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Making a decision on what business to own is one of the first decisions in the E-2 visa journey.
Discover the pros and cons of buying a business, explore franchise options, learn about suitable business structures, understand purchase contract essentials, and get tips on securing necessary business licenses.
This resource provides essential insights. See below for details.
Contact us if you have questions.
Many find the idea of starting a business appealing, but lose their motivation after dealing with business plans, investors, and legal issues associated with new start-ups. For those disheartened by such risky undertakings, buying an existing business is often a simpler and safer alternative.
Advantages
The main reason to buy an existing business is the drastic reduction in start-up costs of time, money, and energy. In addition, cash flow may start immediately thanks to existing inventory and receivables. Other benefits include preexisting customer goodwill and easier financing opportunities, if the business has a positive track record.
Disadvantages
The biggest block to buying a business outright is the initial purchasing cost. As the business concept, customer base, brands, and other fundamental work have already been done, the financial costs of acquiring an existing business is usually greater then starting one from nothing. Other possible disadvantages include hidden problems associated with the business and receivables that are valued at the time of purchase, but later turn out to be non-collectable. Good research is the key to avoiding these problems.
Franchise businesses are very suitable for the E2 visa and enjoy a number of advantages. One of the top concerns of visa officers in deciding an E2 application is what is the likelihood of success of the applicant’s business. Franchise businesses are generally viewed more favorably by immigration authorities, because they are successful business models with highly developed, tried and true systems. Investing in a franchise business also allows foreign entrepreneurs to present professionally prepared operations manuals, marketing, and training materials in their E2 visa applications.
Another key advantage of franchise investment applies to people who lack significant business education or experience. Most visa officers consider franchise training and on-going support to be highly relevant and valuable preparation, and are often satisfied with the applicant’s readiness for entrepreneurship, even if the person has little to no business background. For these reasons, franchise investment is very well suited for E2 visa investment.
For a listing of E2 visa friendly franchisors and professional assistance with finding a suitable franchise investment opportunity, please visit: www.franchise.city
A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchiser or that meet the franchiser’s quality standards.
Franchising is based on mutual trust between the franchiser and franchisee. The franchiser provides the business expertise (marketing plans, management guidance, financing assistance, site location, training, etc.) that otherwise would not be available to the franchisee. The franchisee brings the entrepreneurial spirit and drive necessary to make the franchise a success.
There are primarily two forms of franchising:
1. Product or trade name franchising; and
2. Business format franchising.
In the simplest form, a franchiser owns the right to the name or trademark and sells that right to a franchisee. This is known as product/trade name franchising. The more complex form, business format franchising, involves a broader ongoing relationship between the two parties. Business format franchises often provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.
Please note that our firm does not endorse any franchises. You should exercise due diligence before buying a franchise and consult an experienced E2 visa lawyer to evaluate whether the franchise business you are interested in qualifies for the E2 investor visa.
Registering a Company: Choosing a Business Structure
Forms of Business Ownership
One of the first decisions that you will have to make as a business owner is how the company should be structured. Below are the most common forms of business structure:
SOLE PROPRIETORSHIPS
The vast majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibilities for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are one in the same with the business.
Advantages of a Sole Proprietorship
- Easiest and least expensive form of ownership to organize.
- Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit.
- Sole proprietors receive all income generated by the business to keep or reinvest.
- Profits from the business flow directly to the owner’s personal tax return.
- The business is easy to dissolve, if desired.
Disadvantages of a Sole Proprietorship
- Sole proprietors have unlimited liability and are legally responsible for all debts against the business.
- Their business and personal assets are at risk.
- May be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.
- May have a hard time attracting high-caliber employees or those that are motivated by the opportunity to own a part of the business.
- Some employee benefits such as owner’s medical insurance premiums are not directly deductible from business income (only partially deductible as an adjustment to income).
PARTNERSHIPS
In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership when needed. Yes, it’s hard to think about a breakup when the business is just getting started, but many partnerships split up at crisis times, and unless there is a defined process, there will be even greater problems. They also must decide up-front how much time and capital each will contribute, etc.
Advantages of a Partnership
- Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.
- With more than one owner, the ability to raise funds may be increased.
- The profits from the business flow directly through to the partners’ personal tax returns.
- Prospective employees may be attracted to the business if given the incentive to become a partner.
- The business usually will benefit from partners who have complementary skills.
- Disadvantages of a Partnership
- Partners are jointly and individually liable for the actions of the other partners.
- Profits must be shared with others.
- Since decisions are shared, disagreements can occur.
- Some employee benefits are not deductible from business income on tax returns.
- The partnership may have a limited life; it may end upon the withdrawal or death of a partner.
