There are many reasons why a foreigner (or foreign company) would want to register a U.S. company to do business in the United States. Maybe your U.S. customers feel more comfortable doing business with and making online purchases from a U.S. registered company or you want to sell on Amazon US or you want to use a payment system (like Stripe) that requires a U.S. bank account. Whatever the reasons, choosing a business entity is one of the first steps to starting a business in the U.S. For foreign companies coming into the U.S. this usually means registering as a C corporation (C corp). This is the third article in a series on setting up a U.S. business. This article will focus on corporations, the preferred business entity of most foreign companies coming into the U.S.
Below are the links to the other article in this series.
Setting Up A U.S. Business For International Startups Part 1: The Sole Proprietorship
Setting Up A U.S. Business For International Startups Part 2: The Partnership
Keep in mind, you do not have to set up a U.S. business to do business in the United States. As a foreigner, you can do business in the United States through your established foreign business; however, you can also come into the United States and set up a U.S. business like any U.S. citizen or resident. There are no special requirements or complications involved in creating a U.S. business entity as a foreigner.
Although the requirements and process of setting up a business does not differ for foreigners, you do need to comply with U.S. immigration requirements, including visa and work permit requirements, to come into the U.S. You should not create a U.S. business just to get into the United States because it may not help you. An immigration expert can help you determine the best way for you to legally enter the United States. Furthermore, you may face additional challenges opening a bank account.
What is a corporation?
A corporation is an independent legal entity that is owned by shareholders. The corporation itself, not the shareholders, is held legally liable for actions and debts of the corporation. Corporations are more complex than other business structures. They often have costly administrative fees and complex tax and legal requirements. A corporation can be private or public.
An S corporation (S corp) is a special type of corporation that is created through an IRS tax election. An S corp is just a corporation with a special tax designation that permits the corporation to avoid double taxation. In this arrangement, only shareholders are taxed as long as all shareholders who work for the company are paid reasonable compensation (fair market value) for their work.
S corp are not commonly recommended for foreigners because they must meet strict criteria to elect to become and to remain an S corp. An S corp is only available to a foreigner who has “resident alien” status, meaning you must be either a green card holder or meet the criteria of the substantial presence test. Under this test you must have been living, legally, in the U.S. for at least 183 days during a three year period, which includes the calendar year (and you must continue to meet this presence requirement). If you (or another foreign shareholder) do not continue to comply with this 183-day requirement, you could inadvertently cause your corporation to lose its S corp status. Because this area of immigration is fairly complex, we recommend that you speak with an immigration expert about your options.
What are the advantages and disadvantages of forming a corporation?
Although corporations are the most complex and expensive type of business entity to create and maintain, they are the preferred business entity for foreign companies coming into the U.S. and for companies that intend to seek investment. In fact, many investors may require that the companies they invest in be (or form) a corporation, often a Delaware corporation. Below are some of the important advantages and disadvantages to choosing a corporation as your business entity. Each should be considered based on your specific company circumstances and you should consider speaking with an attorney who can give you advice on the best option for your business.
Advantages:
- Limited liability for shareholders: The corporation, rather than individual shareholders, are liable for the actions and debts the corporation incurs.
- Easier to raise funds: Corporations are the preferred business entity of investors because they can give the company money in exchange for stock. Corporations can also sell stock to raise money.
- Corporate tax treatment: Corporations file taxes separately from their owners (corporate income tax), which is generally a lower (often much lower) rate than personal income tax.
- Attract employees: Corporations can offer stock to their employees for their contributions to the company, which is an attractive benefit for potential employees.
Disadvantages:
- Costly and time-consuming to form and operate: Corporations cost more to create and manage than other type of business entities. Corporations also have more filing requirements, which take more time to complete.
- More paperwork and record keeping required: Corporations are more highly regulated, so that means more paperwork and record keeping is required by federal, state, and sometimes even local agencies.
- Can be double taxed: Corporations can mean double taxation because the corporation is taxed (corporate income tax) as well as the owners, through their income from the business (personal income tax), and shareholders, through their dividends.
In which state should you register a corporation?
