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Doing Business in
the United States (Part I)


State Tax Considerations From the Time When a Business is Preparing to Enter the United States and Continuing Through its Operation Throughout the Country

Israeli businesses are accustomed to thinking of taxes as being imposed by a single level of government, as is the case in Israel. As a result, some Israeli businesses may be misled into thinking that American taxes also are imposed at one level only. The size and prominence of the United States government’s Internal Revenue Service may reinforce that false impression.

In fact, however, all of America’s 50 states, the District of Columbia and thousands of American cities, villages and other municipalities impose taxes on income, on the transfer of real property, and on sales and purchases of goods and services. In addition, Israel’s income tax treaty with the United States does not cover state taxes.

Thus, state taxes can be imposed even in circumstances when federal income taxes would not be imposed. State and local tax liabilities can be substantial. Therefore, United States businesses dedicate considerable time and resources to planning for and defending against the imposition of these taxes. Israeli businesses wanting to compete in the United States must act accordingly. At a minimum, Israeli businesses must be aware of the existence of these taxes so that they, like their American competitors, can seek expert assistance in planning their entry into a state and their operations after their initial entry.

This outline contains four parts. Part one is provided below. Subsequent State Tax Alerts will contain parts two, three and four, addressing the obtaining of tax benefits, control of tax presence, and sales and income tax considerations in expanding into the United States.

Part I
Getting Started:
Choice of Entity and State of Formation

Experience shows that Israeli businesses entering the United States tend to form new corporations under Delaware law to conduct their United States business. While that might be an appropriate decision for some businesses, there are alternatives that should be considered. A different choice might be more appropriate for other businesses. A partial list of considerations includes:

  • For corporations and limited liability companies ("LLC"), forming in Delaware might lead to an unnecessary duplication of annual fees paid to secretaries of state, as those fees also will be required to be paid to the state where the business’s headquarters are located.
  • Corporations generally are subject to two levels of income taxes, while LLCs and partnerships generally are not.
  • If the business generates losses while affiliates are or will be operating at a profit, there may be a state income tax advantage to using a single member limited liability company ("SMLLC"). Doing so may allow one business’s losses to be offset against its affiliates’ gains where that would not be possible under a corporate form.

1. Should the business incorporate?
a. Choice of entity.
i.   Unincorporated division.
ii.  Corporation.
iii.  Partnership
  • General partnership.
  • Limited partnership.
  •     iv. LLC
  • Multiple member LLC.
  •   b. Non-tax considerations.
      c. Tax considerations affecting the choice of an entity.
    i.   Israel.
    ii.  Federal.
    iii. State and local.
  • Fees.
  • Income taxes.
  • Other taxes
  •     iv. Will the business engage in investment activities? Will the business
         develop or rent real estate?

  • These are activities that often generate losses or capital gains that the business may want to pass through to its investors, which may make a partnership or LLC structure desirable

    2. Under which state’s laws should the entity
        be formed or incorporated?
    a. Where will the business have its United States headquarters?
    b. Will the business have offices in other states?
    c. What does the business do to generate income?
    i. Sell goods?
    ii. Sell services?
    iii. Investment activities?
    iv. Financial services?
    v. Protect and license intellectual property?
    vi. Develop or rent real estate?

      d. How will the business make sales?
        i. In person by employees or representatives?
    ii. Retail stores?
    iii. Internet, mail or telephone?
    iv. Several of the above?

    Previous issues of the State Tax Alert Newsletter are available at:

      *David A. Fruchtman is an attorney in the United States. He is not admitted to the Israeli Bar. He is Of Counsel to Horwood Marcus & Berk Chartered, located at 180 N. LaSalle Street, Suite 3700, Chicago, Illinois 60601. He is a Harvard Law School graduate and is chairman of the American Bar Association’s Income and Franchise Taxes subcommittee. He has been named by his peers as one of Chicago’s Leading Tax Lawyers. Horwood Marcus & Berk Chartered has one of the largest state and local tax law practices in the United States. The firm provides tax planning advice to clients of all sizes and has successfully represented clients before courts and administrative tribunals throughout the country, including at the United States Supreme Court.  
      This Alert is for discussion purposes only and does not constitute tax advice; consequently, it is not subject to the attorney-client privilege and does not constitute attorney work product. This Alert may be disclosed to any and all persons, without limitation of any kind, including any potential tax treatment or tax structure of any transaction described hereon. This Alert does not provide federal tax advice and was not prepared in a form to comply with the requirements of an opinion upon which a taxpayer can rely to avoid certain penalties under the Internal Revenue Code of 1986, as amended. No fee was received in connection with producing this Alert. 2006 David A. Fruchtman