Starting a US Company as a Non-Resident

When considering opening a business in the US as a non-US citizen or company, there are three primary considerations: (1) U.S. Immigration visa requirements, (2) the legal structure of your business, and (3) how this will impact your personal taxes. To help analyze these three factors we’ve brought in an immigration attorney and a CPA…. Read More

When considering opening a business in the US as a non-US citizen or company, there are three primary considerations: (1) U.S. Immigration visa requirements, (2) the legal structure of your business, and (3) how this 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.

  • 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.
  • 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.
  • 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. However, the two most popular options are the Limited Liability Company (LLC) and the Corporation. Therefore, a common question becomes, 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.

  • 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 than it is within a corporation 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.
  • 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.
  • 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.
  • 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.”
  • 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, and 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

As a non-US citizen holding ownership in a US entity there are many tax considerations to work through. Here are a few of the big ones.

  • 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.
  • 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).
  • 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).
  • 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.
  • 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.
  • 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.
  • 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, but it does not constitute legal or tax advice.  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, Kaiser and Roten and Safe Harbor LLP expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this article.

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Top 5 Reasons to Consider Changing from an LLC to a Corporation

By Tucker Cottingham and Doug Bend *This post originally appeared on Forbes We help launch dozens and dozens of startups each year.  In the vast majority of cases, we form a Delaware C-Corp. However, lately we have seen many startups that formed their own LLC and now need to convert. Here are the top five… Read More

By Tucker Cottingham and Doug Bend

*This post originally appeared on Forbes

We help launch dozens and dozens of startups each year.  In the vast majority of cases, we form a Delaware C-Corp. However, lately we have seen many startups that formed their own LLC and now need to convert.
Here are the top five reasons you may want to change your company from a Limited Liability Company to a corporation:

1. You want to raise money from VCs. Venture capitalists want to invest in Delaware C-Corps. C-Corps allow investors to create “preferred shares” of stock and provide a consistent legal structure across their portfolios. Some VCs also manage public funds, which are often restricted from investing in LLCs.

2. You want to join a startup accelerator. Accelerators or incubators that take equity often require their participants be incorporated as a corporation. Corporations are comprised of shares of stock, which makes it easy to calculate and distribute equity. Additionally, many accelerators view a corporation as an investment-ready vehicle and a symbol of business acumen.

3. You want to give equity to your employees. In a corporation, it is easy to place shares of stock that the company can later distribute to employees in reserve. In an LLC, the members own 100 percent of the company. In order to give equity to a new member, the members must sell a portion of their personal ownership stake to the new member. This personal sale of securities could trigger capital gains tax and create other complications.

4. You want to issue equity on a vesting schedule. It is relatively easy to issue shares from a corporation that is earned over time on a vesting schedule. In contrast, because there are no shares of stock in an LLC, members usually elect to distribute profit interests. However, defining and calculating those profit interests is an expensive endeavor that requires constant monitoring of member capital accounts.

5. You want to follow best practices. Startups should position themselves to easily accept funding and retain top employees. While it may make sense in some situations to veer off the typical path, doing so usually requires explanation. Founders who want to present themselves as in-line with industry practices seek out corporations.

The process for converting from an LLC to a corporation depends on the state in which you originally formed your LLC. Some states (like Calif.) have a fast-track conversion statute that specifically allows for a domestic LLC to convert to a foreign (out of state) corporation. In other states, a conversion may actually require a merger. In both cases, be sure to consult with a tax expert. You want to consider all tax issues prior to drafting your conversion or merger plan.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice. 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.

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Should Your California Professional Corporation Elect To Be Taxed As An S Corporation?

In California, certain professions that require a state license are prohibited from forming a limited liability company or a traditional corporation and instead must incorporate as a professional corporation. 1. Advantages To Electing To Being Taxed As An S Corporation. If you do not elect to have your California professional corporation taxed as an S… Read More

In California, certain professions that require a state license are prohibited from forming a limited liability company or a traditional corporation and instead must incorporate as a professional corporation.

1. Advantages To Electing To Being Taxed As An S Corporation.

If you do not elect to have your California professional corporation taxed as an S corporation, the default is for it to be taxed as a C corporation.

As a C corporation, your professional corporation would pay federal taxes on its profits and you would also pay individual taxes if you receive salary, bonuses, or dividends from the corporation.

By electing to be taxed as an S corporation, your professional corporation would instead be a pass-through tax entity, like an LLC or a partnership.  Electing to be taxed as an S corporation may also allow you to pass losses from the business to your personal income tax return, where you can use the losses to offset income that you may have from other sources.

Finally, if the corporation pays you a “reasonable salary,” you may not be required to pay self-employment taxes on any additional corporate profits that are paid to you as dividends as a shareholder in addition to your reasonable salary.

2. Disadvantages To Electing To Be Taxed As An S Corporation.

A drawback of electing to have your professional corporation taxed as an S corporation rather than a C corporation is in a C corporation the cost of the premiums for shareholder benefits, such as insurance coverage, are deductible as a business expense. In addition, the shareholders may not be taxed on the value of the benefits.

Another drawback to electing to have your professional corporation taxed as an S corporation is there are restrictions on who can be a shareholder of an S corporation. For example, S corporation may not have shareholders who are non-resident aliens.

Finally, S corporations may only issue one class of stock whereas C corporations can have different classes of stock that have different rights and liquidation priorities.

3. Conclusion.

You should consult with your CPA or tax professional to make sure being taxed as an S corporation is the best fit for your professional corporation, but for most California professional corporations electing to being taxed as an S corporation rather than a C corporation is likely to provide the most tax savings.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice in any respect.  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.  Doug Bend expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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How Many Shares Should You Authorize For Your Delaware Corporation?