Types of Partnerships that should be considered:
- General Partnership. Partners divide responsibility for management and liability as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently.
- Limited Partnership and Partnership with limited liability. Limited means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions, which generally encourages investors for short-term projects or for investing in capital assets. This form of ownership is not often used for operating retail or service businesses. Forming a limited partnership is more complex and formal than that of a general partnership.
- Joint Venture. Acts like a general partnership, but is clearly for a limited period of time or a single project. If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such as well as distribute accumulated partnership assets upon dissolution of the entity.
CORPORATIONS
A corporation chartered by the state in which it is headquartered is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed, it can be sued, and it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.
Advantages of a Corporation
- Shareholders have limited liability for the corporation’s debts or judgments against the corporations.
- Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
- Corporations can raise additional funds through the sale of stock.
- A corporation may deduct the cost of benefits it provides to officers and employees.
- Can elect S corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.
Disadvantages of a Corporation
- The process of incorporation requires more time and money than other forms of organization.
- Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
- Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income; thus it can be taxed twice.
SUBCHAPTER S CORPORATIONS
A tax election only; this election enables the shareholder to treat the earnings and profits as distributions and have them pass through directly to their personal tax return. The catch here is that the shareholder, if working for the company, and if there is a profit, must pay him/herself wages, and must meet standards of “reasonable compensation”. This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.
LIMITED LIABILITY COMPANY (LLC)
The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.
The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued, if desired, by a vote of the members at the time of expiration. LLCs must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets, continuity of life, centralization of management, and free transferability of ownership interests. Taxed as partnership in most cases; corporation forms must be used if there are more than 2 of the 4 corporate characteristics, as described above.
In summary, deciding the form of ownership that best suits your business venture should be given careful consideration. This decision will have long-term implications, so consult with an accountant and a business law attorney to help you select the form of ownership that is right for you.
Purchase Agreement
The purchase agreement is the key document in buying the business assets or stock of a corporation. It is important to make sure the agreement is accurate and contains all the terms of the purchase. It would be a good idea to have a business law attorney review this document. It is in this agreement that you should define everything that you intend to purchase of the business, assets, customer lists, intellectual property, and goodwill.
The following is a checklist of items that should be addressed in the agreement:
- Names of Seller, Buyer, and Business
- Background information
- Assets being sold
- Purchase price and Allocation of Assets
- Covenant Not to Compete
- Any adjustments to be made
- The Terms of the Agreement and payment terms
- List of inventory included in the sale
- Compliance with the Bulk Sales laws of the state
- Any representation and warranties of the seller
- Any representation and warranties of the buyer
- Determination as to the access to any business information
- Determination as to the running of the business prior to closing
- Contingencies
- Possibilities of having the seller continue as a consultant
- Fees, including brokers fees
- Date of closing
Getting Business Licenses and Permits
STATE REQUIREMENTS
While business licensing requirements vary from state to state, some of the more common types are listed below.
Business Licenses
A state business license is the main document required for tax purposes and conducting other basic business functions. Many states have established small business assistance agencies to help small businesses comply with state requirements.
Occupations and Professions
State licenses are frequently required for occupations as varied as building contractors, physicians, appraisers, accountants, barbers, real estate agents, auctioneers, private investigators, private security guards, funeral directors, bill collectors, and cosmetologists. Since you can’t always guess which occupations and professions are licensed by your state, you should always check with your state licensing authorities.
Licenses Based on Products Sold
Some state licensing requirements are based on the product sold. For example, most states require special licenses to sell liquor, lottery tickets, gasoline, or firearms. Contact your state licensing authorities to determine the licensing requirements of your business.
Tax Registration
If the state in which you operate has a state income tax, you’ll have to register and obtain an employer identification number from your state Department of Revenue or Treasury Department. If you’re engaging in retail sales, you will need to obtain a sales tax license.
Trade Name Registration
If your business will only be operated in your local community, registering your company name with the state may be sufficient.
Employer Registrations
If you have any employees, you’ll probably be required to make unemployment insurance contributions. For more information, contact your state Department of Revenue or Department of Labor.
FEDERAL REQUIREMENTS
Employer Identification Number (EIN). With the exception of sole proprietors, most business types must apply for an EIN regardless of whether they have employees.
Licenses and Permits
Most businesses do not require a federal license or permit. However, if you are engaged in one of the following activities, you should contact the responsible federal agency to determine the requirements for doing business:
- Investment Advising
- Drug Manufacturing
- Preparation of Meat Products
- Broadcasting
- Ground Transportation
- Selling Alcohol, Tobacco, or Firearms
Federal registration of intellectual property, including patents, trademarks, trade names, and copyrights, provide business owners with exclusive use of intellectual property in the US as well as in a large number of foreign countries.
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