Setting up a Business in the United States
By: Michael Einbinder, Esq. and Richard Bayer, Esq.
Einbinder & Dunn LLP
In a global marketplace, non-U.S. residents (and non-U.S. companies) will find the United States open for business.
Although there are no federal or state laws or regulations that prohibit non-US. Residents/companies from operating a business in the United States, we do caution that specific industry regulations may make doing business in the United States more challenging.
If you operate a company in a regulated industry, we recommend that you conduct additional research into your specific industry.
This article is intended to provide non-U.S. residents/companies with a roadmap that highlights common issues that will arise when launching a business in the United States from overseas.
Select an Entity Type
Many non-U.S. residents/companies will need to determine which type of entity to form.
Common options include a limited liability company (“LLC”) or a corporation. An LLC can be appealing because it is generally viewed as being more flexible than corporations when it comes to structuring returns for owners (referred to as a “Members”), voting rights and other management decisions.
An LLC can be established to be taxed as pass through entity (sometimes referred to as single-taxation) or as a corporation (which is commonly referred to as double-taxation). For most corporations, the profit generated by the corporation is first taxed at the corporate level. Then, when distributions are made to the corporation’s shareholders, the shareholders must report that income and pay incomes taxes. As a result, a corporation’s profits can be taxed twice.
In our experience, we typically see non-U.S. residents/companies form a corporation to act as a U.S. holding company and if necessary, form subsidiary LLCs that are then owned by the U.S. holding company. When selecting an entity type, much of the consideration will be given to the applicable tax treatment. Accordingly, we strongly recommend that non-U.S. residents/companies consult with accountants and other tax professionals to gain a better understanding of the U.S. tax code, applicable tax treaties and other similar tax-related issues.
In the course of researching entity types, you may come across an S Corporation, which is an entity that was formed as a traditional corporation, but has made a S corporation tax election. S Corporations may have corporate income, losses, deductions and credits pass through to the corporation’s shareholders, much like an LLC. However, to qualify for an S corporation tax election, the corporation must, among other things, be owned only by allowable shareholders, which may not include partnerships, corporations or non-resident alien shareholders.
Choose the State of Formation
Once you have decided which type of entity to form, the next step is to decide the state of formation. The formation state is the state in which you will file the requisite formation documents (whether articles of organization for an LLC, articles of incorporation for a corporation or some other similarly titled document).
Formation costs, the time needed to form a company as well as the compliance obligations will vary from state to state. More importantly, the state of formation will subject your entity to the laws of that state, including its taxation laws and its LLC or corporate laws. Some states, such as Delaware and New York, have well-developed LLC and corporate laws, making them attractive from the perspective of having a stable (and predictable) body of law. Other states may have more favorable tax structure in place.
In short, there are many factors to consider when selecting the state of formation and some states may prove to be more advantageous than others. Please note that many states will require you to prepare an agreement or a document to govern the operation of the company, including many states that have enacted statutes to govern the operation of an LLC or a corporation.
In our experience, it is best practice for business owners to have an LLC agreement (also known as an operating agreement) prepared for an LLC or a set of bylaws and shareholders agreement prepared for a corporation.
If you decide to form the entity in a state from which you do not transact business (for example, Delaware and Nevada are popular states for formation even though those entities formed in those states do not always conduct business from those states) or if you will transact business in multiple states, you will need to qualify your entity in each state in which you transact business. Qualifying to do business in each state in which you will transact business will increase initial filing costs, increase annual state fees and will increase compliance obligations.
Select a Registered Agent
A registered agent is a person or company that is selected by a business to receive legal, tax and governmental notices within the state of formation. Common notices received by registered agents include tax forms, annual filing reminders and service of process in connection with a lawsuit.
Both LLCs and corporations are required to have a registered agent. If your company does not have a physical presence (i.e. maintain an office) in the state of formation or in the states in which it has qualified to do business, you will need to appoint a registered agent in each such state. In our experience, non-U.S. residents/companies often do not have a physical presence in the U.S. when they first launch and so, a registered agent is needed.
In states where you will have a physical presence, such as an office, your company may be able to act as its own registered agent, depending on the laws of that state. However, because of the important role that a registered agent plays, many non-U.S. residents/companies choose to appoint a registered agent to receive all legal, tax and governmental notices to ensure their receipt and their delivery to the appropriate decision makers, who may not be located in the United States. Companies that provide registered agent services also keep up to date with legislative changes and filing dates, which are then communicated to the non-U.S. resident/company, which may prove to be an invaluable service especially when keeping track of such information is difficult to do on a global scale.
Obtain a Taxpayer Identification Number / Employee Staffing
Once the U.S. company has been formed, a taxpayer identification number (“TIN”) must be obtained from the Internal Revenue Service. A TIN must be included on each tax return, statement and other tax related documents, including when the U.S. company files its tax return and/or when it claims benefits stemming from a tax treaty.
If a company is owned by or managed by someone with a Social Security Number, it will likely be easier and quicker to obtain a TIN. However, in most instances, it may take up to several months for a TIN to be issued. We recommend that non-U.S. residents (or non-U.S. companies) initiate the TIN process sufficiently in advance of launching operations in the U.S.
Select a Trade Name / Trademark
Finally, selecting a business name is a critical element in doing business in the United States. Putting aside for a moment that the trade name should reflect your brand’s identity and it often creates the first impression that customers will have your goods and services, the company or brand name should be dissimilar enough from those operating in similar industries as well as tangential industries.
Selecting a strong, unique name will not only work to prevent confusion between competing brands but will help your brand stand out in the minds of your consumers. If you plan on operating throughout the United States, you should consider registering your trade name on the federal level.
Alternatively, if you plan on operating within one state or even a handful of states, trade names can be registered at the state level. If you have a registered trademark in your home country, that registration can form the basis for an application for registration in the United States on the federal level. We recommend that non-U.S. residents (or non-U.S. companies) consult with experienced trademark attorneys before launching a business in the United States.