When forming a corporation in Delaware you will need to indicate on the certificate of incorporation the total amount of stock the corporation is authorized to issue.  There are two schools of thought on how best to make this decision: 1.  Only Authorize 5,000 Shares of Stock. By March 1st of each year you will have to file… Read More

When forming a corporation in Delaware you will need to indicate on the certificate of incorporation the total amount of stock the corporation is authorized to issue.  There are two schools of thought on how best to make this decision:

1.  Only Authorize 5,000 Shares of Stock.

By March 1st of each year you will have to file an annual report and pay a franchise tax in Delaware.  The tax is calculated based on the authorized shares for the company by using either the Authorized Shares Method or the Assumed Par Value Capital Method, whichever is less expensive.

The Authorized Shares Method is based on the number of authorized shares and is calculated as follows:

     (i) If the company is authorized to issue 5,000 shares or less the annual franchise tax is $75;

     (ii) If the company is authorized to issue 5,001 to 10,000 shares the annual franchise tax is $150; and

     (iii) for each additional 10,000 authorized shares the annual franchise tax is increased by an additional $75.  The maximum annual tax under the Authorized Shares Method is $180,000.

You may, therefore, decide to authorize the company to only issue 5,000 shares so you pay the minimum amount of Delaware franchise tax each year ($75).

2.  Authorize Millions of Shares.

The second school of thought is to authorize millions of shares, typically 10,000,000 shares.

The rationale is individuals who receive 1,000,000 shares feel like they are receiving something of greater value and may be more motivated than individuals who receive 500 shares, even if the shares represent the same percentage of ownership in the company.

In addition, having more shares provides more flexibility in allocating shares on vesting schedules.

The drawback is that in Delaware having more than 5,000 authorized shares results in a higher annual franchise tax.

If you authorize millions of shares, you will most likely calculate the Delaware annual franchise tax using the Assumed Par Value Capital Method.  The calculations under this method can be complicated, but the Delaware Secretary of State’s Office provides a good explanation and  examples of how to determine the tax here.

Please contact us at (415) 633-6841 or info@bendlawoffice.com to discuss how many shares you should authorize for your Delaware corporation.

Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect.  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 post.

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The Top Six Reasons Your Company Should Have Strategic Bylaws

California does not require a company to have written bylaws, but below you will find six reasons why every business owner should invest in a strategically thought out set of bylaws for their company: 1.  The Bylaws are the Company’s Legal Backbone A company’s bylaws provide the legal framework for how it operates, including the number… Read More

California does not require a company to have written bylaws, but below you will find six reasons why every business owner should invest in a strategically thought out set of bylaws for their company:

1.  The Bylaws are the Company’s Legal Backbone

A company’s bylaws provide the legal framework for how it operates, including the number of people who may serve on the board of directors, how to call a board of directors meeting, and the officer positions for the company.

2.  What if Your Company Does Not Have Bylaws?

If your company does not have bylaws in place, the laws of California will control how the company is run.  It is much better for the owners to determine how it would like to have the company operate than to rely on the state’s statutes.

It is similar to an individual not having a will or trust.  If they die, the state’s statutes determine how the individual’s assets are distributed.  Instead, the individual should thoughtfully think through how they would like their assets distributed and to set up the legal mechanism to enforce their plan.

Similarly, it is much better for business owners to strategically think about how they would like their company to operate. Relying on state statutes might not always be the best fit for the company.

3.  Bylaws Provide Owners With Piece of Mind

Every company eventually runs into challenges.  It is better to consider some of the potential turning points in your company and provide for them in your bylaws. This preemptive approach allows you to determine how you would like the outcomes of these situations to be determined, rather than waiting to make tough decisions when interested parties and passions may create the perfect storm for litigation.

For example, what will happen if there is a legal dispute between the owners?  Do you want the company to be tied up in the expense and distraction of litigation or would you prefer arbitration?  What happens if one of the owners dies?  What if one of the owners wants out of the company?

The bylaws present an opportunity to calmly and objectively reflect on these issues before they occur.  It is wiser to answer these types of questions ahead of time and determine what might be the best solutions for your company than to rely on the default rules in the state’s statutes or to try to resolve them when clear heads are less likely to prevail.

 4.  Bylaws Help Protect Your Company’s Limited Liability Protection

One of the primary reasons to form a corporate entity is to possibly have personal limited liability from the potential business debts and judgments against your company.

If a company does not have bylaws and is sued, a plaintiff could try to “pierce the corporate veil” by claiming the company should not be provided with the shield of limited liability protection because its owners did not follow corporate formalities.

In determining whether to pierce the corporate veil, the court would evaluate a number of factors to determine whether your company is legitimate, including whether you have the proper corporate documents and records.  By not having bylaws, a business owner is risking not being provided limited liability protection if sued.

5.  Bylaws Help Avert Misunderstandings Among Owners

Communication and clear expectations are key to any successful relationship including the relationship between business owners.  Bylaws clearly lay out how the company will be run which can be crucial in preventing misunderstandings over how the owners expect the company to be managed.

6.  You May Need Bylaws To Get a Bank Account, Loans, and Insurance.

Finally, if you would like to open a business account or apply for loans most banks will require you to provide a copy of your bylaws.  In addition, insurance companies may require you to provide a copy of your company’s bylaws before providing certain types of polices.

As a business owner, it is often tempting to cut corners to lower costs. A strategically thought out set of bylaws should not be one of these corners.   Instead, bylaws should be recognized for what they are – one of the wisest investments a business owner can make to ensure the long-term effectiveness of their company.

If you have any questions regarding bylaws or any other business legal issue, please contact us at (415) 633-6841 or info@bendlawoffice.com.

Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect.  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 post.

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