Principles of International Trade: Import-Export

2018 Chase C. Rhee. All rights reserved.

No part of this book may be reproduced, stored in a retrieval system, or transmitted by any means without the written permission of the author.

Published by AuthorHouse    02/16/2018

ISBN: 978-1-5462-1857-9 (sc)

ISBN: 978-1-5462-1859-3 (hc)

ISBN: 978-1-5462-1858-6 (e)

Library of Congress Control Number: 2017917273

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First published by 1st Books Library 2003

The 2nd edition published by California State University, Los Angeles 2005

The 3rd edition published by AuthorHouse 2007

The 4th edition published by California State University, Los Angeles 2011

The 5th edition published by AuthorHouse 2012

The 6th edition published by AuthorHouse 2018

ABOUT THE AUTHOR

Dr. Chase C. Rhee is a professor of International Trade at the Pacific States University (PSU) in Los Angeles, California. Dr. Rhee also taught Import/Export at the University of California Los Angeles (UCLA) Extension School and the California State University Los Angeles (CSULA) for 20 years.

Dr. Rhee received his bachelor’s degree in international trade at the College of Commerce of Seoul National University, Seoul, Korea and his master’s degree in international management at Thunderbird School of Global Management, Glendale, Arizona. He also received his Doctor of Business Administration (DBA) degree in international management at U.S. International University (name changed to Alliant International University), San Diego, California.

Dr. Rhee has over 30 years experience in international trade (import/export) for a wide range of products including international banking.

Dr. Rhee contributed numerous articles to Los Angeles-based Korea Times and made several presentations on the U.S.-Korea Free Trade Agreement (US-Korea FTA, also called KORUS).

Dr. Rhee is a well-respected expert in international business matters due to his skill in combining academic theories and research with hands-on experience of the real world of international business.

PREFACE

This book, Principles of International Trade (Import-Export), is intended for students studying international trade and business people who want to engage in international trade. This book covers the basic concepts and procedures that are required for starting and completing international transactions.

All businesses, regardless of whether they do only domestic business or not, are affected by international trade and business. Consumers encounter imported products at most retail stores and domestic businesses are exposed to stiff foreign competition. As a consumer or as a businessperson, all of us need to understand international trade for our own benefits.

The draft version of this book, annually or bi-annually revised, had been used as a textbook at California State University, Los Angeles, California (Cal State L.A.) and Pacific States University, Los Angeles, California (PSU) for over ten years before this book was first published in 1993 with the help and encouragement of my family, friends, students, and colleagues at both campuses.

This book consists of 37 chapters, a bibliography, websites, indexes, and endnotes. The text is divided into two parts. The first part, chapters 1 through 27, covers matters for importing goods from overseas and common topics related to both importing and exporting. The second part, chapters 28 through 37, is devoted to topics for exporting overseas. This new edition includes the latest Uniform Customs and Practice for Documentary Credits No. 600 (2007 Revision) and Incoterms 2010 published by the International Chamber of Commerce (ICC).

Instructor’s teaching materials for international trade (import-export) such as Power Point slides and key points for examinations are available at the author’s website, http://www.internationaltraderesearch.com.

The material and information in this text have been brought current as of June 1, 2017. Any errors or omissions exclusively belong to me. I would appreciate any comments, suggestions, or recommendations directed to me at my email address: drccrhee@gmail.com or fax 626-795-5196. Your comments, suggestions, or recommendations will be used in improving this book at the next publication.

