The United States of America holds 13.5% of the global GDP and is only second to China in its share of global revenue. This statistic, along with its strong economy, makes the United States an ideal location for foreigners to start a business and capture that elusive “American dream” pushed so hard by the media and social media.
It’s no wonder many foreign entrepreneurs dream about starting a business in the United States. But the strong economy and market demand are not the only advantages the United States offers. Nonresidents who form a U.S. business can capture this market while also taking advantage of the lower tax rates and enhanced legal protections.
Neither citizenship nor residency is required to start a small business in the United States and the formation process is a lot easier than one might expect. Let’s walk through the formation process and provide a checklist to get you started.
1. Choose Your Business Structure
As non-residents, foreign entrepreneurs have two primary choices of business structure for their United States business. The C Corporation and the Limited Liability Company (LLC) are both excellent options for foreign-owned businesses.
While S Corporations are a popular option for U.S. citizens, this is not a suitable option for non-residents. Foreign entrepreneurs are prohibited from forming an S Corporation in the U.S. because each S Corporation shareholder must be a U.S. Citizen or permanent resident alien.
Let’s review both the C Corporation and the LLC, so you can learn more about your options and decide if one of these business entity types are right for you.
A C Corporation is a separate legal entity from the owners/shareholders, therefore, the owners’ and shareholders’ personal assets are protected from the actions and debts of the company. Likewise, profits and losses are only attributable to the corporation. You can also sell an unlimited amount of stock or shares in the C Corporation, and if desired, you can even go public. Investors prefer the C Corporation business structure, which is good to know if you think you may plan to expand and need an injection of outside money.
The negatives of a C Corporation include increased paperwork, additional deadlines required to stay in compliance as a C Corporation, and the presence of double taxation. Double taxation refers to the corporation paying taxes on its profits, and then the individual shareholders paying taxes on the dividend income they receive from the business.
Limited Liability Companies (LLCs)
Limited Liability Companies (LLCs) are similar to the C Corporation in terms of liability protection, but less strict when it comes to compliance requirements. Owners are called members and an LLC can choose whether it wants to be taxed as a C Corporation or pass-through profits and losses to the owners.
2. Choose the State for Formation
Most resident entrepreneurs usually choose to locate their businesses in the states where they reside, but as a nonresident, you are free to file your business entity in any state. Within the United States, California, Delaware, Nevada, Texas, and Wyoming are all popular options.
To make the decision, look at some key indicators such as the state’s business environment (i.e., regulations and restrictions), its access to resources such as materials and employees, and the costs of doing business there. Some states have high tax rates, for instance, while others offer tax incentives to attract new businesses. You’ll want to do your homework to find your ideal location.
3. Obtain a Registered Agent
A registered agent, sometimes referred to as a resident agent, is a person or company officially recognized by the state in which you incorporate. The registered agent resides within your state of formation and is designated by the business to accept service of process on behalf of the company.
Because you do not reside in the United States, it can be beneficial to have representation stateside to deal with legal paperwork such as service of process notices, correspondence from the Secretary of State, and other official government notifications. Your registered agent can also ensure that you obtain and renew business licenses and stay on top of compliance deadlines.
Requirements for registered agents vary by state, but generally, the agent must have a physical street address within the state, must be available at that address during normal business hours, and must be over 18 years of age. You can also hire a company (like CorpNet) that provides registered agent services.
4. Obtain a Taxpayer Identification Number
All United States businesses are required to have a Taxpayer Identification Number (TIN). The TIN is an identification number used by the IRS to administer tax laws.
Examples of Taxpayer Identification Numbers include:
- Social Security number (SSN)
- Employer Identification Number (EIN)
- Individual Taxpayer Identification Number (ITIN)
United States citizens are required to show their Social Security number to obtain a business Employer Identification Number. Since foreign entrepreneurs do not have Social Security numbers, you can apply for an Individual Taxpayer Identification Number (ITIN).
To obtain an ITIN, you must complete IRS Form W-7, which is the IRS application for Individual Taxpayer Identification Number. The Form W-7 requires documentation substantiating foreign/alien status and true identity for each individual.
5. Set Up a Business Bank Account
To successfully manage a business in the United States, you must open a bank account based in the U.S. Although the USA Patriot Act, passed after the terrorist attacks on 9/11, has made it more complicated for foreigners to open bank accounts in the U.S., it is still possible to do so by following the bank’s specific guidelines.
In general, you’ll need your official corporation documents (with your official U.S. address), an ITIN number, and a passport.
The preferred way to open a bank account in the U.S. is to visit the bank in person, but you can also see if there is a branch of the same bank in your own country that will allow you to set it up from overseas. If neither of these options is available, try contacting a few global banks to see if they have services to help you set up your account by going online.
6. Maintain Business Compliance
In the United States, business compliance doesn’t end once you’ve started your business. You must file an annual report, whether you’ve formed a C Corporation or an LLC. This document keeps the information on file for your business current regarding your physical location, registered agent, and shareholders. You need to submit this form every year even if there haven’t been any changes from the previous year.
Even as a non-resident business owner, you will be required by the Internal Revenue Service (IRS) to pay taxes on the income earned in the United States. You may also be required to pay an annual fee to the state where your business is incorporated.
What if You’d Like to Move to the U.S.?
What happens when you decide you need to move to the U.S. to properly run the business? There are two visas available E-2 Visa or EB-5 Visa. The EB-5 is available to foreign entrepreneurs who invest at least $1 million (or $500,000 if the entity is in a targeted employment area) and create 10 new jobs. The E-2 Visa is available for foreign business owners from countries the U.S. has treaties with and has fewer requirements for job creation and investment.
There are three basic requirements for the E-2 Visa:
- You must prove legitimate control and possession of the funds (such as U.S. tax returns) and the investment in the business must put you at personal risks such as credit card debt and business loans in your name—not in the name of the business.
- You must directly oversee and operate the business on a daily basis.
- Your investment must be substantial. Although there isn’t a set amount for an E-2 Visa, you must show you have enough that you’ll be able to provide for your family and eventually hire employees.
Because you’ve already started your business in the U.S. you should be able to show your commitment to contributing to the U.S. economy through investment and job creation. Contact an expert for help if you’re at all concerned about gaining Visa approval.
We’re Here to Help
Starting a business in another country can seem like a daunting task, and as a non-resident, you will face some additional obstacles, but it’s far from impossible. If you find the varying tax laws and regulations hard to navigate, your best bet is to hire experts to help guide you through the processes. Partner with accountants and attorneys familiar with U.S. business practices.
Finally, get your new business started right by using a business filing company like CorpNet to help you form the best business structure for your new venture.
Choosing a business structure can be a tough decision for the new business owner. CorpNet wants to make the process easier.
This free, online tool helps small business owners navigate the process of picking the right business structure for their new business.