ComplianceOctober 04, 2020

Incorporating in the U.S. - factors to consider

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As a non-U.S. citizen, incorporating a business in the United States is generally similar to the procedure required for a U.S. resident. Because U.S. citizenship and residency are not necessary, non-U.S. citizens are welcome to start or expand on American soil without jumping through any more hoops than a U.S.-born business owner.

However, companies owned by foreign nationals who want to do business in the United States must weigh the options of whether or not to form a corporation or limited liability company (LLC) and whether they plan to maintain a presence in the United States with offices and employees. There are a host of other details to factor into the equation — including differences in language and business practices— but following are the main ones to consider when crossing borders and oceans.

Do you need to incorporate in the United States?

If you only plan to sell goods, perhaps through the Internet or wholesaling to U.S. companies, it may not be necessary to form a U.S. company. Other variables to take into account in making your decision to incorporate in the United States include: differences in individual state tax laws, transportation costs, tariff/trade regulations, size and scope of your company, leases, employees and much more.

You may also give some forethought to the fact that some U.S. consumers are more likely to purchase things over the Web from a U.S. company rather than overseas, so it may be desirable for marketing purposes to incorporate in the United States as well.

How do you incorporate in the United States?

Company incorporation in the United States is administered at the state level —not the federal level — for both foreign nationals and U.S. citizens. The process will differ from state to state but is generally comprised of two steps: 1.) applying to register in that specific state and 2.) establishing a registered agent with a valid, physical address in the selected state. A registered agent can be either the business owner or another designated person who is authorized to receive legal documents on behalf of the business during standard business hours.

To incorporate a company as an LLC or corporation, formation documents must be filed with the appropriate state agency, which is most often the Secretary of State. Required filing fees must also be paid. A corporation’s formation document is typically referenced as the Articles of Incorporation or Certificate of Incorporation, depending on the state. The Articles of Organization or Certificate of Organization often refer to the LLC’s formation document. Formation paperwork is used to advise the state and the public of specific details relating to the company. Formation documents serve as a formal record of reference of the corporation’s or LLC’s existence.

LLCs and corporations must offer certain information in their formation documents. The mandatory disclosures vary minimally by state.

U.S. residents will likely need a Federal Tax Identification Number (EIN) to start their business. This process requires a Social Security number. For foreign businesses, an Individual Taxpayer Identification Number (ITIN) may satisfy the requirement. The Internal Revenue Service (IRS) issues these tax processing numbers to individuals who have to pay U.S. taxes but are not eligible for a Social Security number. Residents and non-resident aliens as well as foreign nationals fall into this category.

To obtain an ITIN from the IRS, complete and mail IRS Form W-7. You can get started by printing Form W-7 and the associated instruction sheet.

Which business type should you choose?

Comparable in title and operation to businesses in other countries, the primary business formation structures are sole proprietorships, partnerships, corporations and LLCs.

Certain business structures limit whether non-U.S. citizens can be owners of a business incorporated in the United States. With LLCs, there are no limitations on the number of investors who can own interests in the business and no restriction on non-U.S. citizens assuming roles as members (owners). By contrast, if the corporation distributes profits to the shareholders in the form of dividends, shareholders pay income tax on those distributions; thus, C corporations are often criticized for imposing “double taxation.”

Under U.S. tax law, a non-U.S. citizen may own shares in a C corporation, but may not retain shares in an S corporation. S corporations allow shareholders (owners) to report their portion of business income and expenses on their personal income tax returns and avoid corporate level taxation. The U.S. tax rules dictate that non-U.S. citizens cannot be shareholders of S corporations. For these reasons, many non-U.S. citizens operating businesses in the United States choose to incorporate their business as an LLC.

Which state should you choose to incorporate your company?

This answer depends on whether your company has an actual presence in the United States. For example, if your company has an office in Miami, you may wish to incorporate your business in Florida. If your company does not plan to have a physical presence in the U.S. (translating that it will operate solely from overseas), then formation of a corporation or LLC in Delaware or Nevada, the two most business-friendly states, may be preferable. If your non-U.S. company operates in more than one U.S. state, you may incorporate in any of these states, but you must also register to do business in the other states through a process called foreign qualification.

In some cases, the laws of your company’s home country may dictate the choice of entity, so it is vital to consult with an attorney familiar with both U.S. and international law to make an informed decision relative to which entity is best for your business.

Do you need a U.S. address to incorporate a business in the United States?

You will need to name a registered agent in your state of incorporation, and the registered agent must have a physical address in your state of incorporation. The registered agent is responsible for important legal and tax documents on behalf of incorporated companies, such as:

  • Service of Process – sometimes called Notice of Litigation – which initiates a lawsuit Important state mail, such as annual reports or statements
  • Tax documents sent by the state’s department of taxation.

In addition to having a physical address in the state of incorporation, the registered agent must be available at that designated address during normal business hours. You cannot use the registered agent address as your legal address. The registered agent address is intended for receipt of official documents only – generally related to taxes and lawsuits. The legal address of your company has to be your home or office in your country.

How do you determine your resident status?

If you are a non-resident, you are taxed in the United States only on U.S. source income (for example, your share of the LLC’s income). If you are a U.S. resident, you are taxed on your worldwide income.

Resident status is not limited to those having a green card. Resident status also applies to those with a physical presence in the United States. For example, for 2009, a person is treated as a resident if he or she is in the United States for at least 31 days and at least 183 days during 2007, 2008 and 2009 (counting all the days in 2009, but only 1/3 of the days in 2008 and 1/6 of the days in 2007). Even if this residency test is satisfied, you can still be treated as a non-resident in certain situations (for details on determining residency and tax obligations, see IRS Publication 519, U.S. Tax Guide for Aliens. Non-U.S. businesses that do not operate in the United States (for example, do not have any income from U.S. sources), do not owe any federal income taxes; however, there may be annual state charges or fees for maintaining the LLC or corporation.

Non-U.S. companies that do not want to form a business here but merely wish to import their products to the United States should explore import rules by navigating the Commercial Importing Procedures and Requirements.

Will you be able to receive financing?

Some non-U.S. businesses may want to become American companies to gain easier access to capital. Banks in the United States lend money to small businesses more readily than many of their foreign counterparts. Once a non-U.S. business has been operating in the United States for at least two years, this business has the same access to capital through U.S. banks as wholly-U.S. companies.

There’s no simple answer to every non-U.S. company’s needs when it comes to selling in the United States. The steps to take depend on careful assessment of the business plans, legal rules in the United States and abroad, financing issues and more. But the main goal for both foreign nationals and U.S. citizens is to be able to operate their businesses without risking their personal assets through incorporation.

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Nikki Nelson
Customer Service Manager
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