TABLE OF CONTENTS

ABOUT THE AUTHOR

PREFACE

TABLE OF CONTENTS

Chapter I: INTRODUCTION TO INTERNATIONAL TRADE

1. Classical Theories of International Trade

2. Interactions between an Exporter and an Importer

Chapter II: ESTABLISHING AN IMPORT BUSINESS

1. Reasons for Importation

2. Requirements for a Successful Import Business

3. Legal Forms of a Business

4. Import Organizations

Chapter III: LOCATING PRODUCTS TO IMPORT

1. Import Sources

2. Unsolicited Offers from Foreign Suppliers

3. Inquiries from Domestic Buyers

4. Selection of Products to Import

5. Selection of Foreign Suppliers

Chapter IV: SPECIAL TARIFF TREATMENT PROGRAMS

1. Generalized System of Preferences (GSP)

2. Caribbean Basin Initiative (CBI)

3. Andean Trade Preference Act (ATPA)

4. Freely Associated States (FAS)

5. African Growth and Opportunity Act (AGOA)

6. Maquiladora Program

Chapter V: FREE TRADE AGREEMENTS

1. European Free Trade Agreements and Common Market

2. United States Free Trade Agreements

Chapter VI: INTERNATIONAL TRADE TERMS

1. Revised American Foreign Trade Definitions 1990

2. Incoterms 2010

Chapter VII: INTERNATIONAL TRANSPORTATION

1. Types of International Transportation

2. Types of International Cargo

3. Total Ocean Freight

4. Ocean Bill of Lading (B/L)

5. Non-Negotiable Sea Waybill and Air Waybill

6. Multimodal Transport Document

7. Letter of Credit and Ocean Bill of Lading

8. Party Responsible for Shipping Arrangements

9. Arrival Notice

Chapter VIII: MARINE CARGO INSURANCE

1. Risks Covered

2. Voyage and Time Policies

3. Causes of Loss Covered

4. Coverage by Additional Endorsements in Open Cargo Policy

5. Conveyances Covered

6. Institute Cargo Clauses

7. Marine Cargo Insurance Coverage

8. Rejection Clause

9. Warranties, Express or Implied

10. Amount of Insurance Coverage

11. Insurance Documents

12. Claims for Loss or Damage

13. Marine Cargo Insurance Policy and Letter of Credit

Chapter IX: TERMS OF PAYMENT

1. Consignment

2. Open Account

3. Cash in Advance

4. Documentary Draft

5. Letter of Credit

Chapter X: FINANCING IMPORTS

1. Transferable Letter of Credit (Article 38)

2. Assignment of Proceeds of a Letter of Credit (Article 39)

3. Back-to-Back Letter of Credit

4. Red Clause Letter of Credit

Chapter XI: INSPECTIONS, PACKING, & MARKING OF IMPORTED GOODS

1. Inspections of Imported Goods

2. Packing of the Imported Goods

3. Shipping Markings

4. Country of Origin Marking

Chapter XII: SHIPPING DOCUMENTS

1. Commercial Invoice

2. Packing List

3. Ocean Bill of Lading

4. Marine Cargo Insurance Policy/Certificate

5. Special Shipping Documents

Chapter XIII: CUSTOMS CLEARANCE

1. Entry Process of the Goods

2. Types of Entry

3. Evidence of Right to Make Entry for Importations

4. Entry Documents

5. Surety

6. Entry Summary and Payment of Duties

7. Automated Commercial Environment (ACE)

8. Immediate Delivery Application Prior to Arrival

9. Entry for Bonded Warehouse

10. Unentered Goods

11. Mail Entries

12. Examination of Goods and Entry Documents

13. Classification

14. Liquidation

15. Protest and Litigation

Chapter XIV: TRANSACTION VALUE

1. Transaction Value of Imported Merchandise

2. Transaction Value of Identical Merchandise

3. Transaction Value of Similar Merchandise

4. Deductive Value

5. Computed Value

Chapter XV: DRAWBACK

1. Types of Drawback

2. General Manufacturing Drawback Ruling (GMDR)

3. Specific Manufacturing Drawback Ruling (SMDR)

4. Evidence of Exportation

5. Filing for Drawback Claims

6. Person Entitled to Receive Drawback

Chapter XVI: CUSTOMS BROKERS

1. Functions of a Customs Broker

2. Services of a Customs Broker

3. Selection of a Customs Broker

Chapter XVII: HARMONIZED TARIFF SCHEDULE OF THE U. S. (HTSUS)

