Important Factors to Consider Before Starting a U.S. Business

While it is possible for individuals or partnerships to run a business without incorporating, the primary benefits of choosing a corporate structure include limited liability and long-term sustainability. Incorporation offers a range of other advantages, particularly for foreign entrepreneurs interested in establishing a foothold in the United States. These advantages include:

• Easier access to funding from venture capital firms and angel investors.
• Utilization of key business tools, such as payment processing systems.
• Eligibility for applying to U.S.-based startup accelerators.
• Enhanced credibility through operating as a U.S.-incorporated entity.
• Access to specialized platforms or services, such as Amazon.
• Pathways to U.S. immigration, particularly through O1 or L1 visas.
• The option to hold funds in FDIC-insured U.S. bank accounts.
• The opportunity to establish a physical office in the United States.
• Reduced bureaucratic hurdles compared to those in the founder's home country.
• Access to tax incentives designed for foreign-owned U.S. businesses.
• Easier contract negotiation and signing with U.S. clients.
• The ability to tap into the U.S. talent pool.

For domestic entrepreneurs, forming a legal entity in the United States also offers various benefits:

• Limited liability protection for personal assets.
• Greater ease in obtaining venture capital or angel investor funding.
• Eligibility for startup accelerators.
• Simplified process for dividing ownership stakes among co-founders.
• Potential tax benefits.
• Increased credibility in the marketplace.
• Business longevity and easier transfer of ownership.
• Options for granting stock to employees, advisors, and other stakeholders.

Corporate law in the United States is largely a matter of state jurisdiction, meaning that the rules and regulations governing business incorporation can vary significantly from one state to another. When making the critical decision of where to incorporate your company, it's essential to align the chosen state's legislative framework with your business objectives.

You are required to form either a corporation or a Limited Liability Company (LLC) under the specific laws of a particular U.S. state. The good news is that once your business entity is incorporated in one state, you can generally operate it in other states, even if the ownership is vested in a foreign entity. However, businesses with a physical presence, like brick-and-mortar stores, may need to complete additional paperwork to operate outside their state of incorporation.

Different states offer unique advantages for business incorporation. For instance, Delaware allows a single founder to establish either a corporation or an LLC, making it a popular choice for startups. As of now, Delaware and Wyoming are the two states most conducive for business formation according to the needs of Startco customers. 

When choosing a business structure, it's crucial to understand the distinctions between Limited Liability Companies (LLCs) and C Corporations, as both offer distinct advantages and limitations. These considerations should take into account factors like ownership structure, managerial roles, tax implications, and your long-term business objectives.

In the case of an LLC, the founding members establish an Operating Agreement. This contractual document outlines the operational rules of the business, including profit-sharing and cost allocation. The flexibility of an LLC allows for a customized organizational structure, as long as all members consent to the stipulated terms. Moreover, LLCs offer the benefit of limiting the personal liability of the owners. In this arrangement, the business entity itself assumes the responsibility for debts and other financial obligations.

Similar to LLCs, C Corporations also provide limited liability protection to shareholders. However, C Corporations are subject to different rules when it comes to taxation and governance. They offer more structure, generally required for raising venture capital, and allow the issuance of stock to employees as part of compensation packages.

One significant difference between the two structures lies in their taxation methods. LLCs are typically "pass-through" entities, meaning the profits and losses pass directly through to the members, who report this income on their personal tax returns. This avoids the "double taxation" issue commonly faced by C Corporations.

In contrast, a C Corporation is considered a separate tax entity. This means it pays corporate taxes on its profits. Shareholders are then also taxed on any capital distributions or dividends they receive, leading to the phenomenon of double taxation. For shareholders who are not U.S. residents and lack a physical presence in the U.S., they are usually exempt from U.S. personal income tax obligations on such distributions.

For U.S. tax purposes, the tax liabilities of a U.S.-based entity may vary depending on the nationality and residency status of its members or shareholders, as well as the nature of its income. Specifically, a U.S. entity that has members or shareholders who are foreign nationals and do not satisfy the "Substantial Presence Test" generally has no U.S. tax obligations if it does not earn "U.S.-connected income." This term usually pertains to income generated within the United States and is relevant for businesses with a physical presence in the country or that operate through a "permanent establishment," such as an office. It also applies to entities that have "dependent agents"—full-time employees or contractors who work almost exclusively for the company and are crucial to its U.S. operations.

