If you are a non-US citizen or company considering opening a business in the US, there are three primary considerations: (1) U.S. Immigration visa requirements, (2) the legal structure of your business, and (3) how it will impact your personal taxes. To help analyze these three factors we’ve brought in an immigration attorney and a CPA.
1. U.S. Immigration Considerations
by Dan Roten, a partner at Kaiser and Roten
There are three primary immigration options for starting and running a business in the U.S.
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E-1 Trade Visa/E-2 Investor Visa
The E visa category allows foreign nationals who are citizens of treaty countries to start businesses in the U.S. There are two types of E visas. The E-1 Visa is for foreign nationals who engage in substantial international trade of goods, services, or technology between their home country and the U.S. The E-2 Visa allows foreign investors to direct and develop a U.S. business in which the investor has either already invested or is in the process of investing substantial funds. E visas are valid for 5 years and E visa holders are admitted to the U.S. for two year periods. The foreign national can renew the E visa indefinitely as long as they continue to maintain an E business in the U.S.
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L-1 Multi-national Transfer Visas
The L-1 Visa enables foreign companies to transfer managerial, executive, and specialized knowledge employees to a U.S. subsidiary, affiliate, or branch who have been employed at the foreign company for at least one year. If the foreign company wishes to open a new U.S. branch, affiliate, or subsidiary, immigration laws allow for the transfer of one managerial or executive employee to open and manage the new U.S. entity through the initial start-up phase.
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EB5 Job Creation – Permanent Residency Visa
The EB5 program allows for permanent residency in the U.S. (Green Card) for foreign nationals who invest $1 Million in a new U.S. commercial enterprise (new is considered any business formed after 11/29/1990). The $1 Million investment must directly or indirectly create 10 full-time jobs for U.S. citizens or lawful permanent residents. The foreign investor is given a conditional two-year green card based on the investor’s business plan and then must place all funds at risk and create the required jobs within the two-year conditional period. Once Immigration is satisfied the funds have been invested and the jobs created, the conditions on permanent residency will be removed.
2. The Legal Structure
by Alex King of Bend Law Group, PC
Depending on the state you incorporate in and the type of business you plan to operate, there can be a myriad of options for incorporating your business. The two most popular options are the Limited Liability Company (LLC) and the Corporation. Why do some entrepreneurs choose to form an LLC instead of a corporation, and vice versa? Below are some considerations to help you decide what type of entity might be the best fit for your business.
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Ownership
The owners of a corporation are shareholders, while the owners of an LLC are members. An LLC is much more a product of contract law, while a corporation is a child of statute. Therefore, it is much easier to create separate classes of ownership within an LLC operating agreement because you can draft the agreement to fit the desired ownership structure. However, unlike a corporation, it can be much harder to set up an equity incentive plan that includes stock options within an LLC. For many startups, especially tech startups that rely on equity compensation to attract talent, this can be a major hindrance.
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Corporate Formalities
Unlike a corporation, an LLC does not have to hold regular meetings and keep corporate minutes, which reduces the paperwork of maintaining your entity. A corporation must hold annual shareholder and board meetings to elect the board of directors and appoint corporate officers. In California, an LLC must file a statement of information with the Secretary of State every other year, while a corporation must file a statement of information every year.
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Management
An LLC’s members or managers can manage the company. In contrast, a board of directors handles the management responsibilities, while the corporate officers handle the day-to-day operations.
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Distributions
A corporation must allocate its distributions in proportion to each shareholder’s ownership share. An LLC, on the other hand, does not necessarily have to allocate its profits or losses in proportion to each owner’s membership interest. Instead, the LLC’s operating agreement (which is subject to certain IRS restrictions against negative capital accounts) can determine the distributive share of gains, losses, deductions, or credits (often referred to as “special allocations”), provided these distributions have “substantial economic effect.”
