What to Consider Before Launching a US Company

Why should I form a company?

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.

  • Other reasons why foreign founders might want to form a legal entity in the US include
  • Raising money from VC firms and/or angel investors
  • Accessing essential tools for running a business, such as payment processors
  • Applying to a US-based startup accelerator
  • Building trust with customers by doing business as a US-incorporated company
  • Accessing a specific platform or service (e.g. Amazon)
  • Pathway to immigration (O1 or L1 visas)
  • Keeping money in a US FDIC-insured bank account
  • Opening a physical location/office in the US
  • Taking advantage of simplified bureaucracy compared to founder’s home country
  • Accessing tax benefits available for foreign-owned companies in the US
  • Signing contracts with US-based clients
  • Accessing US-based talent
  • Other reasons why US-based founders might want to incorporate:
  • Limited liability
  • Raising money from VC firms and/or angel investors
  • Applying to a startup accelerator
  • Splitting the ownership between cofounders
  • Tax benefits
  • Credibility
  • Longevity of a business
  • Issuing stock to employees, advisors, and others

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.

Where do I incorporate my business?

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.

What’s the difference between a C Corporation and an LLC?

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:

  • 31 days during the current year, and
  • 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
  • All the days you were present in the current year, and
  • 1/3 of the days you were present in the first year before the current year, and
  • 1/6 of the days you were present in the second year before the current year. If a foreign person meets the substantial presence test, they will be considered a US resident for tax purposes. In this case, a foreign person may become liable for paying US personal income taxes. Example: You were physically present in the US on 120 days in each of the years 2012, 2013, and 2014. To determine if you meet the substantial presence test for 2014, count the full 120 days of presence in 2014, 40 days in 2013 (1/3 of 120), and 20 days in 2012 (1/6 of 120). Since the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for 2014. However if you are over the 183 days for the substantial presence test, you may be required to pay US taxes. To receive an expert consultation, please speak with one of the tax attorneys or CPA firms within the Firstbase.io Network to assess your specific situation and obtain accurate information around the required tax liabilities. Some basic distinctions and examples of both types of legal entities are as follows: LLCs
  • LLC is an excellent choice for eCommerce stores and small online projects.
  • LLCs offer limited liability for founders, simple structure, and ease of management.
  • LLCs don’t have shares, so you won’t be able to issue stock or go public — but many pretty huge companies are LLCs (Basecamp, Mailchimp), so you can still achieve a lot with this structure. C Corporations
  • C Corporations are ideal for businesses seeking to raise money from angel investors or VC firms.
  • Corporations also offer limited liability for founders and a flexible structure.
  • The ownership of the company is expressed in shares of stock, and you can use these shares to raise capital and issue employee options. When deciding between an LLC and a C Corporation, consider how you intend to structure the ownership and leadership of your business, your fundraising and hiring goals. A core component of the Firstbase.io Network is access to law firms, tax attorneys, and CPAs who can support you as you grow your business regardless of the type of entity you launch with Firstbase.io. It is possible to convert an LLC to a C Corp in the future (even changing the state). Businesses may decide to change their structure to accept outside funding or allocate shares to employees.

As a foreign founder or owner, what are the unique considerations I need to think about?

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:

  • O-1 Visa: A Firstbase.io partner is considered the “O-1 Visa company”. They provide support for founders to use a US-based legal entity to gain visa access. You can visit our help center to receive a free consultation about your visa application and qualification criteria.
  • L-1 Visa: L-1 visa allows employees to transfer among an international group of companies. By creating a US legal entity, you can develop a “qualifying relationship” with your foreign entity that will qualify employees to transfer to the US-based company. The qualifying relationship can be in the form of an affiliate, a subsidiary, or a branch. Firstbase.io can specifically help create a subsidiary of your foreign entity.

