Foreign Businesses Doing Business in the United States
Despite the challenges, foreign businesses continue to flock to the United States. This article gives an overview of the major decisions that foreign businesses must make as they explore entering the U.S. market.
Most foreign companies may establish a U.S. subsidiary or register as a foreign legal entity
In many other countries, branch offices have their own special legal status. Not so in the United States. It is possible to register your foreign legal entity in the United States. Registration of a foreign legal entity is rarely done for several reasons.
It is very easy to set up a separate legal entity in the United States—as much time and money as registering a foreign business. If you are going to go through all of the trouble to set up business in the United States, it is very little additional cost to set up a separate entity as your “representative office.”
Many times, the foreign business does not want to subject itself to the jurisdiction of U.S. courts. Setting up an office without any insulation from liability could expose the assets of the entire company.
Similarly, without a separate legal entity, the assets of the foreign entity’s entire worldwide operations are subject to levy in the event of a judgment against the company.
Finally, direct ownership of a U.S. business may potentially subject a foreign corporation to branch profits tax.
For these reasons, it would be highly unusual for a company wanting to set up a presence in the United States not to form a separate legal entity. You may want to consult with a startup lawyer who can guide you through your choices.
Foreign companies can choose to set up as a corporation or limited liability company
Although there are several different kinds of legal entities, the most common choice for a foreign business is to choose between a corporation or a limited liability company.
The corporation is the traditional structure. Corporations have rigid requirements. They have an annual shareholders’ meeting at which the shareholders elect a board of directors. The corporation is governed by a set of rules and policies known as bylaws.
The board of directors in turn provide the overall policy for the company and appoint the officers. Shares of a corporation are generally freely transferable unless there are separate side agreements such as a shareholders’ agreement.
Related article: Corporate Law for Startups
The limited liability company (LLC) is a relatively recent arrival in the United States. The LLC is much less formal. The members of the LLC are the owners of the LLC and sometimes have management responsibilities. The LLC can mirror the structure of a corporation, but can also assume the structure of a general partnership in which all of the members are responsible for the operations of the business.
The LLC can also be structured as a limited partnership in which one of the members is responsible as the manager of the business and the other members are “silent” or passive investors.
The first LLC was created in 1977 but now has become the legal entity of choice for most businesses, small and large, because of its flexibility. In Delaware for example, last year in 2019, there were 45,000 corporations created. By contrast, 165,000 LLCs or close to four times as many limited liability companies as corporations were created in Delaware.
Related article: Manager-Managed and Member-Managed LLCs: What’s the Difference?
A foreign company may select either a corporation or LLC, but as domestic companies, most foreign companies choose to set up business in the United States as a LLC.
Forming a New Business: Corporations vs LLCs
Choice of Entity Considerations in the Aftermath of Tax Reform
Tax burden on corporations eases
If a foreign business sets up as a corporation, the business is taxed as a corporation. Because of the significant reduction in corporate taxes enacted into law under The Tax Cuts and Jobs Act of 2017, the top corporate income tax rate now sits at 21 percent, down from 35 percent
If the foreign business sets up as a LLC, then it gets to choose how it wants to be taxed either as a corporation or as a pass through entity such as a sole proprietorship or partnership. This may get confusing because the entity is a LLC, but the LLC can be taxed as a corporation. How can that be, you may ask? The LLC is not a taxable entity so it gets to choose its own tax treatment.
You can form the new business in any one of the 50 states or the District of Columbia
The United States are divided into 50 states and the District of Columbia. Since corporate law is based on the state in which the entity is formed, the foreign business needs to take some time to decide in which jurisdiction to form the company.
Foreign businesses like U.S. businesses often choose Delaware, a small state on the Eastern seaboard. Delaware has been at the forefront of corporate law in the United States. It has developed corporate expertise over the decades and a stable legal regime. And it has a special court for corporate matters, the Court of Chancery. Most states have courts of general jurisdiction in which the same judge may hear both criminal and civil matters. Having a special court has made Delaware attractive to many businesses.
Formation in Delaware does not mean that the company has to do business in Delaware. Indeed, most businesses that form in Delaware are doing business in some other state. Once the business is formed in Delaware, the business then needs to register in every state in which it is doing business. The company can only have one state of organization but numerous states in which it is doing business.
You may need a CFIUS review
Any time that a foreign business has a transaction in the United States, it has to think about whether CFIUS applies. Before recent amendments, greenfield investments, starting a new company were not subject to CFIUS. With recent amendments, real estate ventures may still come within the ambit of CFIUS.
If the business is expanding in the United States by merging or acquiring a new business, it should consult with a CFIUS lawyer to determine whether it should make a CFIUS filing.
Related article: Business Acquisitions in US: CFIUS Reviews Expanding
Commencing operations for your new business
Commencing operations for your new business is usually simple. You open a bank account, register with the tax authorities and get a business license. But for foreign businesses there may be an extra hurdle. To open a bank account and file taxes, the business needs an employer identification number (EIN).
An individual who has a social security number can readily be the “responsible person” necessary to obtain a EIN, but if there are no U.S. employees or others willing to be the responsible person, then one of the foreign founders will have to apply to obtain a special designating number. Instead of a five minute application, it can take 6-8 weeks or even longer to obtain an EIN.
And then you need to find a bank who is willing to take your money. This usually want not an issue, but with the new know your customer requirements, some banks may require additional information for you to open a bank account.
Once the entity is created and has a EIN, then it prepares a tax return just like any other U.S. company. The taxes it pays depends on the tax treatment of the entity.
Related article: Checklist for Starting a Business: So Many Things to Do So Little Time
Immigration considerations may influence the foreign investor
Some foreign investors have additional considerations in establishing a U.S. presence, such as immigration. If they have a minimum of $900,000 to invest, they may want to look into the EB-5 Immigrant Investor Program.
The threshold question for others is whether you are interested a non-immigrant visa or an immigrant visa. If a foreign business is simply exploring the U.S. market for opportunities, then you may be interested in a B-1 temporary business visitor visa. You are not eligible to work in the United States, but you are allowed to stay in the U.S. for a maximum of six months.
You may also be eligible for an E treaty visa if you are coming from one of the countries with which the U.S. has a treaty, such as Australia, Armenia, Kazakhstan or Turkey. If you are from one of the countries, you are engaged in substantial trade or developing and directing the operations of an enterprise in which you have invested a substantial amount of capital, you may be eligible for a Treaty Trader (E-1) and Treaty Investor (E-2) visa. Note that some countries are limited to one category or the other and other countries have both categories, depending on the treat.
And finally, if you are interested in having your employees to come to the United States to work for your company as part of an intracompany transfer, you may want to apply for a L-1 visa. The L-1 authorizes a qualified employee of your company, such as a manager or executive or an employee with specialized to be allowed to work and live in the United States.
Easy to start a business in the U.S.
In general, the United states is very favorable country in which to do business. It has low corporate rates and it is easy to form a company. And of course it is a large market–a very large market that is hard to ignore.