Claiming close to 30% share of global consumer spending, the United States continues to be the largest consumer market in the world. It’s no wonder many foreign entrepreneurs dream about how to start a Business in the United States without living in the United States. Selling to the U.S. through a wholesaler or directly online is one way that foreign companies can target the U.S. market. However, many nonresidents set up business entities based in the United States to take advantage of the lower tax rates and protections that having a U.S. business offers.
Neither citizenship nor residency is required to start a small business in the U.S., so the process is very doable if you follow the right steps. Here’s how:
1. Choose Your Business Structure
As non-residents, foreign entrepreneurs have two primary choices of business structure for their U.S.-based business: the C Corporation and the Limited Liability Company (LLC). (Nonresidents are prohibited from forming an S Corp in the U.S. because each S Corp shareholder must be a U.S. Citizen or permanent resident alien.) Here’s the difference between the two:
- C Corporations are 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 attributable to the corporation only. You can also sell an unlimited amount of stock or shares in the C Corp and even go public, if desired. Investors prefer the C Corp structure, which is good to know if you think you may plan to expand and need an injection of outside money. Caveats include the paperwork and deadlines required to stay in compliance as a C Corp, and the double taxation (the corporation pays taxes on its profits, and then the individual shareholders pay taxes on the dividend income they receive from the business, so the profits are effectively taxed twice).
- LLCs are similar to the C Corp 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 Corp or pass-through profits and losses to the owners.
In the U.S., compliance doesn’t end once you’ve started your business. You must file an annual report, whether you’ve formed a 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 U.S. Internal Revenue Service (IRS) to pay taxes on the income earned in the U.S. You may also be required to pay an annual fee to the state where your business is incorporated. Switching entities down the road is possible but may be cumbersome, as it could involve dissolving one corporation and forming a new one depending on the state where you locate your business.
2. Choose the State in Which to Start Your Business
Most U.S.-based 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. 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. Do your homework to find your ideal location. According to WalletHub, Texas, Utah, and Georgia topped last year’s top states to start a business.
3. Get 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 incorporation and is designated by the corporation to accept service of process on behalf of the corporation. Because you do not reside in the U.S., 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 that provides registered agent services. Check with the Secretary of State’s office in the state where you locate your U.S.-based business for a list of companies that provide registered agent services.
4. Obtain a Federal Employer Identification Number (EIN)
All U.S. businesses are required to have a Taxpayer Identification Number (TIN). The TIN is an identification number used by the IRS to administer tax laws. U.S. citizens are required to show their Social Security number to obtain a TIN. 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, IRS Application for Individual Taxpayer Identification Number. The form requires documentation establishing your identity (such as a driver’s license or birth certificate) and your connection to a foreign country (such as a passport).
As of May 13, 2019, the IRS will only allow individuals with an SSN or ITIN to be the “responsible party” on EIN applications. Entities may not use their existing EINs to obtain additional EINs.
5. Set Up a U.S. Business Bank Account
To create an entity based in the U.S., you must open a bank account based in the U.S. Although the USA Patriot Act, passed after the terrorist attacks on 9/11, have 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. Moving to the U.S.
What happens when you decide you need to move to the U.S. to properly run the business? The answer is a bit convoluted and under scrutiny at the moment, but here’s a brief explanation. Under the Obama administration, the International Entrepreneur Rule (IE Final Rule) was created to allow international entrepreneurs to temporarily stay in the United States for up to 30 months (potentially renewable for another 30 months) to enable them to grow their businesses here in the United States. Today, although President Trump’s administration has attempted to squash the rule and limit immigration approvals, the ruling still exists. In fact, there are new efforts by U.S. lawmakers to reintroduce a startup visa.
In the meantime, there are still 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.
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 structure for your new U.S. based business.