    Founders and business owners can qualify for the O-1 Visa. By having a US legal entity, founders and business owners can petition for themselves when looking to qualify for the O-1 Visa. The O-1 is a visa aimed at people with extraordinary ability. In order to qualify for an O-1 visa, an applicant has to meet the US government’s highest criteria for extraordinary abilities including three criteria from the following list:
  • Receipt of nationally or internationally recognized prizes or awards for excellence in the field of endeavor.
  • Membership in associations in the field for which classification is sought which require outstanding achievements, as judged by recognized national or international experts in the field.
  • Published material in professional or major trade publications, newspapers or other major media about the beneficiary and the beneficiary’s work in the field for which classification is sought.
  • Original scientific, scholarly, or business-related contributions of major significance in the field.
  • Authorship of scholarly articles in professional journals or other major media in the field for which classification is sought.
  • A high salary or other remuneration for services as evidenced by contracts or other reliable evidence.
  • Participation on a panel, or individually, as a judge of the work of others in the same or in a field of specialization allied to that field for which classification is sought.
  • Employment in a critical or essential capacity for organizations and establishments that have a distinguished reputation.

    In certain scenarios, if you are a foreign-owned US entity, you may be required to complete a BE-13 form that collects information on the acquisition or establishment of a US-based company by foreign investors who own or control 10% or more of the US entity.
  • What’s the purpose of the BE-13 filing? The BEA uses the BE-13 filings to collect information on the acquisition or establishment of U.S. business enterprises by foreign investors, as well as the expansions by existing U.S. affiliates of foreign investors.
  • By when must the BE-13 filing be made? The BE-13 must be filed no later than 45 days after the effective date/completion of the reportable transaction (i.e., the establishment of a new entity, the closing of an acquisition, or, with respect to an expansion, the beginning of the expansion).
  • How is the filing made? The U.S. affiliate of the foreign investor can file the appropriate Form BE-13 in a number of ways – post mail, fax, or electronically via BEA’s electronic filing portal at www.bea.gov/efile. The BEA website (www.bea.gov/fdi) also provides a number of filing resources, including forms, filing instructions, FAQs and even video tutorials.
  • What are the penalties for failing to properly file the BE-13? Failure to properly file the BE-13 (whether missing the deadline, using the wrong form or providing incomplete or inaccurate information) can result in civil and/or criminal penalties, ranging from $2,500 or more than $32,500 per violation, as well as injunctive relief compelling compliance on the civil side, and imprisonment of up to one year and/or a fine of not more than $10,000 per violation on the criminal side (if it is found that such failure was willful).
  • What form should be used for the BE-13 filing?
  • Form BE-13B – report for a U.S. business enterprise when a foreign entity, or an existing U.S. affiliate of a foreign entity, establishes a new legal entity in the United States and (i) the projected total cost to establish the new legal entity is greater than $3 million and (ii) the foreign entity owns 10 percent or more of the new business enterprise’s voting interest (directly or indirectly).
  • Form BE-13 Claim for Exemption – report for a U.S. business enterprise that (i) was contacted by BEA but does not meet the requirements for filing forms BE-13A, BE-13B, BE-13C, or BE-13D or (ii) whether or not contacted by BEA, met all requirements for filing on Forms BE-13A, BE-13B, BE-13C, or BE-13D except for the $3 million reporting threshold.

    Creating a foreign parent company and/or a subsidiary is an important decision, so we encourage you to seek further legal counsel before taking this step in growing or starting your business.

When does it make more sense to create a subsidiary instead of a new company?

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 subsidiary can help overcome bureaucracies. If you want to maintain the same management structure, a subsidiary can help ease in paying out contractors, affiliates, or partners without dealing with some of the financial roadblocks and red tape that may exist in countries outside of the United States.
  • On the other hand, subsidiaries are flexible enough to offer larger multinational companies the ability to expand into a country with different legal structures that may require a unique management structure due to the nature of the entity or type of business.
  • Similarly, larger multinational companies who have a diverse portfolio of products or services can find value in creating a subsidiary to maintain financial dependence on the parent company while creating a separate structure that maps to the specific needs of the unique product or service.
  • Lastly, organizations can diversify a corporate identity by forming subsidiaries that are housed under a larger parent company while offering the flexibility to create a unique brand that may be different or separate from the brand and voice of the parent company.

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.

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