What You Need to Know about forming a company in the United States
Many foreign businesses want to sell their services or their products in the United States. This article is intended to provide an overview of the issues you need to address when you form a U.S. company. All of these entities have legal and tax issues which need to be considered. It is important to consult with attorneys who can recommend the best entity to form for you to operate the business. There is a lot to consider but do not let that stop you. In the end it is not that difficult.
Formation of the Legal Entity
The first issue is the type of legal entity you need to create in the United States. There are a number of different entities you can select, i.e., sole proprietorships, partnerships, corporations and limited liability companies or LLCs.
The owners of the corporation are not liable for the actions of the corporation. The absence of personal liability is the main reason for forming a corporation instead of operating the business individually, sometimes referred to as a sole proprietorship, or with one or more other persons, which is a partnership. A sole proprietor or the members of a partnership are personally liable for their actions.
The most common entity used is a corporation. The corporation is owned by shareholders. Its business is managed by a Board of Directors. Its operations are run by officers, a president, one or more vice presidents, a treasurer and a secretary.
The basic corporate form is a “C corporation” which refers to Subchapter C of a provision in U.S. tax law for taxing corporations. Publicly traded companies are C corporations. Under U.S. tax law a C corporation is taxed on the income it earns at the rate for corporations. The corporation may pay dividends to its shareholders. Dividends are taxable to the shareholder. This is sometimes referred to as “double taxation” and is the main reason why small businesses do not operate as C corporations.
The second type of entity is a corporation that elects to be taxed under subchapter S which is another provision in U.S. tax law. This type of entity is not a separate taxpayer and its income is passed through to its shareholders. In that sense, it is very much like a U.S. partnership, which is discussed below.
Another popular form to operate a business under is a Limited Liability Company (“LLC”). An LLC is composed of one or more persons. The members of the LLC can be individuals, other legal entities such as corporations or other LLC’s. If there is a single owner of the LLC, a “sole member LLC,” all of the income of the LLC is passed through to that owner. If there is more than one member, the LLC will be treated as a partnership. The income of the partnership is then divided by agreement by the members/partners of the LLC.
The next issue is the contracts. The owners of a U.S. company will need a contract between the foreign company and the U.S. company they formed. This contract will spell out the rights and obligations of the two companies. It may also provide provisions for which companies are responsible for different aspects of the relationship. For example, a company shipping equipment to the United States has to consider various issues. We would need to set forth the terms of the agreement with regard to the ownership, shipping, responsibility for the equipment and any damage to the equipment.
Foreign businesses need to take steps to make certain that it is clear that the U.S. company is not a partner of the foreign company. The foreign company would not want to be considered to be operating in the United States and you would want to avoid any argument that this is a joint venture between the two companies, rather than an arm’s length agreement between them, even though the U.S. company may be owned by the same people.
If there is an individual who may be a partner or employee in the new U.S. entity, you will need an agreement as to the individual’s rights and obligations in the business. You may also need an agreement for what services the individual will provide and compensation for those services.
Some employees of the foreign business may be needed to assist in setting up the equipment and operations in the U.S. The foreign business will need a contract with those employees to make certain that their rights and obligations are clearly spelled out. There is also a need to address issues involving liability for actions of foreign employees.
If you are going to bring equipment into the United States for use by a U.S. subsidiary, you will need to determine whether you need to lease space to store that equipment. Depending on the amount involved, you may be able to lease space on a temporary basis at large storage facilities which are widely available in metropolitan areas. On the other hand, if you need to have a lease for space that you control, that may require entering into a lease with a landlord and providing insurance and satisfying other requirements that a U.S. landlord may demand.
The U.S. entity will be required to have a tax identification number which can be obtained easily and quickly. There are various tax consequences that need to be considered. Tax conventions prevent double-taxation between the United States and many countries which are sometimes referred to as tax treaties. The foreign business should consider these various treaties and determine the best way to operate while minimizing tax liability.
Liability and Insurance
A key consideration for a foreign business operating a U.S. company is how to minimize liability in the United States. This may require provisions between a U.S. subsidiary stating that the foreign business bears no responsibility for various events. However, whatever agreements the two businesses have, those agreements may not necessarily be binding on a third-party. For example, if someone is injured in connection with something done by a U.S. company, that injured party is not bound by any agreement between the companies. For that reason, you will want to minimize the liability of your foreign business. You may seek to have the U.S. company and other people provide indemnification against any liability that any one seeks to impose on the foreign company.
You may also need to buy insurance for the U.S. entity. The insurance would cover the general liability of the U.S. company. You may be able to have the foreign company named as an insured and have the insurance policy obtained by the U.S. entity cover its liability.
The rewards of direct access to the U.S. market are many and the risks can be controlled by careful planning. The first step is to make a business plan and then formulate the best way to operate that plan through a well thought out formation of a U.S. company.