The Substantial Presence Test is a criterion employed by the United States to ascertain if international residents are subject to specific U.S. tax requirements. According to the Internal Revenue Service (IRS), an individual must meet the following conditions within a calendar year to qualify:

1. Presence in the U.S. for at least 31 days in the current calendar year, and
2. A total of 183 days present over a three-year period that includes the current year and the two preceding years. This is calculated as follows:

• All days in the current year,
• One-third of the days in the year before the current year, and
• One-sixth of the days two years prior to the current year.

If a foreign individual meets these criteria, they are deemed a tax resident of the United States and may be obligated to pay U.S. personal income taxes.

For illustrative purposes, if you were in the U.S. for 120 days each in 2012, 2013, and 2014, you would count 120 days for 2014, 40 days for 2013 (one-third of 120), and 20 days for 2012 (one-sixth of 120). The three-year total would be 180 days, thus you would not meet the Substantial Presence Test for 2014.

Should you exceed 183 days in the U.S., you may be liable for U.S. taxes. For expert advice tailored to your individual circumstances, it is advisable to consult tax attorneys or certified public accountants affiliated with the Startco Network.

Limited Liability Companies (LLCs):

• Suitability: LLCs are often well-suited for smaller enterprises like eCommerce stores and online projects.
• Key Features: One of the principal advantages of an LLC is the limited liability it offers to its founders. This business structure is comparatively simple and easy to manage.
• Ownership Structure: It's important to note that LLCs do not have shares. Consequently, they cannot issue stock or go public. However, this hasn't prevented businesses such as Basecamp and Mailchimp from achieving significant scale and success as LLCs.

C Corporations:

• Suitability: These are generally more appropriate for businesses planning to seek external funding from angel investors or venture capital firms.
• Key Features: Similar to LLCs, C Corporations also offer limited liability protection to founders. Additionally, they come with a flexible organizational structure.
• Ownership Structure: A C Corporation’s ownership is divided into shares of stock. This allows for easier capital raising and enables the company to offer stock options to employees.

Decision-Making Factors:

When deciding between an LLC and a C Corporation, it's crucial to consider your business's ownership structure, leadership requirements, and goals for fundraising and employee hiring. The Startco Network provides valuable resources, including access to law firms, tax attorneys, and Certified Public Accountants (CPAs), to help you make an informed decision and grow your business.

Future Options:

It's worth noting that an LLC can later be converted into a C Corporation, even with a change in jurisdiction. Businesses may opt to restructure to accommodate external funding or to facilitate stock distribution to employees.

Understanding these basic distinctions can guide you in selecting the legal structure that is most aligned with your business objectives.

If you're a foreign entrepreneur interested in establishing a legal entity in the United States, you'll find that you have access to most of the resources that are available to domestic businesses. One crucial step for foreign founders is obtaining an Employer Identification Number (EIN), as most do not possess a U.S. Social Security Number. This EIN is your entry ticket into one of the world's most dynamic startup ecosystems.

You can secure an EIN without being a U.S. resident through Startco, a tech service platform that assists entrepreneurs globally. Boasting a customer base in over 120 countries, Startco has a dedicated EIN authorization team that liaises directly with the IRS. This team's role is to expedite the EIN acquisition process for foreign business owners. For specific queries about the EIN process, feel free to contact Startco for more information.

The United States provides a robust immigration framework for entrepreneurs. For expert advice on visa applications, it is advisable to consult an immigration attorney. Startco collaborates with legal professionals and specialized legal tech companies to help you and your family explore visa options.

Establishing a U.S. legal entity could open doors to specific visa categories, namely the O-1 and L-1 visas:

The O-1 visa targets individuals with exceptional talents. To qualify for an O-1 visa, you must satisfy at least three of the following criteria set by the U.S. government:

• Winning national or international awards for excellence in your field.
• Holding memberships in associations requiring outstanding achievements, as vouched for by experts in the field.
• Featured in publications about your work in professional or major media outlets.
• Making original contributions of significant impact in your field.
• Publishing scholarly articles in renowned journals or major media.
• Commanding a high salary or remuneration, substantiated by contracts or other reliable documentation.
• Serving on a panel or as a judge reviewing others' work in your specialized field.
• Holding a critical or essential role in reputable organizations or establishments.