1. Structure of the HTSUS

2. Columns of the HTSUS

3. Commingling of Goods

4. General Rules of Interpretation

5. Types of Customs Duty

Chapter XVIII: TEMPORARY FREE IMPORTATIONS & ATA CARNET

1. Temporary Free Importations Under Bond (TIB)

2. ATA Carnet

Chapter XIX: PRICING IMPORTED GOODS & DISTRIBUTION CHANNELS

1. Cost of Imported Goods

2. Value Marketing

3. Distribution Channel

4. Selection of a Sales Representative

5. Sources of Information

Chapter XX: U.S. GOVERNMENT’S IMPORT RESTRICTIONS

1. Agricultural Commodities

2. Arms, Ammunition and Radioactive Materials

3. Consumer Products

4. Electronic Products

5. Foods, Drugs, Cosmetics, Medical Devices, and Biologics

6. Gold, Silver, Currency, and Stamps

7. Pesticides and Toxic and Hazardous Substances

8. Textile, Wool, and Fur Products

9. Trademarks, Trade Names, and Copyrights

10. Wildlife and Pets

11. Obscene, Immoral, Seditious Matter, and Lottery Tickets

12. Petroleum and Petroleum Products

13. Products of Convict or Forced Labor and Child Labor

14. Products of Unfair Competition

15. Artifacts and Cultural Property

16. Foreign Assets Control Regulations

17. Alcoholic Beverages

18. Motor Vehicles and Vehicle Equipment

19. Boats and Boat Equipment

20. Penalties for Violation of Trade Laws

Chapter XXI: IMPORT QUOTAS

1. Tariff-Rate Quotas

2. Absolute Quotas

3. Quotas Administered by Other Government Agencies¹⁰⁷

Chapter XXII: ANTIDUMPING, COUNTERVAILING, & SAFEGUARD MEASURES

1. Dumping by a Foreign Manufacturer

2. Subsidies by a Foreign Government

3. Antidumping Duties (ADs) and Countervailing Duties (CVDs)

4. Procedures for ADs and CVDs

5. Safeguard Measures

Chapter XXIII: FOREIGN-TRADE ZONES

1. Purposes of a Foreign Trade Zone

2. Treatment of Goods

3. Benefits of a FTZ

4. Foreign Trade Zones (FTZs) and FTZ Subzones in California and New York

Chapter XXIV: LOCATING PRODUCTS TO EXPORT & LOCATING EXPORT MARKETS

1. U.S. Exporters

2. Purposes for Exporting

3. Product Considerations

4. Export Markets

Chapter XXV: INTERNATIONAL ORGANIZATIONS

1. General Agreement on Tariffs and Trade (GATT)

2. World Trade Organization (WTO)

3. International Chamber of Commerce (ICC)

4. Organization for Economic Cooperation and Development (OECD)

5. Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technology

6. G-7/G-8

7. G-20

Chapter XXVI: EXPORT ENTRY STRATEGIES & EXPORT INTERMEDIARIES

1. Export Entry Strategies

2. Export Intermediaries

3. Export Trading Company Act (ETCA) of the U.S.

Chapter XXVII: OVERSEAS AGENTS/DISTRIBUTORS & AGENCY AGREEMENTS

1. International Partner Search Service

2. Agency Agreements

Chapter XXVIII: FOREIGN CORRUPT PRACTICES ACT & ANTIBOYCOTT LAWS

1. Foreign Corrupt Practices Act (FCPA) of 1977

2. Antiboycott Laws

Chapter XXIX: EXPORT PRICING

1. Export Cost Factors

2. Export Pricing Strategy

3. Export Pricing Methods of Manufacturers

4. Pro Forma Invoice

Chapter XXX: SALES CONTRACTS

1. Contractual Terms

2. Claim Settlement Methods

Chapter XXXI: INTERNATIONAL FREIGHT FORWARDER & ELECTRONIC EXPORT INFORMATION (EEI)

