Domestic Affairs: Establishing a Business Entity in the US

As our global economy becomes smaller, more foreigners are establishing entities in the United States to do business. And with good reason—its economy is consistently strong and stable, U.S. citizens are often a welcoming market, and there’s more opportunity to reach investors. But where do you begin?

While several steps must be followed, it’s actually relatively simple to get started. The key is to know your business goals so you can make the best choices along the way.

Build your business, beginning with entity structure.

Your entity structure is a critical part of your business’s foundation. It helps determine your tax liability, the methods you use to expand your workforce, and whether/how you offer stock options.

An LLC (limited liability company) is the simplest and most common business structure in the U.S. If you’re the sole owner and operator of the business, it’s an ideal choice because an LLC is not subject to corporate taxes. Your liability risk is also mitigated to a degree because your business is kept as a separate entity from you. You would, however, have self-employment tax on the money you earn.

LLCs can either be single-member entities (sole proprietorship) or multi-member (partnership). In the latter, you would run the business with one or more individuals and share responsibility. While this allows for your workload to be distributed to others, it also introduces possible ambiguity in who does what. All partners are also subject to self-employment tax.

If you’d like to bring on investors or issue stock, however, you might choose to incorporate your business. This often opens up new tax breaks and separates your liability further from your personal business. A corporation also creates the image of a larger or more established company. While the U.S. has two primary classifications for corporations, only one—the C corporation—is permitted for non-citizens.

Your CPA can guide you on the tax advantages and other benefits of each business structure.

Risky Business: Is Your Company in Compliance with Tax Laws?

Being aware of tax laws does more than open a plethora of savings opportunities. It also reduces your business risk. Noncompliance with IRS or state Departments of Revenue rules can lead to tens of thousands of dollars in penalties.

What’s your “state” of affairs?

Regardless of your business structure, the state in which you establish your business will be known as your formation state. But how do you decide where you’ll go? You’ve got 50 states to choose from, and each has its own tax laws and requirements.

If you want to open a physical location in a specific city—or you already have one—it’ll make the most sense to establish your business in that state. This is because if you do business in a state other than your formation state, you have to register in that state as well. Such a state is called a foreign state in this circumstance. Qualifying in a foreign state means more applications, more fees and more/differing concerns about compliance. (We’ll get to this process later.)

If you won’t have an in-country presence, however, you’ve got a lot more flexibility. This is the time to consider the level of taxation, difficulty in registering and other factors. Delaware and Nevada are often viewed as the most business-friendly states in the U.S. (In fact, over half of the companies in the Fortune 500 are incorporated in Delaware.) These states have no state corporate income tax, as well as no personal income tax for non-residents. Additionally, shareholders and select company leaders do not have to be state residents. Delaware also boasts more flexible business laws and other benefits.

Once you make your selection, you’ll need to file formation documents per that state’s requirements and pay filing fees.

What’s the Difference Between a Resident and Non-Resident Alien?

Resident aliens are subject to U.S. income tax to the same extent as U.S. citizens. Non-resident aliens can be subject to U.S. taxation to a certain extent on their income from sources within the United States.

As they say in Hollywood … get an agent.

You’ll need a registered agent—an entity to be your official point of contact in your business’s formation state. Also called a resident agent or statutory agent, their purpose is to accept legal documents, tax forms, official mail and other communications on your behalf.

You will name your registered agent in your Articles of Organization if you’re structuring as an LLC. For a C corporation, this will be called your Articles of Incorporation. Your registered agent can be an individual or a company. The only qualifications are:

• They are 18 years of age or older;
• They have a physical address in your formation state; and,
• They are available in person during normal business hours.

You can actually serve as your own registered agent as long as you meet the above criteria. If you will be staying in your home country, however, someone else will have to serve this purpose. The cost is very low—typically a few hundred dollars a year.

Obtain Your Employer Identification Number

Much like U.S. citizens need a Social Security number to identify themselves with the IRS, U.S. businesses must have a federal tax number. This is called an Employer Identification Number, or EIN.

Obtaining an EIN normally requires submitting the business owner’s Social Security number. If you do not have one, you must obtain an Individual Taxpayer Identification Number (ITIN) to use on your EIN application. Doing so involves completing and mailing IRS Form W-7; read more about this form on the IRS website.

Multi-state operations? Enter the foreign qualification process.

As we noted earlier, any U.S. state other than your formation state is called a foreign state. And if your business dealings cross state lines, you’ll have to undergo foreign qualification.

Several factors contribute to whether you have to qualify in a foreign state. The most obvious one is your direct business dealings with clients. Are you selling goods or providing services to parties in other states? If so, you’ll have to qualify there.

However, in this age of telecommuting, you might have employees working remotely from other states. Or maybe you have a bank account or an additional location (such as a warehouse) in another state. This introduces the presence of foreign states.

Every state has its own requirements for foreign qualification. But there are generally a few similarities, such as paying filing fees, registering for a certificate and proving that your company is in good standing. You also might have tax filing obligations, again depending upon the tax laws in that foreign state.

As you’ve seen, establishing a business entity in the U.S. has a range of complexities. So it’s best to enlist a CPA knowledgeable in international business taxation issues. You might also consider consulting an attorney with knowledge of business structure and tax law, especially when drawing up your paperwork and filing your applications.