A foreigner who wants to do business or make investments in the United States does not need to start a U.S. company – the Internal Revenue Service is happy to bill a foreign company for the domestic tax it owes. But it’s easier to manage with a U.S. subsidiary, according to Richard Hartnig, a lawyer and tax adviser with Schwartz International, a tax consultancy in Atlanta. “If the IRS sends something to a foreign company, it can take months, because they send it by regular mail,” Hartnig says. Moreover, in some cases, a U.S.–registered company can control when it pays the tax. And, Hartnig adds, for passive investments in real estate or businesses, “if you have a company file the tax return, you can avoid getting on the IRS’s radar.”
Here are four things to keep in mind when you establish a U.S. business as a foreign national:
1) Choose your company structure
Most foreign nationals, says 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 I.R.S. 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 return.
2) Choose a state for registering your company
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 advisers 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 advisers are so familiar with Delaware’s welcoming ways that many haven’t bothered to learn the requirements of more far-flung states.
3) Register your business
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:
- The company principals choose a unique name.
- They select a registered agent that is able to receive legal documents for the company. (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.)
- The company fills out a one-page certificate of incorporation that identifies the corporate name; the name and address of its registered agent; 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.
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.
4) Obtain an employer identification number
An employer identification number 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.”
The Bottom Line
In most cases, foreigners with business or investments in the United States should set up a domestic corporation. While forming a U.S. company is not particularly difficult, the tax strategies and consequences – in both the U.S. and your home country – that should inform your decision can be complex. Consult with experts on tax law in both your home country and the U.S. before taking the plunge.