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Company registration in USA

If not the USA, what other country can be considered a haven for entrepreneurs in our era? A well-established business culture, various incentives offered by different states and numerous examples of evolving from a "garage business" into a multinational corporate giant make this country an ideal place for registering a company, starting a firm or doing business. In this article we will speak about company registration in USA, the benefits of starting a business, types of companies, the registration process, nuances of conducting business, taxes, and reporting. All of this will be explained with the assumption that this article is being read by a non-US resident interested in the business aspect of America and seeking structured and easily understandable information.

Company registration in USA

Posted 31 October 2023

Summary

Currently, the USA comprises 50 states, in addition to a federal district and island territories

Mixed – territorial and worldwide

Federal level – 21%

State level – from 0% to 12%

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    Diane

    Diane, partner of GFLO Consultancy

    Advantages of company registration in USA

    Opening a company in the USA offers numerous advantages, some of which are specific to the type of business and its activities. However, there are general advantages that can be highlighted:

    1. English as the de facto national language. While the USA doesn’t have an officially designated language, English is widely spoken and used for government documents and laws. Most of the population converses in either English or Spanish, with English predominating. Documents are often issued in English, and some legal aspects can be understood with basic English proficiency. Translation of documents issued in the USA is often unnecessary.
    2. Common law system. The USA’s legal system places a significant emphasis on precedent. This results in uniformity in decisions for similar legal cases, reducing the influence of personal interpretations of the law. Some legal institutions, such as trusts, are especially developed within the common law system.
    3. Domestic market. Access to American business partners can be valuable, as many prefer working with domestic companies. Additionally, the purchasing power of American consumers remains among the highest globally.
    4. IT market. The USA is a hub for IT startups, including numerous privately-held companies in Silicon Valley valued at over USD 1 billion, often referred to as “unicorns.” Well-known examples include Airbnb, Stripe, and Epic Games (the creators of Fortnite). Moreover, the two largest stock exchanges are also based in the USA.
    5. Corporate legislation. For LLCs, the legal foundation is partnership law, while corporations operate under corporate law, which has existed for over two centuries. The prevalence of legal precedent leads to established practices, clear legislation, and predictable regulation, which is also highly flexible.

    Legal forms of business organization in USA

    For non-residents in the USA, the following two legal forms of companies are most common:

    • Limited Liability Company (LLC)

    Company registration in USA as an LLC is perhaps the most popular choice. LLCs are transparent for tax purposes, meaning that tax obligations pass through the legal entity (LLC) and settle at the level of the company’s members. When a single individual forms an LLC, its tax treatment resembles that of a sole proprietorship. If two or more people are involved, it operates as a partnership. Furthermore, LLCs have the option to elect corporate tax treatment. We will delve into the taxation of companies in the USA later, especially concerning non-resident ownership.

    LLC companies are formed by members and managed by managers. Importantly, the presence of managers is not mandatory; members can independently run the company without electing managers.

    • Corporation (Corp)

    Corporations come in two types: S-Corp and C-Corp. It’s crucial to know that non-residents can register a C-Corp, whereas S-Corp is a hybrid of LLC and Corporation and is only available to residents.

    C-Corp is a traditional corporation that non-residents can establish. Corporations include shareholders, directors, and top management. Typically, shareholders appoint directors, and directors oversee management. Unlike LLCs, this type of company is a separate entity for tax purposes, meaning the company reports its own tax obligations.

    The process of company registration in USA

    The process of company registration in the USA may vary depending on the state. However, the general procedure remains fairly consistent and can be divided into the following stages:

    1. Choosing the state and type of company. You need to decide on the state where you want to register your company. Each state has its own rules and tax rates. Next, you choose the type of company. For non-residents, the most common choices are LLC or C-Corp.
    2. Choosing a name and strategy for launching the company. Coming up with a name for your company is relatively simple. There are intricacies and nuances here, which we don’t need to delve into right now. Our specialists can provide detailed guidance on this matter if necessary. However, it’s essential to plan your strategy, including intellectual property protection, tax planning, budgeting for office space, hiring staff, and other aspects. Objectively speaking, not every company requires all of this. In practice, most don’t even think about these matters and operate perfectly fine. However, there are others who incur additional costs when their intellectual property becomes the target of so-called patent trolls or when they face fines for delayed reporting or for doing business in another state without proper registration. It’s far better and more advantageous to proactively prevent these issues rather than dealing with them on a case-by-case basis.
    3. Preparing and filing documents. Once you’ve selected the state and type of company and you’ve planned everything, it is time to prepare the registration documents. Company registration in USA typically requires very little information to be disclosed in most states. Subjectively speaking, the U.S. is currently one of the most private jurisdictions regarding the public disclosure of ownership structure of a company. For LLC, you will typically prepare “Articles of Organization,” while for C-Corp it’s “Articles of Incorporation.” Each state may have specific requirements for these documents. After preparing them, you submit them to the Secretary of State, who handles the registration.
    4. Registration. Company registration in the USA involves entering it into the state’s registry, assigning relevant numbers, and stamping the submitted documents. The company is officially considered established at this point, but it’s not recommended to start operations until the next step is completed.
    5. Preparing internal company documents. Developing internal company documents, such as the bylaws (for C-Corp) or the operating agreement (for LLC). These documents aren’t registered with the state but regulate the company’s internal processes. It’s crucial to have these in place before commencing operations.
    6. Obtaining a Tax ID Number. Every company, regardless of its type, must obtain a tax identification number known as an EIN (Employer Identification Number). Non-residents may also need an ITIN (Individual Taxpayer Identification Number) to open a bank account and file tax returns.
    7. Opening a bank account. After obtaining the necessary tax numbers and accepting internal company documents, you can approach a bank to open a corporate bank account. Most banks require a personal visit for this. However, if visiting a bank is not feasible, your company is not limited to U.S. banks. You can inquire about opening an account with foreign banks as well.
    Interesting:

