For foreign entrepreneurs, starting a business in the U.S. can be a game-changer, providing access to a vast market and innovative business networks.
However, the process of starting a company in the U.S., as a Non-U.S. Person, involves navigating a range of legal challenges and in this article we aim to outline essential issues involved. For the purposes of this article, the term “Non-U.S. Person” refers to persons that are neither U.S citizens, U.S residents nor entities formed under laws in the U.S.
Choosing the right business structure
This choice is particularly important for foreign entrepreneurs because different business structures come with varying liability, tax, regulatory and operational implications.
The most common entity types used by Non-U.S. Persons when starting a business in the U.S. are:
- C Corporation (“C Corp”) – By default, all corporations formed in the U.S. (regardless of state of incorporation) are C Corps. C Corps are treated as separate legal entities from their shareholders (owners) for tax and legal purposes and offer limited liability protection to their shareholders. They can have an unlimited number of shareholders and can offer various types of shares (typically, common stock and preferred stock) which make them an attractive option for raising capital and attracting a wide range of investors. C Corps can also elect to become S Corporations (“S Corps”), which are corporations that are treated, for tax purposes only, as “pass-thru entities”. In other words, with S Corps, the profits and losses of the corporation “pass through” to the shareholders’ personal tax returns. However, C Corps owned by foreign entrepreneurs often cannot elect to become S Corps as certain requirements must be met to do so, including the need for all shareholders to be individuals that are U.S. residents or U.S. citizens.
- Limited Liability Company (“LLC”) – This is a flexible business structure that combines elements of both corporations and partnerships. Similar to a C Corp, an LLC is treated as a separate legal entity from its members (owners) for legal purposes and thus offers limited liability protection to its members. However, unlike a C Corp, for tax purposes only, an LLC is treated as a “pass-thru entity”. In other words, the profits and losses of the entity “pass through” to the LLC members’ personal tax returns. That said there is the option to elect for different tax treatment if need be. LLCs also tend to have fewer formalities and administrative requirements compared to C Corps and offer a more flexible management structure that can be tailored to different ownership and operational needs.
It is worth bearing in mind that, for Non-US Persons, factors such as pass-through taxation and company ownership structure can have complex international tax implications. Therefore choosing between the various entity types requires careful consideration of one’s business goals and tax preferences.
Choosing the right U.S. State
As the formation, tax, administrative and compliance requirements for C Corps and LLCs vary from state to state, choosing the right state(s) for incorporation is essential.
A popular option for foreign entrepreneurs is the state of Delaware for a number of reasons, including:
- A business-friendly legal system with a specialized business court (Court of Chancery) and well established corporate law precedents
- Flexible corporate laws that allow companies to organize and manage themselves in ways that suit their specific needs
- No state corporate income tax on out-of-state revenue
- No sales tax
- Limited disclosure requirements for shareholders and directors, ensuring a fair degree of privacy
- Ease of incorporation
- The perception that investors prefer to invest in companies incorporated in Delaware due to its stable and predictable legal environment
However, each state can offer unique advantages and challenges, depending on the requirements and goals of the business. It is also worth noting that if a company is incorporated in one state and is seen as doing business in another state, it may need to register for authority to business in that other state which could have state tax and compliance implications. Therefore, to avoid the need for unnecessary and costly out-of-state registrations, selecting the right state for incorporation, to begin with, is important.
Obtaining a U.S. Business Bank Account
The documents typically required to open a business bank account in the US are:
- An Employer Identification Number (EIN).
- Proof of registration and incorporation documents.
- A U.S. business address.
Opening a U.S. business bank account is a critical step that can pose significant challenges to foreign entrepreneurs for a number of reasons. In particular, most banks require the person opening the account on behalf of the U.S. company to be physically present at a branch in the U.S. to open an account. Therefore, if said person is unable or unwilling to do so, his/her banking options will be limited. Further, when the company applies to the IRS for an EIN, if the responsible party for EIN purposes (typically the president of the C Corp or a member (owner) of the LLC) does not have a U.S. social security number, the process for obtaining an EIN can take longer and be more difficult.
Navigating U.S. Legal and Regulatory Requirements
Foreign entrepreneurs can face numerous legal and regulatory challenges when establishing a business in the U.S. These challenges include compliance with state company laws, state and federal tax laws, state and federal securities laws, industry specific regulations, state and federal employment laws and immigration laws.
Foreign entrepreneurs would need to be particularly vigilant with regard to tax because in addition to international tax considerations, compliance with U.S. tax laws can be challenging due to the complex interplay of federal taxes, state taxes, and in some cases, local and municipal taxes.
Final Remarks
Starting a business in the United States as a Non-U.S. Person can be a rewarding venture, providing access to the world’s largest economy. However, it is imperative for those wishing to do so to be fully informed as to their options and have a clear and viable plan.
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