The L-1 visa permits employees to transfer between international affiliate companies. By establishing a U.S. legal entity, you create a "qualifying relationship" with your foreign business, thereby facilitating employee transfers to the U.S.-based company. Types of qualifying relationships can include affiliates, subsidiaries, or branches. Startco offers specialized assistance in setting up a subsidiary for your foreign entity.

Understanding these options and criteria can significantly aid your journey as a foreign entrepreneur in the United States. Please consult professionals for personalized advice tailored to your specific needs.

For foreign-owned U.S. entities, compliance with BE-13 form requirements may be obligatory under certain conditions. Specifically, if a foreign investor owns or controls at least 10% of the voting securities in a U.S.-based company, the completion of a BE-13 form becomes necessary.

Purpose of the BE-13 Submission:

The Bureau of Economic Analysis (BEA) utilizes the data collected through BE-13 submissions to track and analyze foreign investments in U.S. enterprises. These filings offer critical insights into the acquisition, establishment, or expansion activities of U.S. companies by foreign entities.

Deadline for BE-13 Filing:

The BE-13 form is expected to be submitted within 45 days following the effective date of the transaction that triggered the filing requirement. This date could relate to the establishment of a new entity, the conclusion of an acquisition, or the commencement of an expansion project.

Methods for Filing:

The U.S. affiliate of the foreign investor has several options for submitting the BE-13 form. The form can be sent via mail, fax, or electronically through the BEA’s dedicated online portal at www.bea.gov/efile. Additional resources, including comprehensive instructions, FAQs, and video tutorials, can be found on the BEA website at www.bea.gov/fdi.

Penalties for Non-Compliance:

The failure to accurately and promptly file the BE-13 form carries both civil and criminal repercussions. Civil penalties range from $2,500 to $32,500 per violation, along with potential injunctive orders mandating compliance. Criminal penalties may involve imprisonment for up to one year and/or a fine not exceeding $10,000 per violation, especially if the failure is deemed willful.

Appropriate BE-13 Form Types:

• Form BE-13B: This form is applicable when a foreign entity or its existing U.S. affiliate sets up a new legal entity in the United States and: (i) the estimated total cost for the new entity surpasses $3 million, and (ii) the foreign entity owns 10% or more of the voting interest in the new enterprise.
• Form BE-13 Claim for Exemption: This form is designed for U.S. enterprises that either (i) were contacted by the BEA but do not meet the criteria for other BE-13 forms, or (ii) meet all filing requirements except for the $3 million reporting threshold.

Due to the complexities and potential legal ramifications involved in establishing a foreign parent company or subsidiary, it is strongly recommended to seek specialized legal advice prior to taking any such steps in business development.

When contemplating the establishment of a subsidiary for a foreign parent company, it's essential to first ascertain whether there are existing agreements that may restrict the creation of such an entity. Prior to the incorporation process, approvals from relevant lenders or shareholders should also be secured. For those who require specialized advice, Startco is equipped to offer recommendations via the Startco Network to navigate the legal complexities involved.

There are various situations where forming a subsidiary may serve as a more strategic choice than establishing a completely new company:

1. Streamlining Bureaucratic Hurdles: Subsidiaries can provide a simplified avenue for maintaining a consistent management framework while facilitating payments to contractors, affiliates, or partners. This can be particularly beneficial for operations in countries where financial regulations and bureaucratic obstacles differ from those in the United States.
   
   
2. Legal and Management Flexibility: Subsidiaries offer the agility needed for larger multinational corporations to penetrate markets with diverse legal landscapes. The adaptability of a subsidiary structure can be pivotal when local laws necessitate a unique managerial setup or a specialized type of business entity.
   
   
3. Portfolio Diversification: For expansive multinational corporations that offer a wide range of products or services, subsidiaries can serve as strategic units. They enable financial interdependence with the parent company while also allowing for a separate organizational structure tailored to the specific requirements of individual products or services.
   
   
4. Brand Differentiation: Subsidiaries offer the latitude to develop distinct brands that can co-exist under the umbrella of a larger parent corporation. This facilitates brand diversification and allows for a more nuanced market presence, separate from the brand identity of the parent company.

Choosing between a subsidiary and a new company should be a well-considered decision, influenced by multiple factors including legal constraints, management preferences, and strategic objectives.

Check out our services:

• Start a Limited Liability Company (LLC)
• Start a S-Corporation Company
• Start a C-Corporation Company
• Open a company in the USA