Forming a Company in the USA
We can form your company in any U.S. state
There are multiple important reasons, when operating a business in the U.S., to operate the business under a limited liability company, corporation, or other form of legal entity that has a separate legal existence from the owner of the business. The primary reason for operating the business under a limited liability company or corporation is that it protects the business owner's personal assets from liabilities that arise from operation of the business. The business owner can also save on taxes by operating under a limited liability company or a corporation rather than as a sole proprietor or a general partnership. Limited liability companies and limited partnerships can also be valuable tools in estate planning for simplifying the transfer of assets to heirs and for reducing or avoiding inheritance taxes.
Asset protection is particularly important in the U.S., which is one of the most litigious societies in the world, since litigation attorneys offer contingent fee arrangements whereby the client does not have to pay any legal fees if the client does not succeed in winning a judgement or settlement. The contingent fee system incentivizes frivolous lawsuits as a means to obtain "easy money". As a result, business owners need to take many steps to protect their business from lawsuits, and to protect their hard-earned personal assets from liabilities arising from lawsuits, or even from a threatened lawsuit leading to a settlement, against the business.
We can assist clients to form legal entities such as limited liability companies, corporations, limited partnerships, among others, in any of the 50 U.S. states. Included in our entity formation services is the application for a Federal Employer Identification Number, which is required in order to open a bank account for the entity, in the U.S.
We are providing below FAQ's with important information that someone looking to start up a business in the U.S. should consider.
Questions and Answers about Business Formation in the U.S.A.
· What are the benefits of incorporation?
· In which state should I incorporate?
· What services are provided by the registered agent?
· Are there annual filings if I incorporate?
· How many directors and officers are required to form a corporation?
· What are the requirements for foreign ownership of a U.S. company?
· How does an S corporation differ from a limited liability company?
· How does an S corporation differ from a C corporation?
· How does an S corporation differ from a sole proprietorship?
· Do all states recognize S corporation status?
What are the benefits of incorporation?
Incorporation can provide many benefits. Incorporation can help limit your personal liability as a business owner. In general, creditors of your corporation must satisfy their claims by seizing the assets of the corporation rather than your personal assets. In contrast, as a sole proprietor or partner in a partnership you are financially responsible for all liabilities of the business, and your personal assets are subject to seizure or lien by creditors.
Other benefits of incorporation can include greater tax deductions for health insurance and medical expenses, lower payments for Social Security tax and Medicare tax, and greater opportunity to raise capital for the business through the issuance of stock.
In which state should I incorporate?
Generally, you should incorporate in the state where your office is physically located. If you incorporate in another state such as Delaware, you may need to submit an application to qualify as a foreign corporation in the state where your office is physically located. We can assist you with the foreign qualification application.
Most states have revised their corporate laws based on the laws of Delaware. For companies that are privately owned (not publicly traded), generally there are no substantive differences any more between the corporate laws of Delaware and those of other states. If you incorporate for the purpose of owning and operating a business, the general rule is that you should incorporate in the state where your main business office is located.
What services are provided by the registered agent?
Under state law, every company is required to have a registered agent located in the state of incorporation and in all states where the company is qualified to transact business. The role of the registered agent is to receive legal papers (called service of process) and government notices on behalf of the company. We also arrange to file the annual reports, which are generally required by most states of the corporations or limited liability companies existing under the laws of the state.
Are there annual filings if I incorporate?
Yes. In general, corporations file an annual tax return (IRS Form 1120 or 1120S) and a simple one page annual state report that updates information such as the address of the corporation and the names of its current officers and directors. (The names of the shareholders are generally not listed in the annual state report.) Note that annual tax returns are also filed by sole proprietorships (Schedule C to IRS Form 1040), limited liability companies (IRS Form 1065) and general partnerships (IRS Form 1065).
How many directors and officers are required to form a corporation?
In most states, one person is enough to form a corporation. The same person may hold the offices of President, Secretary and Treasurer and may be the only person on the Board of Directors. The officers manage the daily business of the corporation based on the instructions of the Board of Directors.
Who owns the corporation?
The corporation is owned by the shareholders. A corporation may have one or more shareholders. In general, since the shareholders elect the persons who serve on the Board of Directors, the corporation is controlled by the shareholders. The shareholders who own more than 50% of the corporation's common stock get to make the ultimate decisions about running the corporation, unless there is some sort of special weighted voting arrangement where a shareholder might have voting rights out of proportion to his/her ownership share.
What are the requirements for foreign ownership of a U.S. company?
Generally, there are no restrictions on foreign ownership of a company formed in the United States. The procedure for a foreign citizen to form a company in the United States is the same as for a U.S. resident. It is not necessary to be a U.S. citizen or to have a green card to own a corporation or limited liability company formed in the United States. To receive pass-through profit distributions, a foreign citizen may form a limited liability company. In contrast, all profit distributions (called dividends) made by a C corporation are subject to double taxation. (Under U.S. tax law, a nonresident alien may own shares in a C corporation, but may not own any shares in an S corporation.) For this reason, many foreign citizens form a limited liability company instead of a C corporation.
A foreign citizen may be a corporate officer and/or director, but may not work in the United States or receive a salary or compensation for services provided in the United States unless the foreign citizen has a work permit (either a green card or a special visa) issued by the United States. Some work permits allow a foreign citizen to work only for a sponsoring employer. Such work permits generally do not enable a foreign citizen to also work for a new, unrelated company formed by the foreign citizen. The foreign citizen would need to obtain a separate work permit to work for the new company. We will be glad to answer your immigration questions.
What is a C corporation?
