Series: Launching a Foreign-Owned Business Entity in the United States
The U.S. offers immense opportunities for businesses to thrive, including a large consumer market, diverse industries, and access to talent. It is no wonder that since 2006, the U.S. has been the world’s largest recipient of foreign direct investment (FDI).
Foreign-owned companies with an interest in U.S. expansion will be faced with many challenges. The Outsourced Accounting Services team at Forvis Mazars understands the unique landscape that foreign entities face and has developed this article series to help businesses navigate these hurdles. Follow along our Launching a Foreign-Owned Business Entity in the United States series as we cover the key aspects for business success, accounting regulations and software, payroll necessities, various taxes, and shadow payroll.
Expanding a foreign-owned company into the U.S. market is an exciting opportunity, requiring careful planning and compliance with various legal, tax, and regulatory requirements. The process can seem daunting, particularly for foreign businesses unfamiliar with the U.S. system. This article will outline the essential steps to launching a foreign-owned entity, from forming an entity and obtaining the necessary registrations to navigating tax and accounting compliance.
Step 1: Choosing the Right Entity Structure
The first step in establishing a presence in the U.S. is selecting the appropriate legal structure in consultation with legal counsel. The entity structure selection will have implications for liability, taxation, and regulatory compliance. The most common types of business entities used by foreign companies include:
- C Corporation: A C corporation is a separate legal entity from its owners, offering limited liability protection. It is a taxpaying entity, and a second layer of tax may occur when earnings are distributed from the corporation in the form of a taxable dividend.
- Limited Liability Company (LLC): An LLC provides limited liability protection and more flexible tax treatment. LLCs can be taxed as a partnership or corporation, depending on the number of owners and elections made. An LLC taxed as a partnership is not a taxpaying entity. In other words, the partnership is fiscally transparent so that earnings flow through to the owner, and the foreign owner may then be subject to tax in the United States.
- Branch Office: A foreign company can also open a U.S. branch, which is not a separate legal entity. While this option might simplify some aspects of the formation process, the non-U.S. parent is then directly subject to U.S. tax and must file non-resident income tax returns.
Foreign-owned businesses often opt for a corporation or an LLC taxed as a C corporation to create a blocker, limit liability, and facilitate smoother tax and regulatory compliance.
Step 2: Incorporating the Business
Once the entity type is selected, the next step is incorporating the business in a U.S. state in consultation with legal counsel. The incorporation process typically involves:
- Choosing a State: Many foreign companies choose to incorporate in Delaware due to its business-friendly laws and established legal framework for corporations. However, the company should also consider where the business will operate because incorporating in Delaware while operating exclusively in another state may result in dual registration requirements.
- Filing Articles of Incorporation (or Formation): The legal document to establish the company, known as the articles of incorporation (for a corporation) or articles of organization (for an LLC), must be filed with the state’s secretary of state. This document includes basic information about the business, such as the company name, address, and registered agent.
- Appointing a Registered Agent: Depending on the state of formation, most businesses are required to appoint a registered agent with a physical address in the state of incorporation. The registered agent is responsible for receiving legal documents and notices on behalf of the business.
Step 3: Obtaining an Employer Identification Number (EIN)
An employer identification number (EIN), issued by the IRS, is essential for tax purposes. The EIN functions like a social security number for businesses, allowing them to open bank accounts, file tax returns, and register for payroll.
Foreign-owned companies without a U.S. address or Social Security number (SSN) can still obtain an EIN by either of the methods below:
- Complete Form SS-4 by Mail: While domestic businesses can apply online, foreign businesses without a U.S. address or without U.S. personnel SSN need to apply via fax or mail. When filling out the form, foreign businesses can indicate in the field box 7b for SSN or ITIN “foreign.”
- Use the U.S. Address of the Registered Agent: While not a strict requirement, many foreign businesses use the address of their registered agent or legal counsel to facilitate communications with the IRS.
Step 4: Opening a U.S. Bank Account
Depending on the requirements of the financial institution, opening a U.S. bank account can be a challenging and potentially lengthy process for foreign-owned businesses due to various regulatory requirements.
To open a U.S. bank account, you’ll typically need:
- EIN: Banks require an EIN to open a corporate bank account.
- Formation Documents: The bank will need to see the articles of incorporation or organization and proof of the business’s legal formation in the United States.
- Proof of Identity: The company’s owners or authorized representatives will need to provide proof of identity. This often includes a passport, proof of residency, and potentially an in-person visit, though some banks offer remote account setup options for foreign owners.
Additional Steps for Consideration
Once the above steps are accomplished, the entity must consider additional objectives to maintain compliance in the United States. Although we’ll expand on these topics in future articles, please note the following:
- Financial reporting
- Although the U.S. does not have a statutory requirement for financial reporting, other objectives must be considered.
- Payroll taxes
- Depending on the size and jurisdiction, there are varying levels of federal and state payroll tax and unemployment tax considerations.
- Sales and use taxes
- Although there is no value-added tax (VAT) in the U.S., the sales and use tax regime is complex, with rules varying by state that also differ by product and service the entity provides.
- Income taxes and information returns
- The U.S. has a complex federal income tax regime, but there are also challenging information return requirements, including a withholding tax system when certain payments are made to entities outside the United States.
- In addition, most states also have a separate income tax compliance system.
- Further, there could be franchise, margin, and other tax regimes at the state and local levels to consider.
How Forvis Mazars Can Help
Setting up a foreign-owned entity in the U.S. involves several legal, tax, and regulatory steps, but the process can be manageable with proper planning and working with a knowledgeable professional. By choosing the right business structure, obtaining an EIN, registering for payroll and sales tax, and adhering to U.S. tax obligations, foreign businesses can establish a strong foundation for their U.S. operations. If you have questions or would like additional information on how we can help support your business, please contact an Outsourced Accounting Services professional at Forvis Mazars today.