1. Services Provided by the International Freight Forwarder

2. Electronic Export Information

Chapter XXXII: EXPORT CREDIT INSURANCE

1. Functions of the Export Credit Insurance

2. Risks Covered

3. Risks Not Covered:

4. Export Credit Insurance Programs

Chapter XXXIII: NEGOTIATION OF SHIPPING DOCUMENTS

1. Instructions for Opening a Letter of Credit

2. Examination of a Letter of Credit

3. Common Discrepancies

4. Negotiation with Discrepancies

5. Documents for Negotiation

6. Presentation of Documents

Chapter XXXIV: FINANCING EXPORTS

1. Buyer’s Financing of Exports

2. International Factoring

3. Forfaiting

4. U.S. Government’s Export Financing

Chapter XXXV: U.S. GOVERNMENT’S EXPORT CONTROLS

1. U.S. Government Agencies Controlling Exports:

2. Export Control Purposes

3. Scope of the Export Administration Regulations (EAR)

4. General Prohibitions

5. Export License Requirements

6. License Exceptions

7. Country Groups

8. Destination Control Statement

9. Sanctions

10. Violators

Chapter XXXVI: U.S. GOVERNMENT’S EXPORT SUPPORTS

1. U. S. Department of Commerce (USDC)

2. U. S. Department of Agriculture (USDA)

3. U. S. Small Business Administration (USSBA)

Chapter XXXVII: U.S. EXPORT INCENTIVES: IC-DISC (INTEREST CHARGE DOMESTIC SALES CORPORATION)

1. Purpose of an IC-DISC

2. Background of an IC-DISC

3. Definition of an IC-DISC

4. Operations of an IC-DISC

5. Structures of a Parent Company and its IC-DISC

6. Qualifying Conditions of an IC-DISC

7. U.S. Tax Benefits of an IC-DISC

BIBLIOGRAPHY

WEBSITES

ENDNOTES

CHAPTER I

INTRODUCTION TO INTERNATIONAL TRADE

No country is completely self-sufficient. No country can produce all products it needs, nor is blessed with all natural resources necessary to maintain its economic growth. The resulting interdependence of nations is becoming more important as the world economy is being globalized and businesses are expanding their markets beyond their countries’ borders.

Import is a business activity that brings foreign goods and services into the country where the business is located. On the other hand, export is a business activity sending goods and services beyond a nation’s border. Import and export are also called international trade or foreign trade.

1. Classical Theories of International Trade

(1) Mercantilism

Mercantilism advocates more exports and fewer imports. A nation becomes richer and more powerful when it exports more than it imports. The trade balance between imports and exports is settled by precious metals such as gold and silver. The more precious metals a country accumulates, the more prosperous it becomes. However, not all nations can have a trade surplus for the same time period, since a nation’s surplus is another nation’s deficit. This theory was popular among European countries during the sixteenth to eighteenth century. While promoting exports, countries raised trade barriers to discourage imports that resulted in reduced international trade after all.

Nowadays no country admits it is implementing the mercantilism as its trade policy. More often, it is used when a country accuses other country which exports a lot but imports much less with import restrictions.

(2) Absolute Advantage

In 1776 Adam Smith of Great Britain published the book entitled An Inquiry into the Nature and Causes of the Wealth of Nations. In this book, he proclaimed that a country’s wealth consists of the goods and services available to its citizens rather than gold and silver. He denounced mercantilism and advocated free trade.

To increase the wealth of nations, instead of producing all items a country needs, it should produce and export goods at an absolute advantage, and import goods at an absolute disadvantage. The international specialization in production would result in more outputs to all trading partners.

Some countries have a ‘Natural Advantage’ at some products due to climate and natural resources such as Saudi Arabia in petroleum. Other countries have an ‘Acquired Advantage’ at other products due to product and process technology such as Japan in electronic goods.

Let’s assume that the countries of Mexico and the U.S.A. each have 100 resources available for producing tomatoes and beans. In producing 1 ton of tomatoes, Mexico uses 4 units of resource and the U.S.A. uses 10 units of resource. In producing 1 ton of beans, Mexico uses 20 units of resource and the U.S.A. uses 2 units of resource.

