Even though enterprises may be carried out without incorporation by an individual or partners, the main factors for choosing a corporate form is for the limited liability and the perpetual existence these organizations can offer.
Likewise, entities are capable of moving portions of the ownership interests in the company applying simple techniques. Furthermore, incorporating a business adds trustworthiness to the venture in the market because it gives identity and professionalism.
Corporate law in the United States is state law. Statutes and case law vary from state to state. When incorporating a business, you should consider your business model to understand which state has the legislation that fits better on your enterprise goals.
You must create a company or LLC under the laws of a certain US state. Thankfully, an entity incorporated in any state can operate outside of this state, even as a foreign-owned US entity. There are certain types of businesses (ie. brick and mortar stores or physical locations) that can require filing extra paperwork if you physically operate your business outside of the state of incorporation.
As a result, each state has its own set of rules and regulations around incorporating a business. For example, one founder is enough to form a corporation or an LLC in Delaware. Due to the specific needs of Firstbase.io customers, Delaware and Wyoming are the two states currently available for business formation. Additional information can be found here and here about why either of these states are a great fit for startups.
Both Limited liability companies (LLC) and C Corporations will provide limited liability for founders. When deciding between an LLC and a C Corporation, consider how you intend to structure the ownership and leadership of your business, your goals, and potential tax obligations.
When forming an LLC, owners create an Operating Agreement, a contract specifying how the business will be run and how costs and profits will be shared. As long as all parties agree to the terms, the actual structure of your LLC can be at your discretion.
Operating an LLC moves liability for debts and obligations of the business from the entrepreneurs into the entity itself. LLCs and corporations will provide limited liability for their shareholders.
The choice can be driven by many factors like tax obligations, corporate governance, the need to raise venture capital or issue stock to employees, or other enterprise objectives.
Concerning tax issues, LLCs are "pass-through" entities. Pass-through taxation allows LLC's members to pay personal income taxes on the income of the business.
On the other hand, a corporation is an independent entity for tax purposes. Corporations generally pay corporate taxes on their own profits, and their shareholders pay personal income on the capital distributed to them.
Shareholders are taxed separately if the company distributes dividends to them, or if it pays them a salary, in the case of employee shareholders. If the shareholders are not US residents and don’t have physical presence in the US, they are normally not liable for paying US personal income taxes.
Important: Generally, If the members or shareholders of a US entity are foreigners who don’t meet the “substantial presence test”, and the company doesn’t have any “US-connected income”, it has no tax liabilities in the US. The term “US-connected income” generally means income generated in the US, and applies to businesses that have physical presence of the business in the United States and operate in the US through a “permanent establishment” (e.g. an office or other fixed place of business) or have “dependant agents” (e.g. full-time employees, or contractors and companies that work almost exclusively for the company) that do something essential to grow your business in the US. The US uses the Substantial Presence Test as a way for international residents to assess whether they qualify for certain tax requirements based on the physical duration of stay within the US. From the guidelines provided by the IRS (www.irs.gov), here are the terms you must meet for the calendar year for tax purposes:
As a foreign founder of a US legal entity, you are afforded the opportunity to access most of the resources available to US legal entities. Since most foreigners do not have a US Social Security Number, obtaining the EIN (more information about this below in this guide) is an extremely important first step before gaining access to one of the best startup ecosystems in the world. Firstbase.io allows you to obtain EIN without being a US resident.
Firstbase.io is a technology service supporting founders globally with customers from more than 120 countries. Firstbase.io operates an EIN authorization team that works directly with the IRS on behalf of foreign customers to expedite the process of retrieving the EIN from the IRS once it is issued. Please reach out to us if you have specific questions about how this process helps foreign business owners obtain their EIN faster.
The United States has a comprehensive path to immigration for entrepreneurs. You should consult an immigration lawyer to get insights into your visa application. Firstbase.io has a partnership with lawyers and unique legal tech companies that can help you and your families understand the options available in obtaining a US Visa.
The entity formation can expand your immigration opportunities, specifically giving you access to the O-1 and L-1 visa:
If you want to create a subsidiary of a foreign parent company, you need to verify whether it is subject to agreements that forbid the creation of a subsidiary. You should have the required lender or shareholders’ approval before the incorporation. Firstbase.io can offer recommendations to help facilitate some of these legal discussions if necessary through our Firstbase.io Network.
There are several scenarios where a subsidiary is a useful option and relevant alternative instead of a new entity:
The information contained on this guide, whether free or paid, is for educational and informational purposes only. The Company assumes no responsibility for errors or omissions in the contents of the guide. The information contained on this guide is not intended as, and shall not be understood or construed as, legal or tax advice. The information contained on this guide is not a substitute for legal advice from a licensed attorney who is aware of the facts and circumstances of your individual situation. We have done our best to ensure that the information provided on this guide is accurate, providing valuable information. Regardless of anything to the contrary, nothing available on or through this guide should be understood as a recommendation that you should not consult with an attorney to address your particular information. The Company expressly recommends that you seek advice from an attorney prior to taking any actions. Neither the Company nor any of its employees, owners, or contributors shall be held liable or responsible for any errors or omissions on this guide or for any damage you may suffer as a result of failing to seek competent legal advice from a licensed attorney who is familiar with your situation.