Your expansion to the U.S. begins by selecting the entity you will use to conduct business.
In considering what type of business entity to use when conducting business in the U.S., the threshold question is whether to register your business in the U.S. (i.e., establish a “branch office”) or create a brand new entity. Most international business owners choose to form a new entity.
Branch Office: registering to to business
A branch office is an extension of a foreign company that merely registers (“qualifies”) to do business in the United States. A branch office is likely sufficient in instances where no physical presence in the U.S. is planned, such as an Internet-based business, or one that has no office or employees in the U.S.
Form an entity, establish a physical presence
If you plan to have a physical presence or significant operations in the U.S., you should consider forming a separate business entity for your U.S. operations. There are several entity types in the U.S., although international companies typically choose either a corporation or limited liability company (LLC).
A corporation is a business entity that is owned by shareholders and governed by a board of directors. A corporation can issue stock in order to raise capital. A corporation is considered to have legal “personhood,” meaning that it can sign contracts, own property, sue and be sued in its own name. The people who form, own and run the corporation are considered to be separate from the entity, which means that those individuals have limited liability for the corporation’s debts and judgments.
Corporations are taxed at the state and federal level. Individual stockholders are also taxed on dividends when the corporation distributes profits, and the corporation receives no deduction for this use of cash. If the entity is owned by a U.S. citizen or a resident alien of the U.S., the corporation can make an election to become an “S corporation” (defined below).
Limited Liability Company
An LLC is an entity that provides its owners (called members) with the same limited personal liability for business debts and judgments offered by corporations. An LLC can be formed with only one member, and other business entities, such as a corporation or another LLC, can be LLC members.
LLCs are considered “pass-through” entities for income taxation purposes. Those LLCs with only one member report LLC earnings and losses directly on the member’s individual income tax returns. Those with multiple members generally must file a partnership income tax return to report total earnings and distribute pro-rata profits to each member. Each member then files an income tax return to pay the tax on their allocable share of income (whether or not it was actually distributed).
An S Corporation is a corporation that uses the same entity structure and offers the same limited liability to shareholders as a conventional corporation, but is taxed at the federal level like an LLC, meaning earnings and losses pass through to shareholders, who report them on their individual income tax returns. Most states also recognize this entity structure.
To become an S Corporation, a company must first form a corporation, and then apply for S Corporation status with the IRS. To qualify for S Corporation status, the corporation must be a domestic corporation, and its shareholders must be U.S. citizens or resident aliens (or certain types of trusts and estates). Partnerships, corporations and non-resident aliens cannot be shareholders in an S corporation. An S corporation can have no more than 100 shareholders, and can only issue one class of stock. Finally, certain types of businesses cannot form S corporations, such as certain financial institutions, insurance companies and domestic international sales corporations.
Which is right for you?
Your choice of business entity can affect how much you pay in taxes, how much paperwork you are required to do, and your ability to raise money. Therefore, it is important to get expert advice from an attorney and an accountant, who can help you evaluate the different options with regard to your particular business plan and projections to see which entity is best suited for your company.
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