When each uses half of its resources (50) per product without trade

When each uses all its resources (100) only for product at an absolute advantage

It is more beneficial that the USA produces only beans at an absolute advantage using all 100 resources, while Mexico produces only tomatoes at an absolute advantage using all 100 resources. Then, one country exports a product it produces and imports a product it does not produce.

(3) Comparative Advantage

In 1817 David Ricardo expanded the Absolute Advantage Theory of Adam Smith. He declared in his book On the Principles of Political Economy and Taxation that even when a country does have or does not have an absolute advantage on all of its products, trade gains can occur if the country specializes in the production and export of products at a comparative advantage which is a greater advantage than other products, and imports products for which the advantage is less. The reason is that a country must give up less efficient production in order to allocate more resources to more efficient production due to limited resources. The comparative advantage theory has been a basis for export-oriented economic development of less developed countries.

When each uses half of resources (50) per product without trade

When Mexico produces tomatoes and USA beans only and trade

In this situation, USA and Mexico together produce more tomatoes by 20 tons (50 tons-30 tons) but less beans by 6.25 tons (12.50 tons-18.75 tons). The advantage cannot be compared at this stage, because the result is more production in one product and less production in another product.

Therefore, to make a comparison easier, let’s assume that the USA produces 12.50 tons of beans using all 100 resources (100 / 8), while Mexico produces 30 tons of tomatoes by using 60 resources (60 / 2). Then, Mexico can produce 10 tons of beans with the remaining 40 resources (40 / 4).

In this case, the USA and Mexico produce 30 tons of tomatoes and 22.50 tons of beans together. The result is that the production of beans is increased by 3.75 tons (22.50 -18.75).

For more analysis, let’s assume once again that the USA produces the same 12.50 tons of beans using all 100 resources and Mexico produces 6.25 tons of beans by using 25 resources (25 / 4) to make the total production of beans by two countries 18.75 tons. Mexico can use the remaining 75 resources in producing 37.50 tons of tomatoes (75 / 2).

In this assumption, USA and Mexico can produce more tomatoes by 7.50 tons (37.50-30.00), while producing the same 18.75 tons of beans.

Therefore, in order to increase overall production of tomatoes and beans, it is more beneficial that the USA produces only beans at which it has a comparative advantage and Mexico produces only tomatoes at which it has a comparative advantage, even though Mexico has absolute advantages at both tomatoes and beans. Then, each country exports the product it produces and imports the product it does not produce.

Ricardo’s Law of Comparative Advantage was developed under the assumption that (1) a country has limited resources so that it must allocate its resources, (2) transportation cost of products from one country to another is not considered, and (3) there is no mobility of resources between countries.

2. Interactions between an Exporter and an Importer

An importer who wants to import a product sends an inquiry to an overseas supplier. The letter of inquiry usually consists of a short introduction of the inquirer, the name and quantity of the product an importer wants to import, and the time of shipment he desires. The importer also inquires an exporter about the price, the terms of trade, the terms of payment required, and sometimes the minimum quantity the exporter is willing to accept.

If an importer responds to an exporter’s advertisement or sales letter, or is referred to the exporter by an important person or organization, it is beneficial to mention this. In any case, an importer must have a specific inquiry about the products he wants to import. Too general an inquiry on any or all products a manufacturer exports will not receive special attention and as a result, the importer might not get even a reply from the exporter.

When an exporter receives an inquiry from a potential importer, the exporter sends his offer to the overseas importer. An offer usually consists of a description of the product, price with terms of trade, quantity, the time of shipment, and terms of payment. The exporter answers all the questions raised by the importer. An offer with a validity date is called a firm offer. When a firm offer is accepted by an importer, the exporter must comply with all the terms and conditions he proposed.

When an importer receives an offer from his overseas exporter, the importer first must determine if the price and other trade terms are acceptable to him. It is common for an importer to ask for discount or change in the trade terms. Sometimes an importer sends an exporter a counter-offer that contains the terms and conditions an importer is willing to accept. After several negotiations, the importer sends his acceptance of the exporter’s offer and a written purchase order to the exporter.