    The term “registration” in the context of an American company, whether it’s an LLC or a C-Corp, isn’t precisely applicable. The correct procedures are referred to as “formation” for an LLC and “incorporation” for a C-Corp. “Registration” typically refers to the submission of a notice to a foreign state indicating an intention to conduct business within its jurisdiction. Once this document is submitted and accepted by the state, the company is considered registered within that state for the purpose of conducting business activities.

    Tips to keep in mind when conducting business in USA

      • Choosing a state. As mentioned earlier, selecting a state can be either straightforward or complex, depending on your company’s plans. It’s straightforward when your business activities will be within one state, and you’ll have a physical presence there. In this case, you simply choose the state where your operations will be based.

    It becomes more complex when your business doesn’t plan to operate within the U.S. In such cases, businesses often choose states with favorable conditions. For example, Wyoming, Delaware, Florida, Nevada, and others are known for their advantages. The most popular choices are usually Wyoming and Delaware. However, each state has its intricacies. For instance, Wyoming is the most budget-friendly state with minimal taxes, but banking procedures there can be more complex due to local regulatory requirements.
    Choosing the right state becomes even more complicated when your business plans to operate in multiple states within the U.S. In such cases, numerous factors come into play, such as the location of your main office, the availability of local suppliers, the intention to hire local employees, the ease of obtaining permits and licenses (if required), local tax rates, the state’s legal practices, and more. After analyzing these crucial business parameters, you can select the most suitable state for your company’s registration.

    • Choosing the type of company. For non-residents, the choice typically starts with a fundamental question: Will your future company conduct business within the United States or not? If it will, opting for a C-Corporation (C-Corp) is often more advantageous. If not (including having no U.S. bank account), a Limited Liability Company (LLC) may be a more appealing choice. Of course, various other criteria also come into play, and each case may have its unique considerations. Nevertheless, this principle often guides the selection process. This is primarily due to the peculiarities of U.S. corporate taxation. An LLC does not pay taxes itself (except when it elects to be taxed as a corporation), instead taxes are paid by the individuals forming the company.
    • Sales tax. Many readers are likely familiar with Value Added Tax (VAT) or Goods and Services Tax (GST) in the case of the European Union. In the United States, the equivalent is the sales tax. If a company plans to provide services within the U.S. (regardless of its legal form or composition), it may be required to pay this tax. The primary complexity arises from the fact that the U.S. is divided into states, and both the tax rate and the categories of goods and services subject to taxation are determined at the state level. It’s worth mentioning that these regulations can vary significantly from state to state. Therefore, if your company deals with the sale of goods or the provision of services within the U.S., it’s crucial to determine which states your services will be available in and establish a connection with those states (known as a “nexus”). If a connection is established, the company must register and pay taxes in the respective state. The criteria for establishing a connection with a particular state are also determined separately by each state.
    • Opening a bank account. This process has many nuances that can either increase your chances of success or, conversely, diminish them. It’s essential to know that, in the case of non-residents, a personal visit to the bank is usually required in the vast majority of cases. Additionally, many banks may also request a lease agreement for a physical location in the U.S.
    • Company documents. Besides the previously mentioned Articles of Organization/Articles of Incorporation or their equivalents, most other documents are typically internal company documents. This category includes the company’s Bylaws. Those are not submitted to the state. This might perplex some, but it’s a standard practice in doing business in the U.S., and there’s nothing wrong with it – it’s just how things work.
    • Operating in other states. An “other state” refers to any state where your company is not registered, which means the other 49 states besides the one you have chosen. If your company has a substantial connection with or intends to conduct business within such a state, it must file a notice (registration) with that state and obtain permission. Failure to comply with this requirement can result in fines and legal action against the company.

    Taxation in USA

    After successfully completing company registration in USA, it’s crucial to consider the issue of company taxation. This is perhaps one of the most complex and convoluted issues for non-residents, owing to several factors:

    • Firstly, the taxation system itself is intricate, consisting of three levels – federal, state, and local;
    • Secondly, the extensive legal framework, which can hardly be called well-structured, making it quite problematic to navigate independently;
    • Thirdly, the issue of qualification (interpretation) of concepts, requiring an understanding of the practical application of various norms, as well as an analysis of judicial practices.