The term C corporation refers to the way in which the corporation is taxed. There is a corporate level income tax on the profits of a C corporation. In addition, if a dividend is paid to shareholders from retained earnings, the dividend is included on the personal tax return of each shareholder. Thus, the profits of a C corporation are subject to potential double taxation. Your corporation will be taxed as a C corporation this year unless you timely file IRS Form 2553 to elect tax treatment as an S corporation.
What is an S corporation?
The term S corporation refers to the way in which the corporation is taxed. An S corporation is a pass through entity. There is no corporate level income tax. Instead, a pro rata portion of the annual profit or loss of the S corporation is included on the personal tax return of each shareholder. If IRS Form 2553 is filed within 75 days after incorporation, the corporation will be treated as an S corporation for tax purposes. Many start-up businesses benefit by making the election to be taxed as an S corporation.
How does an S corporation differ from a limited liability company?
A limited liability company (LLC) is like an S corporation. Generally, business owners form an LLC rather than an S corporation if one or more of the following situations apply:
1) ANY owner of the company is another business entity or a nonresident alien (a person is a nonresident alien if he or she is neither a resident nor a citizen of the United States).
2) The company will be owned by more than 100 persons.
3) The company plans to issue more than one CLASS of stock (for example, special allocations of profits and losses will be made that are not proportionate to the equity percentage of each owner).
4) The owners desire to use business debt (money borrowed by the company) to increase their tax basis.
5) The state where your business is located imposes an entity level income tax on the profits of an S corporation and does not impose such a tax on the profits of an LLC.
Formation of an S corporation or an LLC can offer many benefits including limited liability and tax savings. An LLC also provides liability protection like a corporation. It should also be noted that the taxation of an LLC can be switched from sole proprietor or partnership to taxation as a corporation, and can then be taxed either as a C corporation or as an S corporation. The LLC offers more flexibility and options with regard to taxation.
How does an S corporation differ from a C corporation?
Some start-up companies benefit by starting out as an S corporation, while others remain as C corporations because the owners desire to deduct 100% of medical expenses, the corporation fails to qualify for S corporation status, or the shareholders desire to have the opportunity to exclude from gross income 50% of the gain from the sale of "qualified small business stock" (explained below). Generally, a corporation fails to qualify for S corporation status if one or more of the following situations apply:
1) ANY owner of the company is another business entity or a nonresident alien (a person is a nonresident alien if he or she is neither a resident nor a citizen of the United States).
2) The company will be owned by more than 75 persons.
3) The company plans to issue more than one CLASS of stock (for example, special allocations of profits and losses will be made that are not proportionate to the equity percentage of each owner).
If the above situations do not apply to you, then the corporation may apply for S corporation status by timely filing IRS Form 2553. The law requires submission of Form 2553 for the S election within 75 days after the corporation first has assets, shareholders or starts doing business. If you miss the deadline, you may file Form 2553 within 75 days after January 1, but there may be tax consequences. If a corporation fails to qualify for S corporation status, then the corporation must be a C corporation. With a C corporation, 100% of the medical expenses incurred by you (as a shareholder and employee), your spouse and your children are tax deductible. In a sole proprietorship, only 60% of such medical expenses are tax deductible for the 2001 tax year.
In 1993, Section 1202 of the Internal Revenue Code was enacted to provide a 50% exclusion of any capital gain from the sale of "qualified small business stock." For shares to qualify for the exclusion, several tests must be met. For instance:
1) Shares must be purchased directly from a C corporation and the shares must be held for at least five years (shares do not qualify if purchased in any later trading market).
2) A "qualified small business" must have not more than $50 million in assets at all times before and immediately after the issuance of stock.
3) At least 80% of the corporation's assets must be used in the "active conduct of one or more qualified trades or businesses" throughout the holding period.
4) There are also limitations on the persons who may use the exclusion. You should consult your own tax advisor as to the availability of the capital gains tax exclusion.
How does an S corporation differ from a sole proprietorship?
With an S corporation, the distribution of S corporation profits is exempt from the 15.3% Social Security/Medicare tax that is imposed on wages. The shareholder of an S corporation saves about $1530 for every $10,000 profit distribution ($10,000 x 15.3% = $1530) because the entire profit distribution is exempt from the Social Security/Medicare tax. This tax savings strategy is commonly called "wage reduction." Remember to pay a reasonable wage if you implement the wage reduction strategy.
By contrast, in a sole proprietorship, all self-employment income is subject to the 15.3% Social Security/Medicare tax (called self-employment tax in the context of a sole proprietorship). If you are the sole owner of a business that has not incorporated, your business is considered a sole proprietorship.
The 15.3% security/Medicare tax is comprised of a 12.4% Social Security tax and a 2.9% Medicare tax. Wages above $113,700 are exempt from the 12.4% Social Security portion of the tax. Note, however, that the 2.9 % Medicare portion of the tax is applied to all wages (and self-employment income), without an upper limit.
In addition to the tax savings benefit explained above, there are asset protection reasons for choosing to run your business as an S corporation. With an S corporation, your liability is limited to the money you invest in the business. With a sole proprietorship, you have unlimited personal liability and all of your personal assets are subject to the rights of creditors to seize or place a lien against your personal assets.
Do all states recognize S corporation status?
For state income tax purposes, 45 states accept the S corporation election that is made with the federal Internal Revenue Service, but 5 states require an additional filing with the state tax authority in order to obtain S corporation status under the state's tax laws. Those states include: Arkansas, New Jersey, New York, Ohio, and Wisconsin.
Get started with forming your U.S. company by giving us a call at +1 (941) 362-7100​ today.