The world is more interconnected than ever. This is particularly true for startups seeking to impact markets across the globe. The United States is still one of the largest markets of business and individual consumers. Startups from around the work routinely seek to establish operations within US borders. To do so, however, the startup founders must overcome various legal and procedural hurdles. While this process is more difficult due to many of the legal and procedural requirements, foreign startup founders can legally establish business operations within the United States. Below, we discuss the various legal and procedural considerations:
Setting up a business entity under US law is very procedural in nature. Below is a checklist and explanation of things that must be completed.
Select a Business Entity
The most common forms of business entity for startups are limited liability companies (LLCs) and corporations. Either of these options are good starting points for the startup. The thing to remember is that the LLC and corporation must elect to either be taxed as a partnership or as a C-corporation. S-Corporation status is not available if the company is owned by a non-US citizen.
Register a Business Entity
A business entity is formed under state law. Any individual, foreign or domestic, can register a business entity. To do so, however, the organizer of the business must be able to identify a local office and registered agent to receive correspondence. A foreign startup may not have an agent or employee or place of business within the US at the time of registration. To get around these, numerous services exists to serve as the primary office and registered agent for foreign business.
Organizational Documents and Setup
Once approved as a business entity by the state of incorporation, the organizers must create the governing documents of the business entity. For an LLC, this is an operating agreement. For a corporation, the document is known as the bylaws. These documents will lay out the rights and obligations of owners and managers of the company. Most importantly, they will lay out the authority of the members of the company to undertake certain action. Proof of authority may be required of a company agent or employee when undertaking some of the other procedural aspects of establishing the business operations, such as opening a bank account or purchasing insurance. The company will also need to undertake some organizational tasks. These tasks can be done through meetings of the owners and managers or through documents with written consent of all of the owners. Organizational setup for a corporation includes shareholders voting to elect directors. The directors then meet to approve specific company actions. The organizational setup requirements of an LLC are minimal. Simply having members vote to approve the LLC agreement is generally all that is required.
Any business entity must contact the Internal Revenue Service to establish a Federal Employer Identification Number (FEIN). You can think of this as the social security number of the business. Further, the entity must obtain a State Employer Identification Number or tax ID. If the company sells goods, the state may also require the company to obtain a sales tax identification number. These numbers are used to report taxes and to deposit employee tax withholdings, such as Social Security, Medicare, Sales & Use taxes, Ad Valorem or Property taxes, Unemployment, and Worker’s Compensation.
A more difficult problem arises when a company has operational profits or losses that pass through to the owners. In this case, the owner will be subject to US taxation. If the compensation to a non-US resident is compensation for work or services rendered while in the US, the individual will file a US tax return. The same graduated tax rates for US citizens applies to the non-US resident. There are limits on the extent to which a company can treat compensation paid to owners for services rendered as an expense. If the business owner receives pass-through compensation or dividends, this is generally taxed at a 30% flat rate.
Select a Business Entity
Opening a Bank Account may be the most daunting task for a foreign startup. Federal law makes it difficult for banks to meet the regulatory and reporting requirements of services foreign individuals. Specifically, the Foreign Account Tax Compliance Act, Anti-Money Laundering Statutes (such as the “know your client rules), and money transfer restrictions from the 2003 Patriot Act all make the role of the bank in servicing foreign account holders difficult. Some banks will still open accounts for non-residents, but place extensive restrictions and requirements on the accounts, such as restrictions on deposits, online access, money transfer, and very high minimum balances. The startup, however, can get around these legal hurdles by establishing the business entity, identifying a registered agent, and getting an EIN prior to opening the account. The agent will need to show up to the bank in person with company documents authorizing her to establish the account. She must have the Federal (and sometimes state) EIN. She must also have identification as the person authorized to undertake opening the account. The bank will generally not require any additional information to open the bank account for the domestic company.
Immigrant or Work Visas
Finally, the founders of a non-US startup may need to figure out a way to come into the country to work in the startup. Of course, this can be avoided when the startup simply hires US employees to handle all startup operations. To come to the US and undertake business activity, the following work Visas are potential options:
H-1B Visa – Traditionally, an H-1B is not an option for individuals setting up a company. There are too many requirements for the company to demonstrate unfulfilled demand and need for foreign labor. Some state-sponsored university programs allow foreign-born business founders to obtain H-1B status, which allows the entrepreneur to work on his or her business while also mentoring university students on their own startup ideas.
E-2 Treaty Investor – The US has a treaty agreement with numerous countries. If a startup founders are from one of these countries and able to raise significant investment capital, this visa may be an option. This visa generally only lasts for two years and can make it difficult for the startup founder to later obtain a green card.
0-1 Visa – This visa is available for individuals with a deemed, “extraordinary ability”. This visa is generally only available for scientists, athletes, and performers.
EB-5 Visa – This visa provides permanent resident status to the holder. It requires the individual found a company with a minimum investment of $500,000. Also, the company must employ a minimum of 10 employees within two years of the visa granting.
It is advisable to work with a legal professional on any matters affecting visas or legal work status.
For a US Company with LawTrades
The experts at LawTrades can offer all of the legal advice and services necessary for startup companies to incorporate in the United States.