Posted by KLSM CPA Firm PLLC

How To Set Up a Business in the United States as a Foreigner

How To Set Up a Business in the United States as a Foreigner


Starting a business in the United States as a foreigner can be a tad difficult, but the country makes it very easy to register your business and start a business. Learning English is an essential requirement if you plan to do business with Americans. Still, other aspects, such as applying for your Employer ID number and choosing the type of business you want to do, can make things more confusing. Some of the things to note and steps to follow have been outlined below.


Choose your business structure.

Most foreigners choose to start a C corporation, which can be developed by offering an unlimited number of shares and is generally more attractive to foreign investors. However, its profits are taxed twice, first at the corporate level company, then on dividends to shareholders.

The benefits are generally clear for corporate shareholders: Corporate shareholders are generally entitled to a lower dividend rate. Foreign sole proprietors are also likely to do better with a C corporation, as the structure will protect them from direct I.R.S. scrutiny.

C Corporation owners pay more for this shield because of double taxation. But in several cases, tax planners can use pension costs, salaries, and other expenses to reduce business income and eliminate double taxation.


Register Your Business 

The forms and other requirements for starting a business vary slightly from state to state. Find out how each works. Here is a general model for many states:

  • Company executives choose a unique name.

  • Select a registered agent who can receive legal documents for the business.

  • Draft articles that identify the name of the company, the name and address of the registered agent, the total number and par value of the shares that the company is authorized to issue, and the name and postal address of the incorporator.

  • Once the business is established, it is necessary to submit a report and pay the deductible tax annually.


Choose a state to register your business.

The company must determine where it is located. If a state dominates its market, it is best to incorporate it there. There is no way to eliminate the obligations of doing business there. On the other hand, if the company is not concentrated in a particular state, then a low burden state is recommended. This is in part due to the "weak" corporate law, which offers generous protections for shareholders and directors, as well as its outsider-friendly rules.


Obtain an employer identification number

An employer identification number is required to hire workers and open a bank account, pay taxes, or obtain a business license. 


TAXATION

Income tax

  • Under current legislation, federal corporate income tax rates and net capital gains are progressive and range from 15% to 35%.

  • A foreign company operating in the United States is subject to normal United States corporate income tax rates, but only for actual income related to the United States.

  • United States income that is not derived from assets used in the United States trade or the activity of a foreign company and that is not actually related to a United States trade or business or cannot be attributed to the United States permanent establishment of the foreign company in the United States (such as dividends, interest, and royalties) is subject to a rate of 30% (or a lower rate under an applicable treaty).

  • States and some municipalities (such as New York City) generally levy corporate income tax at rates between about 1% and 12%. These taxes are collected by the U.S. and foreign companies operating in a particular state. So, for example, a Chicago corporation with an office in New York pays New York State taxes and all Chicago taxes payable as a result of Chicago business transactions. State tax calculation is generally based on taxable income reported for federal tax purposes, subject to minor adjustments. Taxable income can, within certain limits, be allocated among states so that the entity does not pay double taxation on the same income. Each state has its allocation formula, although most use a three-factor formula (sales, payroll, and in-state assets) or a single in-state sales factor.

Sales tax

  • Sales taxes are collected at the state and local levels instead of the federal level on products and certain services sold in the United States. In this respect, it differs from a value-added tax system in that it is a single consumption tax applied at the point of consumption, as opposed to a chain of transactions leading to final consumption. Sales tax is levied at the rate in effect in the state and/or locality of ownership of the goods. It is not based on the rates in effect at the point of shipment. Applicable tax rates vary from state to state and location to location, with rates ranging from 2.9% to 9.98%, with exemptions typically granted for food and medical (for example, the sales tax rate in New York is currently 8.875%). In addition, goods purchased for resale are generally exempt from sales tax. In addition, sales taxes do not apply to intangible assets, for example, royalties on copyright in relation to the V.A.T. system in E.U. countries.

  • All businesses that need to collect and remit sales tax must register in the appropriate states where they have established a connection before starting their business. For example, NY State requires that the sales tax registration form be completed 20 days before the start of operations.

  • Wholesale businesses can also register as a supplier of state sales taxes to accept certificates of resale from their customers and purchase certain items (such as raw materials, machinery, equipment, and electricity used in production) without paying the tax. A resale certificate is an official document that allows the buyer to make tax-free purchases that would ordinarily be subject to sales tax if he intends to resell the goods or services.

  • In addition, some states require the buyer of an existing business to file a bulk sales tax return and pay sales tax for the purchase of certain assets, such as furniture and fixtures, computers, and other goods and consumables.


Payroll Taxes 

Social Security taxes must be paid by U.S. residents, employers, and employees, at a rate of 6.2% each for the first $127,200 of salary (for 2017), plus a "Medicare" tax, always paid by the employer and employees with 1.45% of the total salary, without limitations.

However, under one of the U.S. totalization agreements, foreigners will not have to pay U.S. social security taxes if they are temporarily transferred to the U.S. for less than five years, as long as they stay subject to security tax (Not all totalization agreements have a five-year rule). In addition, they would still be entitled to benefits in the United States, provided the foreigner had contributed to the Social Security system for at least 18 months in the United States. There are other types of taxes. There are other types of payroll taxes such as federal unemployment insurance, state unemployment insurance, and insurance requirements, such as workers' compensation insurance and state-mandated disability insurance.


Transfer Pricing

The I.R.S. increases its control over transfer pricing when U.S. members and related foreign groups are involved. Regulations have been adopted, which reinforces the "arm's length" with more emphasis on documentation and comparability. Arms-length transactions are classified as transactions between two independent companies. Transactions between a holding company and its wholly-owned subsidiary are not taken into account under normal market conditions.

Several methods are permitted to determine an appropriate interest-free price, including the use of comparable transactions, comparable profits, and profit-sharing methods. Taxpayers must recognize and document the best method for their situation. Failure to comply with simultaneous documentation of pricing determinations, including a written transfer pricing study, may result in substantial penalties of up to 40% of the transfer fee payable.

I.R.S. adjustments can also lead to double taxation, as some treaty partner countries may not provide correlative adjustments in U.S. transfer pricing cases. In cases where a signatory country is involved, consult a competent authority for business-to-business transactions.

To facilitate transfer pricing disputes, the I.R.S. encourages the use of advanced pricing agreements (A.P.A.s). An A.P.A. is a potential agreement between the I.R.S. and the taxpayer to determine compliance with the arm-length standard. If Treaty partners are involved, the competent authorities of the countries concerned are also expected to participate in the process. If possible, taxpayers should seek bilateral and possibly multilateral agreements to ensure that all affected countries agree on the pricing strategy.


Bottom Line

In most cases, foreigners doing business or investing in the United States must establish a domestic corporation. Consult with tax experts in your country and the United States before diving in, as the rules for foreigners can be more complex than if you were a citizen. A competent tax professional will help you with relevant information when setting up your business in the United States, take all the necessary legal steps, and advise you on running your business.


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