    The complexity of the tax system can also be an advantage as it creates the necessary variability for tax optimization.

    As mentioned earlier, in the USA, there are three levels of taxation:


    Federal

    A fixed rate of 21% has been in place since 2018, replacing the previous progressive scale with a maximum rate of 35%.


    State


    Local

    At the county or city level. Typically, taxes are minimal and depend on the business’s location within the USA.


    Important:

    Taxes paid at the state and local levels are deducted from the company’s taxable base at the federal level. Therefore, calculating the corporate income tax rate for a specific state by simply adding the federal rate and the state rate is incorrect.

    C-Corporations pay taxes on the company’s worldwide income, regardless of who forms the company since the corporation is a separate tax entity from its founders.

    LLCs, as mentioned earlier, are “transparent” for tax purposes unless they have elected corporate tax status, in which case the company, like a C-Corp, pays taxes as a separate entity based on its worldwide income.

    Additionally, an LLC can have two statuses based on the number of non-residents forming it:

    1. Disregarded entity – if one person forms the company.
    2. Partnership – if 2 or more non-residents form it.

    In the first case, when a company is formed by one non-resident and complies with the conditions mentioned below, it can be entirely exempt from taxation in the USA. Conditions:

    • The person forming the company is not a resident of the country according to US tax legislation;
    • The company has no income earned or related to activities within the USA, according to US tax legislation;
    • The company does not have so-called FDAP (dividends, royalties, etc.) income.

    In this case, it can be assumed that the company and its income can be exempt from taxes in the USA.

    If an LLC is formed by two or more non-residents, it has partnership tax status. Any LLC with partnership status is considered a local company, and as a result, withholding tax of up to 30% can often arise at the source. If there is no planned activity in the USA, and there are two or more non-resident members, it is advisable to consult our experts to determine the tax burden of the future company.

    Preparation and submission of reports in USA

    All companies registered in the USA are required to obtain a tax identification number – EIN and file reports within the legally mandated deadlines. If the company’s registration in the USA involved non-residents, there may be a need to file a tax return for them as individuals, requiring an ITIN number.

    Interesting:
    Even if a company has a “disregarded entity” status, it is also required to obtain an EIN number. Since 2017, all LLCs with foreign ownership exceeding 25% or having the previously mentioned status must report to the IRS similarly to corporations. This pertains to the submission of forms and declarations, not the taxation of the companies themselves!
    Important:
    Since May 13, 2019, when applying for an EIN, you are required to provide either an SSN (Social Security Number for U.S. residents) or an ITIN number of the “Responsible Party,” who is typically the owner of the company. Our specialists can assist in obtaining an EIN number, including in cases where there are difficulties in providing an ITIN or SSN.

    It’s essential to understand that the processes of tax payment and filing of forms and declarations are not always interconnected. A company may need to file a form or declaration without incurring a tax liability, and vice versa.

    All types of companies in the USA, regardless of ownership structure, have specific requirements for filing reports, forms, and declarations with the relevant U.S. authorities. Since listing all possible variations of required forms based on the type of company and ownership structure is likely to extend into another article, if not more, we recommend consulting our advisers for guidance tailored to your specific situation. Nevertheless, here we will outline general deadlines and requirements for filing in the case of LLCs and C-Corps.


    C-corp

    • Annual report according to the deadlines of the states where they are incorporated or registered for business purposes.
    • By January 31, corporations must distribute Form W-2 to their employees and file reports with the IRS. This applies only to corporations with employees in the state.
    • By February 28, Form 1099 or a related form must be filed if the company had reportable transactions in the USA.
    • By April 1, the deadline for electronic filing of Form 1099.
    • By April 15, the deadline for filing the tax return Form 1120.
    • At the state level, separate deadlines for filing tax returns may be set. For example, in the state of Delaware, this is also April 15.
    • Some corporations are also required to make quarterly estimated tax payments (ETP).

    LLC (disregarded entity)

    • Annual report according to the deadlines of the states where they are formed or registered for business purposes.
    • Assuming that the company is owned by a non-resident who is not conducting business in the USA, in most cases, Form 5472 is filed along with pro forma Form 1120 by April 15.

    LLC (partnership)

    • Annual report according to the deadlines of the states where they are formed or registered for business purposes.
    • By January 31, partnerships must distribute Form W-2 to their employees and file reports with the IRS. This applies only to partnerships with employees in the state.
    • By February 28, Form 1099 or a related form must be filed if the company had reportable transactions in the USA.
    • By April 1, the deadline for electronic filing of Form 1099.
    • By March 15, partnerships must file Form 1065.
    • Many partnerships with foreign ownership may have additional obligations for filing forms and reports, such as the requirement to file Form 8804 and Form 8805.

    Conclusion

    Company registration in USA offers numerous opportunities for business development and expansion. However, the specific administrative structure, legal system, and laws of the country require a systematic approach for the successful achievement of your business objectives.

    GFLO Consultancy experts are pleased to assist and help you with any inquiries, just get in touch or leave a request through the form right below.

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