:max_bytes(150000):strip_icc():format(jpeg)/thinkstockphotos-490611683-5bfc34bac9e77c0051817f91.jpg)
Starting a U.S.-based business as a foreigner can be a long road, but the country makes it easy to register your company and open your business. Learning English is a basic requirement if you plan on doing business with Americans, but other aspects, such as filing for your Employer Identification Number (EIN) and choosing which type of company you want to be, can make matters more confusing.
Key Takeaway
- Foreign entrepreneurs often choose to establish a C corporation in the U.S. because it allows for unlimited stock issuance and is attractive to outside investors, despite double taxation on profits. This structure also provides a level of separation from IRS scrutiny for foreign individuals, especially beneficial for those hesitant to be directly involved on U.S. tax rolls.
- Selecting the right state for incorporation is crucial. Delaware is popular for incorporation due to its flexible corporate laws, protections for shareholders and directors, and the absence of requirements for a local physical address or bank account.
- Registering a business involves specific state-imposed forms and processes. For instance, in Delaware, incorporation begins with choosing a unique company name, selecting a registered agent, and filing a certificate of incorporation, with fees starting at $89.
- An Employer Identification Number (EIN) is essential for various business operations like hiring workers, opening bank accounts, and paying taxes. It’s free to apply for an EIN directly with the IRS, but if the company’s principal officer lacks a U.S. Taxpayer Identification Number, the process must be done via mail or fax.
- Foreign business owners should consult experts in both U.S. and home country tax laws due to the complexities involved, ensuring they take full advantage of opportunities while remaining compliant with regulations.
Selecting the Right Business Structure for Your U.S. Company
Most foreign nationals, says Schwartz International tax advisor and lawyer Richard Hartnig, choose to establish a C corporation, which can expand by offering unlimited stock and is typically more attractive to outside investors, even though its profits are taxed twice, first at the corporate level, and then as dividends to shareholders.
For corporate shareholders, the advantages are usually clear: Corporate shareholders typically qualify for a lower dividend rate. And so long as the U.S. company doesn’t primarily hold real estate, the corporate parent won’t pay capital gains when it sells the U.S. affiliate. Even individual foreign owners are probably best off with a C corporation, says Hartnig, since the structure will shield them from direct IRS scrutiny. “Foreign individuals are very, very hesitant to put their names on the U.S. tax rolls,” he says.
Of course, C corporation owners pay more for that shield as a result of the double tax. But in many cases, tax planners can use salaries, pension costs, and other expenses to reduce corporate income and eliminate much of the double taxation.
All that said, in some cases–usually depending on the particulars of one’s native tax laws–a limited partnership may be the best business structure. In a limited partnership, partners without management control have limited liability, and profits are passed through to the members, who pay income tax on their individual tax returns.
Deciding Where to Incorporate Your U.S. Business
The company’s business should determine where it locates. If one state dominates its market, it’s best off incorporating there–there’s no way to avoid obligations of doing business in, say, California, a famously high-cost jurisdiction, by registering in Nevada or Delaware, two famously low-burden states. On the other hand, if the business will not be concentrated in any particular state, most advisors will probably recommend Delaware incorporation, followed by Nevada.
This is in part because of Delaware’s “flexible” corporate law that offers generous protections to shareholders and directors, and also due to its outsider-friendly rules. (Besides not requiring either a local physical address or bank account, Delaware makes its corporate law website available in 10 languages.) It’s also, at least in part, a matter of inertia: Tax advisors are so familiar with Delaware’s welcoming ways that many haven’t bothered to learn the requirements of more far-flung states.
Steps to Register Your Business in the U.S.
The forms and other requirements for forming a business entity vary somewhat by state. Here’s how incorporation works in Delaware, which serves as a simplified model for many states:
- Choose a unique company name.
- Select a registered agent to receive legal documents. (A company with a physical address in the state can serve as its own agent, but this is not true in other states, like California.)
- Fill out a certificate of incorporation with details such as the corporate name and the agent’s address. The certificate also includes the total amount and par value of the shares the corporation is authorized to issue, and the name and mailing address of the incorporator. Fees start at $89 and increase principally based on the amount of stock issued or capital raised.
- Pay the necessary fees based on the stock issued or capital raised.
- Annually file a report and pay franchise tax.
Once the business is incorporated, it must file a report ($50) and pay franchise tax (from $175) annually. Though many online services exist to help with entity formation for a separate fee that can reach several hundred dollars, the paperwork is generally fairly straightforward, and states (usually through their secretary of state) normally provide guidance online to help individuals file the proper paperwork.
How to Get an Employer Identification Number (EIN) for Your Business
An Employer Identification Number (EIN) is necessary not just to hire workers but to open a bank account, pay taxes, or often to get a business license. Apply for the EIN for free directly with the IRS, and avoid the many online services with government-sounding internet addresses that charge for this service. But unless the U.S. company’s principal officer (who the IRS calls the “responsible party”) has already obtained a separate Taxpayer Identification Number from the agency, it can’t apply for an EIN online–it must apply by mail or FAX, and where the form asks for the Taxpayer Identification Number, enter “foreign/none.”
Once you have obtained an EIN, you should consider comparison shopping to find a business bank account that fulfills your specific needs. Some key factors to review include rewards, access to brick-and-mortar and online services, the convenience of making cash deposits, and the ability to earn attractive interest rates on your deposits.
The Bottom Line on Starting a U.S. Business as a Foreigner
In most cases, foreigners with business or investments in the United States should set up a domestic corporation. Consult with experts on tax law in both your home country and the U.S. before taking the plunge, as the rules for foreign nationals can be more complex than if you were a citizen.