You do not have to form your corporation in the state in which you live and primarily conduct your business. Because of their favorable laws for corporations (they are known as “business friendly” states), Delaware, Nevada, and Wyoming are popular choices for businesses to incorporate. This is a strategic decision, just like what type of entity to form, that many people make with the advice of their attorney. The important factors to consider include:
- Formation fees: Formation fees vary greatly by state. This is a one-time fee that shouldn’t significantly impact your bottom line or decision.
- Annual fees and filing: Most states require that you submit an annual one-page report along with an annual fee.
- Legal and court system: State court systems vary. For example, Delaware has a completely separate business court, which means the judges will have more business expertise and cases move through the system more quickly.
- Investment and funding: This is an especially important consideration for companies that are considering participation in an accelerator program or who intend to seek funding/investment. Many investors are more familiar with Delaware law, and thus prefer to invest in and work with Delaware companies.
- State corporate income tax: Because state income taxes (corporate and personal) vary greatly among states, this is another very important consideration, as it will affect your bottom line. A few states impose gross receipts tax rather than corporate tax, and two states do not impose either gross receipts tax.
How do you form a corporation?
Corporations are formed under the laws of the state in which they are registered. You can work with an attorney to register your business or register your corporation through an online service. Your corporation will be legitimate either way, but an attorney can help you make decisions based on your specific business. Although it is likely you will be able to change your business entity in the future, it is easier to just create the most appropriate entity initially. Once you have decided to form a corporation and decided where to incorporate, follow the important steps laid out below. Keep in mind, the requirements and steps will vary among states.
1. Choose a company name: Make sure your name is not already taken by another company in your state, does not include words that are restricted by your state, and doesn’t violate another company’s trademark. Most states require that corporations include a corporate designation, e.g., corporation (co.), incorporated (inc.), or limited at the end of their name.
2. Decide on a registered agent: You must designate a registered agent if you are not physically present in your state of incorporation to collect all official government and legal documents. A registered agent is a person or company that is physically present in the state of incorporation that is available during business hours to accept and sign for official government and legal documents. Beware: a mail forwarding service is not sufficient. Your registered agent has a legal responsibility to accept official government and legal documents on your behalf and forward them to you.
3. Appoint your director(s) (initial): Directors are the people who can make decisions on behalf of the company. State requirements vary, but most states permit a corporation to have only one director (the owner).
4. File Articles of Incorporation and pay the filing fee: You must prepare and file Articles of Incorporations (also called “certificate of incorporation” or “charter”) with your state’s corporate filing office, which is usually the secretary of state’s office. This document does not have to be lengthy or complex. In fact, you may be able to just fill out a form available in your state’s filing office. This document usually specifies the following details about your corporation: name, principal office address, and sometime the names of directors. You will also be required to pay a filing fee at this time. Filing fees range from around $50-450, most on the lower end.
5. Create bylaws: Bylaws generally lay out the rules that govern the corporation’s day-to-day operations. You can draft your own bylaws or hire an attorney to draft them for you. This document generally defines when and where meetings occur, how votes are taken and counted, and how ownership can change (in the event someone retires, quits, or dies).
6. Hold first board of directors meeting: The first board of directors meeting is where the corporation makes its first important decisions, including setting the corporation’s fiscal year, appointing officers, adopting the bylaws, authorizing the issuance of stock, and adopting an official stock certificate form and corporate seal, and approving the election of S corporation status, if intended.
7. Issue stocks to owners (initial): Stock should be issued immediately and before you start doing business.
8. Obtain licenses and permits: Once you have registered your business, you are required to obtain all necessary business licenses and permits. License and permit regulations vary by industry, state, and locality.
9. Register for taxes: Most companies need to register with the IRS, register with state and local revenue agencies, and obtain a tax ID number. Corporations are required to pay federal, state, and in some cases local taxes.
Although a corporation is the most preferred business entity for most foreigners coming into the U.S. to do business and companies looking to grow through investment, it would behoove you to learn about all of the business entity options available to you in the United States. If you have questions about the best option for your business, you should speak with an attorney who can answer those questions and offer advice based on your specific business. Corporations are more complex and expensive than other business entities to form and manage, so you may wish to work with an attorney or service that can guide you through the formation process. Good luck with your U.S. business!
Related Articles and Content You Might Like:
How To Save On Startup Legal Costs In The US
Setting Up A U.S. Business For International Startups Part 1: The Sole Proprietorship
Setting Up A U.S. Business For International Startups Part 2: The Partnership
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