make use of the S-corporation, since their members must be US-citizens. Accordingly, a corporation with a foreign shareholder will always be subject to double taxation. On the other hand, an LLC or a partnership with a foreign member is still treated as a pass through entity for tax purposes, so that taxes are paid only once at the owner level. The foreign investor thus needs to consider the issue of double taxation (which might actually be preferred for investors from countries with a high corporate income tax rate) or a pass through entity.

The foreign company as a member of a partnership or an LLC will be considered to be engaged in any U.S. trade or business in which the partnership or the LLC is engaged, and the branch profits tax may apply to the foreign company.

V. Branch Offices/Representative Offices

Branch or representative offices are rarely formed in Washington. They are far more common in Europe and Asia because they can be used to avoid onerous minimum capital requirements, but because there are no such requirements in Washington, they rarely make sense here. Additionally, such offices do little to insulate the foreign company from liability arising from its Washington state operations.

VI. Delaware/Nevada/Washington

United States companies do not need to be formed in the state in which they will be located or even where they will be conducting their business. For tax reasons, Delaware and Nevada used to be considered the best states for incorporating a business, but Washington State has now joined those states due to its own tax and other benefits. Washington has no state corporate income tax (which usually goes in addition to federal income tax). Washington does impose a Business and Operations tax, but that tax applies only to income earned within the state and it applies equally to foreign companies.

VII. Conclusion

In addition to choosing the right legal entity, there are countless other legal requirements with which United States companies must comply, including, securing their own federal and state tax ID, securing work permits for foreign employees, meeting legal payroll requirements, and properly maintaining their books. In addition to these requirements, the company should, among other things, take all legal steps necessary with its employees, its trademarks and other intellectual property, and its liability risks.

In general, forming a company in the United States is easier and cheaper than doing so in most European and Asian countries, but the difficulties here in staying in compliance with the countless other laws that apply to companies means companies must always remain legally vigilant.

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