Legal Question in Business Law in California

Re: Partial Ownership of a Foreign Company by a California S-Corp

If you have foreign ownership, you would not be able to make the S election. The only type sof sharholders allowed in an S corporation are individuals, estates, exempt organizations described in section 401(a) or 501(c)(3) of the Internal Revenue Code, or certain trusts described in section 1361(c)(2)(A). An S corporation also cannot have ny nonresident alien shareholders.

Re: Partial Ownership of a Foreign Company by a California S-Corp

Don't know where to start with this one. I am not quite sure what you are asking as far as California Corporation structure, I assume you will just own an equity interest in the company and the company will be structured in China. Doesn't sound like they will own a portion of the company here, and it does not sound like you own enough of the company to have a majority interest (making them a daughter corporation).

The issues I would be concerned with deal with securities law (depending on how your ownership is structured), Chinese Law (foreign ownership of a Chinese Entity), International Tax implications (Duties, etc), as well as how your interest in the other company is held, what exactly you are importing, and tax reporting for both Chinese and Federal Income Tax Law.

Bottom line is you really should not get into overseas investing of this nature without having at the very minimum a qualified attorney with experience in the area, as well as CPA who can handle this and is aware of the tax implications. Most of the firms that specialize in this in California are located in San Francisco or Los Angeles (depending on where you are).

Frankly this is way too complicated and invovled a question to be answered on lawguru.

Re: Partial Ownership of a Foreign Company by a California S-Corp

In my opinion, it's perfectly OK for a United States (California) S-Corp. to have a 10%, 15% or even 100% stake in a foreign (overseas) corporation, be it in China or wherever.

It used to be that an S corporation could not have a subsidiary without losing its S election and becoming a C corporation by default. That limitation was removed by Section 1388 of Public Law 104-188 which eliminated the restriction on S corporations having subsidiaries. For tax years 1997 and thereafter, S corporations can have subsidiaries as far as the Internal Revenue Code is concerned, and it doesn't matter where they are. Of course, the Chinese subsidiary will NOT be, nor could it ever be, entitled to "S" tax treatment itself.

Further, I do not know of any problem with "California Corporation structure" as you call it; the State of California does not incorporate you as a "C" corporation or an "S" corporation. As far as the Secretary of State of California is concerned, you are simply a corporation, or, more particularly perhaps, a for-profit corporation. It is the IRS that makes or un-makes you as "S" or "C;" those letters designate tax elections and do not designate separate types of corporation. The commonly-used terms are, unfortunately, misleading to a lot of business owners. Instead of thinking of your business as an '"S" corporation,' probably you should think of it as "a California corporation that has, for now, elected to be taxed as a pass-through entity under (former) Subchapter S of a certain section of the Internal Revenue Code."

As to the W9 part of the question, this is outside of my current knowledge and I should decline to express a view.