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Investment
Entrepreneurs hoping to achieve venture seed funding typically choose the Delaware Corporation. Venture capital firms won’t automatically screen out businesses that are not incorporated in Delaware, but they prefer it due to its friendly corporate governance benefits, ease of dealing with the DE secretary of state, and well known and predictable corporate laws. Furthermore, investors prefer the corporate structure because they often are prohibited from investing in an LLC, which is taxed as a partnership. They prefer a structure that allows the company to freely grant equity compensation to talented new hires without the added hassle that comes with an LLC structure. (For additional Delaware considerations you can check out these two blog posts, here and here.)
3. Taxes
by Chun Wong, principal at Safe Harbor LLP
There are many tax considerations for a non-US citizen holding ownership in a US entity. Here are a few of the big ones.
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Type of Entity
U.S. business entities are generally classified for U.S. tax purposes as corporations, partnerships, or disregarded entities. Corporations are subject to income taxes themselves (the dreaded “double taxation”). The income of partnerships and disregarded entities (“pass-thru entities”) is generally taxed directly to the owners of those entities.
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Income Taxes (Federal & State)
U.S. businesses are generally subject to U.S. federal and state income taxes. Federal corporate income taxes are imposed at graduated rates up to a maximum rate of 35%. State corporate income taxes range from 0% to 12%. State income taxes are generally only due to states in which the entity is doing business. Individual federal income taxes are imposed at graduated rates up to 39.6%, and state rates for individuals range from 0% to 13.3%. Individual income taxes are generally imposed on individuals who own interests in pass-thru entities (such as a Limited Liability Company).
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Withholding / Branch Profits Taxes
The U.S. imposes a 30% withholding tax on certain types of payments to non-U.S. persons (such as dividends, interest, rents, and royalties) and on the U.S. branch profits of foreign corporations. These 30% taxes are generally a second level of U.S. tax (in addition to income taxes).
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Estate & Gift Taxes
The U.S. imposes estate and gift taxes on nonresident aliens that own property situated in the U.S. For U.S. estate tax purposes, shares in a U.S. corporation are treated as situated in the U.S. Importantly, the estate tax exemption for nonresident aliens is only $60,000 and there is no gift tax exemption for nonresident aliens. There are far fewer estate and gift tax treaties. However, to the extent they exist, they can reduce U.S. gift and estate taxes.
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State Sales Taxes
Many U.S. states impose sales taxes on goods sold in their state. The threshold of activity that requires a seller to withhold on sales into a state can be quite low. Each individual state must be analyzed to determine whether sales taxes must be withheld.
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Treaties
Income tax treaties with the U.S. can reduce or eliminate U.S. withholding taxes. Treaties may also prevent U.S. income taxation altogether if a foreign business does not have a permanent establishment in the U.S. Income tax treaties do not apply to the individual states.
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International Tax Compliance and Organizational Structures
Along with the complex domestic tax issues, there are often even more complex U.S. international tax issues for both outbound and inbound transactions. In choosing the optimal entity choice, international investors or business owners must always align legal, tax, and accounting structures to avoid adverse consequences of foreign-owned U.S. entities, and U.S. companies must also be cognizant of foreign-owned corporations (CFCs). Proper structuring or organization can also create benefits such as deferral of tax and optimal utilization of foreign tax credits or even avoiding triple taxation in some cases. Some of the more common terms of description for U.S. international tax include: controlled foreign corporations, foreign partnerships, FBAR, FATCA, Passive Foreign Investment Company’s (PFICs), Interest Striping, FIRPTA, and anti-inversion. The common descriptors contain many traps and pitfalls for the unwary. Obtaining the advice of attorneys and well-versed tax advisors in advance will often, if not always, result in more beneficial outcomes and eliminate or minimize adverse consequences.
As you can see, one size does not fit all. Crafting a strategic entity can mean a world of difference as your business begins to take off. With so many considerations, it can be immensely helpful to schedule a consultation with each expert as you plan your US company.
Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.