Unless the transaction is between related parties or firms of a long-standing relationship, an exporter usually will not fulfill the purchase order without an assurance of the payment for the products he will ship. In international trade, unlike in a domestic transaction, a letter of credit (L/C) opened by the importer’s bank is usually required by the exporter. Most manufacturers in developing countries are reluctant even to start the manufacturing processes until a letter of credit is received. Therefore, a letter of credit needs to be opened not when the product is ready to ship, but when the purchase order is placed and the manufacturing process begins.

When the product an importer ordered is shipped on the vessel, an ocean bill of lading (B/L) is issued to the exporter. The bill of lading carries the title to the products. The shipping lines do not release the cargo without an original bill of lading at the port of importation. An exporter obtains the bill of lading from the shipping company after shipment of the ordered goods and prepares other shipping documents required by his buyer in the letter of credit. The exporter then presents the shipping documents to his bank for payment for the products he has shipped.

The bank that receives the shipping documents first forwards the documents to the opening bank for payment. After payment for shipment is received, the exporter’s bank pays the exporter. Depending on the reimbursement condition of the letter of credit, sometimes the exporter’s bank first pays the exporter and forwards the shipping documents to the opening bank and gets reimbursed. In this case, the interest for the period between payment to the exporter and reimbursement is charged to the exporter. When an exporter gets paid for the product he has shipped, the international transaction is completed between an exporter and an importer.

However, an importer must wait for the vessel to arrive at the port of importation, even if the payment for his import has been made earlier against the shipping documents specified in the letter of credit. After the cargo arrives at his port, the importer’s customs broker clears the goods through customs and get the shipment released by the carrier upon presentation of the bill of lading.

After customs clearance, the imported cargo goes through a distribution channel. The cargo is shipped to the importer’s domestic buyers or importer’s warehouse for future distribution. An importer’s work is not complete until he sells his imported goods to domestic buyers and receives payment.

CHAPTER II

ESTABLISHING AN IMPORT BUSINESS

1. Reasons for Importation

Import is a business where profit is a major reason for existence. When a businessman finds products overseas which are not available in his country, he may import them for resale in his country. For example, the fruits of South America and Australia/New Zealand are imported into the United States during the winter season. Ethnic foods and specialty products are also imported into the United States when they are not available in the United States.

When a businessperson is interested in products which are available overseas and in his own country, overseas prices of similar quality should be cheaper than domestic prices for importation to be profitable. Many consumer goods imported from developing countries belong to this category. Although their quality is not equal to U.S. products, due to the cheaper prices, they are able to capture the U.S. consumer markets.

Even though prices of imported goods are higher than domestic products, if imported goods’ quality is better than domestic products, importing makes sense. Luxury items catering to high-income buyers come under this category. For instance, European luxury automobiles and Japanese electronic products are in big demand because of their better quality.

In the case of high priced machinery or a factory project that requires large capital, the availability of financing plays a more important role. Foreign governments that want to promote their exports are willing to provide much better financing to importers of their products than domestic sources. Similar to the United States, most countries have an Export-Import Bank whose major function is to finance their major exports.

2. Requirements for a Successful Import Business

Like any other business, without buyers of imported goods, the import business cannot exist. Selling ability by an importer himself or his salesmen is the backbone of a successful import business. Sell first, import later should be a motto for all beginning importers. No matter how attractive the foreign products appear to an importer, he should find buyers first before importing them.

After sales are made, an importer must deliver the goods to his buyers on time. He must have reliable suppliers who provide goods on time in accordance to the specifications. Incorrect merchandise and late deliveries can easily ruin an importer’s business.

In the import business, an importer pays his supplier before receiving the goods through a bank’s letter of credit, but only gets paid after delivering the goods to domestic buyers. Without a good financing ability, an import business cannot be successful.

An import business is conducted by two parties located far away from each other and with different business practices. All imports are subject to customs regulations and other governmental controls depending on the nature of the goods. Knowledge of import procedures and regulations is vital for an importer to avoid pitfalls. Importing is not an easy business nor does it yield a quick result. It is not expected to be successful in one trial or two. It requires persistence and perseverance even after several failures.

