Forms of Business Entities under U.S. Law: Partnership, LLC and Corporation at a Glance

Formation, liability, organisation and taxation – what German companies should consider when choosing a legal form for a U.S. venture

Anyone who wants to set up a subsidiary in the United States or acquire a stake in a business there must first choose a legal form. Company law in the U.S. is predominantly the law of the individual states; many states follow model statutes (Uniform Acts, Model Acts), and Delaware has its own widely used bodies of law in the Delaware General Corporation Law (DGCL) and the Delaware Limited Liability Company Act (6 Del. C. § 18-101 et seq.). In outline, three groups can be distinguished: entities that resemble partnerships (Personengesellschaften) in the German understanding (general partnership, limited partnership, limited liability partnership), the corporation as a company limited by shares (Kapitalgesellschaft) and the limited liability company (LLC) as a hybrid. The comparisons with German legal forms are approximations, not equivalences.

General partnership: the basic model

The general partnership (comparable to the OHG, §§ 105 et seq. HGB) is formed by at least two natural or legal persons by a written, oral or implied contract (partnership agreement). It does not have to be registered and requires neither a minimum contribution nor a formation fee. The relevant model statute is the Uniform Partnership Act (UPA 1997). All partners are in principle equally entitled to manage and represent the partnership (self-organisation; Selbstorganschaft) and are personally liable without limit. Cash, property and services may be contributed.

Limited partnership and limited liability partnership

The limited partnership (comparable to the KG, §§ 161 et seq. HGB) has two groups of partners: the general partner manages the business alone, represents the partnership and is personally liable without limit. The limited partner is liable only up to his or her contribution and has only rights to information and control. Unlike the general partnership, the limited partnership must be registered: a certificate of formation in sworn form (sworn certificate) must be filed, and the designation “L.P.” must be used in business dealings. The model statutes are the Uniform Limited Partnership Act (ULPA 1916) and the Revised Uniform Limited Partnership Act (RULPA 1985).

The limited liability partnership (comparable to the Partnerschaftsgesellschaft under the PartGG) is a more recent form created for members of the liberal professions. It is subject to strict formal requirements: registration for a fee, an annual application to continue, and proof of a statutory minimum insurance cover; the designation “L.L.P.” must be used in business dealings. A partner is not liable with his or her private assets for the partnership’s obligations, but is fully liable for his or her own misconduct; the partner is thus protected against the errors of the other partners. Not all states recognise the L.L.P.

Limited liability company: the hybrid

The LLC combines elements of the partnership and the company limited by shares (comparable to the GmbH or to a KG without a general partner). It is formed by filing the formation documents, requires no minimum capital and may be formed by a single person; the designation “L.L.C.” must be used. Liability is limited to the contribution. The members can largely shape the organisation freely. They can manage the business themselves (member-managed) or delegate it to a board of managers (manager-managed); in the latter case the structure resembles that of a corporation. Unless agreed otherwise, voting rights depend on the amount contributed. Profits are distributed in proportion to the shares or in accordance with the operating agreement.

Business corporation: the most important form

The business corporation (stock corporation) is the most important form of business entity under U.S. law. It is a legal person with legal capacity. A single person (incorporator) can form it. What is required is the first set of constitutional documents (articles of incorporation or, in Delaware, certificate of incorporation), a second set for internal organisation (bylaws), an initial meeting at which the board of directors is elected and the executive officers are appointed, and a corporate book. Whether a minimum capital is required is determined by the law of the state of incorporation. In business dealings, designations such as “Corporation”, “Inc.”, “Ltd.” or “Co.” must be used.

The corporation follows the principle of management by non-shareholders (Fremdorganschaft). The central body is the board of directors with joint power of representation; day-to-day business is conducted by the executive officers (in particular the president/CEO, vice president, secretary and treasurer). The shareholders have no right to manage the business. They elect and remove the directors, have voting and information rights and can assert the company’s claims by way of a derivative suit. Shares are as a rule divided into classes: preferred shares carry limited membership rights, such as preferences on dividends and liquidation, while common shares carry full membership rights. The liability of shareholders is limited to their shares; the exception is liability by piercing the corporate veil (Durchgriffshaftung). Profits may be distributed as cash dividends, as distributions in kind or as bonus shares (stock dividends).

As regards sub-forms, U.S. law distinguishes the public corporation (not to be confused with a public-law body; Körperschaft des öffentlichen Rechts), with an anonymous body of shareholders and shares that are freely transferable, usually on a stock exchange, from the private corporation (close corporation), with few shareholders who often take an active part in management and whose shares are transferable only with restrictions, often only among shareholders.

Which law applies?

For corporations and LLCs the law of the state of incorporation governs the internal relationships (internal affairs doctrine; cf. CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69 (1987)). A company incorporated in Delaware with its administrative seat in another state therefore remains subject to Delaware law as regards its internal constitution. External relationships are governed by general conflict-of-laws rules. For the general partnership, the model statute (§ 106 UPA 1997) in principle refers for internal relationships to the place of the chief executive office; the agreement of the law of the state of formation is predominantly regarded as permissible. For the limited partnership, the model statute applies the law of the state of formation to internal relationships.

Transferability of interests

In partnerships and LLCs a member can in principle sell his or her interest at any time, unlike under German law. The acquirer does not, however, automatically obtain power to manage and represent; this regularly requires a members’ resolution. Shares in a public corporation are freely transferable, shares in a private corporation often only subject to restrictions.

Taxation in outline

Partnerships and LLCs are in principle not taxed themselves; profits are taxed in the hands of the members, and the entity files a tax return (information return). Under the U.S. entity classification rules (“check-the-box”, Treas. Reg. § 301.7701-3), a multi-member LLC is by default treated as a partnership and a single-member LLC as a “disregarded entity”; the LLC may, however, elect to be taxed as a corporation. The corporation is subject to corporate income tax (federal rate 21 %, 26 U.S.C. § 11), and distributions to shareholders give rise to a second layer of tax (double taxation). The S corporation (small business corporation) is taxed once, like a partnership, but requires that it has no more than 100 shareholders, that no shareholders resident abroad (nonresident aliens) participate, that no legal entities or partnerships are shareholders and that there is only one class of shares (26 U.S.C. § 1361(b)). A German parent company is therefore ruled out as the owner of an S corporation. State taxes are not covered in this article.

Conclusion

The choice of legal form depends on the need for liability protection, the desired organisation and the tax structure, and should never be made in isolation. For subsidiaries of German companies, the corporation and the LLC are in practice the main options; what matters is that the limitation of liability is also actually observed in practice. Please feel free to contact us if you have any questions.

Status: 23 October 2026

NIETZER Rechtsanwälte · Attorneys at Law (USA) · Heilbronn · www.unternehmensrecht.com

This article is for general information only and does not replace legal advice in an individual case.