There are 2 main types of business entities in the USA: Corporation (or Corp, or Inc.) and Limited Liability Company (LLC). Other forms exist such as sole proprietorships, partnerships, and specific structures (not-for-profit, banks, etc.) but those are hardly ever appropriate for foreign owners establishing a US entity.
The Corp and the LLC structures have their own specific organization and tax treatment which may, or may not, fit your US project. Before checking what is the best state to create your US entity, make sure you know the pros and cons of both structures.
Although it is technically possible to change from one type to another, it is cheaper and faster to dissolve the existing US entity and create a new one in most cases.
Why does this affect especially foreign-based companies?
The LLC structure is usually the best vehicle for owners who are US citizens to optimize their individual taxation. Therefore, US lawyers who are not experienced with international clients will tend to advise this type of entity whereas it might not be in international owners’ best interest. Indeed, the latter will most likely be required to declare their worldwide revenue to the American tax administration… but no one tells you that at first!
The Corporation structure is usually the best vehicle for international owners who want to protect their interests abroad (usually the Parent Company’s interests) and for entrepreneurs who wish to raise funds or sell their business in the future. However, beware that some US lawyers or tax experts might scare foreign owners with the “double taxation principle” related to this structure: the Inc. is taxed on the generated net income and the owners are taxed on distributed dividends. Unfortunately, they often forget to mention the international tax conventions as well as the various intercompany options Parent Companies can use to mitigate the “double tax” exposure.
Worst case scenario: you might be advised to create a hybrid structure such as an “S-Corp” or an “LLC taxed as a Corp.”. If the first one is exclusively for US citizens and can be discarded if you are not, the second one has been crafted from the ground up for very specific and unusual situations regarding ownership and management. As a result, each correspondence with federal administrations, states authorities, and banks will most likely last forever because this structure is so uncommon that they do not have any specific process to handle it… why would you make your US expansion more difficult than it already is?
SOLUTION: Create a Corp. (=Inc.) or an LLC
When you create a US entity, these 2 structures (LLC or Inc.) will fit your needs in almost every situation. Once you understand the legal and tax implications for both the company and the owner(s), the choice is obvious.
Besides, although you might have taken many decisions with the goal of optimizing your tax liability for your parent company, tax optimization opportunities often come along with volumes (in terms of sales and/or investments), or sophisticated projects (ex: acquisition). Therefore, the key here is to focus on the structure that will offer you the best combination to protect your interests and to ease your US expansion while mitigating your tax exposure.
1. Overall Process
- Learn the main features and differences between a Corp. and an LLC (see section 3)
- Discuss with a Business Lawyer and a Tax Specialist who are are experienced with international businesses expanding to the USA (be careful when you select a lawyer or a CPA: they are not all used to working with international companies)
- Understand the implications of each business structure based on your specific situation: ownership structure, nature of transactions between the parent company and the US entity, tax exposure, legal exposure, and funding strategy
- Make sure you have a clear understanding of the costs and implications in terms of operations and individual taxation in case you want to register several owners (shareholders or members)
- Step back and make up your choices by prioritizing your growth strategy & US operations
- Clarify the Business Lawyer’s scope of work, the documentation to be provided, and the process for coordinating with US authorities on your behalf to obtain all legal forms
- Once your company has been created, you can open a bank account at a US bank [see How to Open a US Bank Account]
2. Minimum Requirements
- Choice of structure between a Corp. and an LLC
- Choice of state of incorporation or formation
- Usually Delaware or Nevada
- See Best States to Create Your US Entity
- Name of the US entity (legal name)
- The name must be available in the State of Incorporation
- You can use also a brand name by filing a “Doing Business As” (DBA) form (different from a Trademark registration) and officially use this name instead of the legal name
- Business value proposition in the USA
- Fiscal year ending date
- Ownership structure
- Name (individual and/or company) and address
- Percentage of ownership and organizational chart that includes the US entity
- Capital amount
- Minimum is $1
- This information is kept secret and will not appear on any document but tax returns
- The capital is not deposited on a specific bank account but on your regular US business checking account. So, once received, the funds can be used to pay bills for your US entity
- Governance structure (see details in section 3)
3. Key similarities and differences between a Corp. and an LLC
4. Process to Incorporate a Corporation
- You provide your business lawyer with the minimum requirements listed in section 2
- The business lawyer prepares the documentation listed below to “incorporate” the US entity:
- Organizational Action by Sole Incorporator
- By-laws
- Written Consent of Stockholder Ratifying Incorporation action
- Written Consent of Board to issue shares & appoint officers
- The lawyer communicates with the state administration to get (through a registered agent):
- Certificate of Incorporation
- The lawyer may, or may not, coordinate with the federal administration to obtain the tax identification number (also called: employer identification number, EIN, FEIN, or Tax ID Number). Tip: If you have a US Social Security Number, the EIN application can be filed online from the IRS website. If you don’t, the application can be filed by mail or fax using the SS4 Form (see instructions at this link). Ask your lawyer to make sure you apply properly.
- The official document provided by the tax administration is: Notice CP575 A, an official letter that confirms the US company’s EIN
- In case you have several stockholders, rules must be set up such as (but not limited to): voting rights, process in case of conflicts, rights in terms of access to information, and, above all, restrictions related to stock transfer (process when a stockholder leaves or dies, etc.)
- To formalize all these rules, the business lawyer will prepare: Stockholders Agreement
- Once the capital is wired by stockholder(s) to your US bank account, the lawyer issues:
- Share certificate(s)
5. Process to Form a Limited Liability Company (LLC)
- You provide your business lawyer with the minimum requirements listed in section 2
- The business lawyer prepares the documentation to “form” the US entity:
- Certificate of Formation
- Publication in newspaper, if required by state laws
- In case you have several members, rules between them must be set up such as (but not limited to): funds contribution, net income/loss allocation, nomination of manager(s), process in case of conflicts, rights in terms of access to information, and, above all, restrictions related to interests transfer (process when a member leaves or dies, etc.)
- To formalize all these rules, the business lawyer will prepare: Operating Agreement
- The lawyer communicates with the state administration to get (through a registered agent):
- Certificate of Formation
- The lawyer may, or may not, coordinate with the federal administration to obtain the tax identification number (also called: employer identification number, EIN, FEIN, or Tax ID Number). Tip: If you have a US Social Security Number, the EIN application can be filed online from the IRS website. If you don’t, the application can be filed by mail or fax using the SS4 Form. Ask your lawyer to make sure you apply properly.
- The official document provided by the tax administration is: Notice CP575A, an official letter that confirms the US company’s EIN
- In case there is only one member who is non-US citizen or permanent resident, the tax administration will require that you submit additional information (which will depend on your business activity)
4. Budget
Fees usually amount to $1,500 (lawyer + administration fees).
In case there is more than one stockholder or member, fees increase along with the complexity of the stockholders agreement or operating agreement.
5. Timeline
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.