Business transactions even within the same country, require clear communication between parties. Important matters must be in writing. In the importing business, clear communication is further required between an importer and exporter of different countries using different languages.

An importer is a go-between. He must build trust with both buyers and suppliers. He must deliver the goods to the buyers on time and in strict compliance with the specifications. In order to succeed, he must have good reliable suppliers. He must perform the duties promised to the suppliers such as opening a letter of credit on a timely basis. Building trust with buyers and suppliers leads to a lasting success.

3. Legal Forms of a Business

An import business can be conducted as a sole proprietorship, a partnership, a corporation or a limited liability company (LLC).

(1) Sole proprietorship

A businessman can conduct his import business as a sole owner. All that is legally required is a business license issued by the local city government where the business is located. If the businessman wants to use a business name other than his legal name, then the fictitious name must be registered with the county government and advertised three times in the local newspaper. A newspaper usually registers the fictitious name with the county on behalf of the applicant for a business license, if he buys advertisements from the same newspaper.

As to the business tax, some cities charge a fixed amount per employee, while other cities levy a percentage of the gross sales amount. The individual has unlimited liability for his business activities. Federal and state income taxes for business income are paid as the owner’s individual income.

(2) Partnership

When more than one legal entity forms a business, it becomes a partnership. A partnership is also required to register its fictitious name with the county government. There are two kinds of partnership:

(a) General Partnership

All partners are general partners who have unlimited liability for the business activities like a sole proprietorship.

(b) Limited Partnership

A limited partnership must have one general partner and one or more limited partners who are liable up to their investment and do not participate in the management of the partnership.

(3) Corporation

A corporation is a legal entity. It acts like a living person in conducting a business, but the stockholders, that is, the owners of the corporation have a limited liability up to their investments. A corporation must register with the state government. There are two types of corporation based on how a corporate income tax is paid, that is, a C corporation and an S corporation¹.

(a) C Corporation

A C corporation is one that is taxed under Subchapter C of Chapter 1 of the Internal Revenue Code. It pays its own federal and state income taxes. When a corporation’s net income is distributed to stockholders as a dividend, stockholders must pay income tax on the dividend again resulting in double taxation on the same income.

(b) S Corporation

An S corporation is one that elects to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. Like a partnership, it does not pay a corporate income tax, while stockholders enjoy the limited liability like a regular C corporation. The S corporation’s income is allocated to its shareholders whether distribution of dividends occurs or not, and each stockholder pays federal and state income taxes on the pro-rata share of the corporate income. In this corporation, the double taxation of the same income is avoided. Several restrictions apply to an S corporation, such as a maximum number of stockholders. The maximum number of stockholders was increased to 100 from 75 by the American Job Creation Act of 2004 (AJCA) and family members may elect to be treated as a single shareholder.

Unlike domestic products, the product liability stops at the importer of the products instead of going to actual foreign manufacturers. An importer should incorporate his import business, especially if he imports products susceptible to liability such as medicines, cosmetics, toys and other products used by children.

(4) Limited Liability Company (LLC)

An LLC is a company that enjoys both a limited liability like a corporation and no double taxation like a partnership. Owners of an LLC are called members. There is no maximum number of members and most states also allow single member LLCs. Members may include individuals, corporations, other LLCs, and foreign entities.

LLCs are created under state statutes, and therefore are not uniform. For example, California adopted its LLC in September 1994². LLCs are now available for all 50 States and Washington, D.C.

The LLC articles of organization must be filed with the Secretary of State to form an LLC and the LLC members must enter into a verbal or written operating agreement. A formal written agreement is advisable. The articles of organization usually contain who will manage the LLC.

An LLC does not issue stock and is not required to hold annual meetings or keep written minutes, which a corporation must do in order to preserve the liability shield for its owner. An LLC’s life is perpetual, unless members agree to a date or events of dissolution.

4. Import Organizations

There are no clear distinctions among various import organizations.