There are 3 layers of regulation in the USA: federal, states, and local (counties and cities).
When you create a legal entity in the USA, the process is performed at the state level. Therefore, whatever business type you decide between a Corporation and an LLC (see Creating a US Entity: Corp. vs LLC), the structure is formed under the law of 1 state only. This state can be your “home state” (where you conduct your business), or another state considered as more “business friendly” such as Delaware.
Please note: Although your US entity is formed in 1 state, you can conduct your business in all other 49 states. To do so, you need to register your entity to be “licensed (or “qualified”) to do business” in each state you have a “permanent establishment” (or “nexus”) such as sales, offices, employees, inventory, fixed assets, etc. We strongly recommend that you review your business model with you tax expert (CPA) to identify your nexus and identify where you need to register your business “to do business” according to each state’s tax law.
Why does this affect especially foreign-based companies?
Most of the time, you should consider having your US employees or your office near your market (clients, prospects, business partners) and near transportation hubs. However, when choosing the state of formation for your company, you should also consider: the state’s legal framework, foreign owners protection, tax exposure, funds raising requirements, and the level of flexibility that will help support your US growth.
Incorporating your business in a different state than your home state is most of the time more expensive (approximately a few hundred dollars more). Indeed, in that case you need to register in 2 states to incorporate and to be licensed to do business, instead of only 1. However, if you look at the big picture, having your business formed in a “business friendly” state will save you a significant amount of time (then save you much more than a few hundred dollars when it comes to lawyer fees!) for every legal proceeding you will have to handle as your activity grows.
1. Overall Process
- Understand the main criteria to consider when choosing your state of incorporation
- Discuss with a Business Lawyer and a Tax Specialist who are experienced with international businesses expanding to the USA
- Make sure you that you have a clear understanding of the legal & tax exposure of your foreign interests
- Step back and make your choice by prioritizing your growth strategy & US operations
- Clarify the Business Lawyer’s scope and define whether you are responsible for paying formation fees or not. Usually, Business Lawyers pay formation fees and then add the corresponding amount on their invoice since your US entity does not have a US bank account yet.
2. Items to consider when choosing your state of entity creation
Incorporation / Formation process:
Some states have implemented procedures to facilitate the registration of new businesses, including those owned by foreign entrepreneurs.
When you incorporate your US entity in Delaware, you:
- Do not need to have the US citizenship
- Do not need to have a social security number (SSN)
- Do not need to live in the state of Delaware (you will use a “Registered Agent” instead)
- Do not need to provide any original document (all the process is performed online)
Every state has its own fees structure but the difference between states usually amounts to a few hundred dollars. State laws, however, will have much more impact on your budget depending on their complexity (e.g.: lawyer fees) and additional requirements to complete and maintain the registration (e.g.: publication fees).
- Formation fees: one-time filing fees paid to the state of incorporation (between $50 and $500)
- Annual fees and filings: recurring fees paid every year to the state of incorporation to maintain your registration (between $0 and $400)
- Franchise tax: recurring fees paid every year to the state of incorporation for the privilege of being incorporated in the state. The tax calculation differs from one state to another. It can be a flat fee (e.g.: $800 in California) or a fee based on the number of shares and par value (e.g.: in Delaware > a good tool to calculate your annual fees in Delaware). You should check the state’s fees structure before making your choice.
- Legal framework: some states, like Delaware, have implemented regulations to facilitate legal procedures such as contracts, litigations, and disputes resolutions, which means less paperwork for your lawyer and lower fees for you.
For international businesses, it is also crucial to consider the level of legal protection of your interests outside the USA. For instance, the state of Delaware does not communicate any information related to shareholders of businesses incorporated under its laws. In other words, business owners’ identities, personal information and privacy are protected by the state.
Whatever state you choose to create your US entity, fees will be (on average):
- Formation fees: $100
- Minimum annual fees and Franchise tax: $250/year
The timeline will depend on the information flow and whether you have the minimum requirements already available.
It usually takes 10 business days to 1 month.
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Disclaimer: The materials provided in this US Toolbox are for general information purposes only and are not intended to constitute comprehensive or specific legal, accounting, tax, marketing, or other advice. These materials may not reflect recent developments in the law, may not be complete, and may not pertain to your specific situation and circumstances.TradeSherpa, Inc. assumes no responsibility for errors or omissions in the materials, or for any losses that may arise from reliance upon the information contained these materials. Because these materials are intended to provide only general advice, specific advice should be taken from qualified professionals when dealing with specific situations and circumstances.