Steps for Incorporating Business in the U.S.
Many non-U.S. citizens and foreign companies seek for reasonable opportunities to make open business or make new investments in the U.S. We can count various necessities and legislative obligations concerning how to create a company within borders of U.S. Indeed, “incorporating” shows up as the most convenient alternative, in terms of benefits and flexibility provided for individuals or legal entities desiring whether to start or expand their business. Incorporating business in USA comes along with its unique requisites and implementation framework based on regulations designed by state and federal authorities. In this view, this article would provide you with the most essential information and tips concerning Incorporating business in USA.
1.Overall Look to Incorporating Business in the USA
Knowing and comprehending the basic requirements regarding which steps to follow during incorporating business in USA is of critical importance, when it comes to shift your path from plan phase to that of action and realize what you have already envisaged. In this junction, prior to asking how to conduct incorporating business in USA, it would be better to consider why you prefer to incorporate; rather than conducting business or making investment through one of the options of sole partnership or proprietorship. So, let’s have a quick look at what main reasons could be to choose incorporating business in the USA:
2.Why Incorporating Business in the USA?
- Unlike partnership or sole proprietorship structure, a corporation –whether it is a S/C Corporation or Limited Liability Company (LLC)- provides protection on personal assets. Moreover, incorporating business in USA ensures limited personal liability for owners & partners, since it demonstrates a separate legal entity against laws.
- Based on its own legal existence, a corporation has an unlimited life span which does not depend on the ones of particular owners or partners. Besides, a corporation can interfere in legal activities such as merging with other businesses, buying & selling properties, or being part in judicial processes.
- In corporations, each member is represented by his/her shares and entitled to certain rights based on those shares. Therefore, the option of incorporating business in USA is less complicated to progress when a change in ownership structure or transfer of shares is required.
- Corporations come forward with their robust legal body in terms of creating credibility and attracting new investors.
- Raising capital is pretty much easier for corporations.
- Incorporating business in USA brings along significant tax benefits.
On the other hand, when incorporating business in USA, you should take into consideration that incorporating would require some extra formalities. These could be counted as:
- Tracking specific obligations in terms of documentation & recording.
- Holding annual meetings.
- Considering some additional expenses stemming from fees.
3.How to Incorporating Business in the USA?
After deciding to create your business through one of aforementioned ways, you should follow some general steps for “incorporating business in USA”, which are addressed below:
Step 1 – Selecting Type of Business:
Considering which type of model, regulated by U.S. laws and preferred by investors or entrepreneurs to settle, is the most suitable one for your business appears as the first step in the process of incorporating business in USA. The word of incorporating mostly refers to creating a C- or S- Corporation type; nevertheless, in this article we aim to look from a wider perspective and include also LLC option in your pocket, in order to be able to better evaluate all of those three structures by comparing them with each other.
Basically, LLC could be counted as one of the best alternatives for incorporating business in USA, since an LLC feature provides simplicity in formation process; offers protection for personal assets in terms of pretending unexpected consequences which might stem from a legal claim or bankruptcy, through “limited liability”; creates tax benefits by “pass-through taxation” system, which allows the owner(s) report the amount of taxes through their personal tax returns rather than holding the company responsible for paying tax as a legal entity; enables also non-citizens establish company and conduct business under same obligations and rights with U.S. citizens. All forms of business models from companies selling leather products for smartphones to companies providing consultantancy and accounting services are eligible for LLC format.
On the other side, C- Corporation is another type of incorporation structure, which is mostly preferred when developing large and publicly treaded businesses. There are three essential layers in C- Corporation body: -
- Shareholders, who own the company depending on the shares that they have bought
- Board of directors, the organism which deals with the management issues
- Officers, who are in charge of running daily processes and tasks.
Other than limited liability protection, advantage of longevity, easy transfer of ownership through sales of shares, and high credibility; a C- Corp also offers below pros:
- Tax-deductible expenses
- Self-employed tax savings
- Reasonable salaries for owners
- Lower audit risk
- Flexibility in spreading business earnings among stockholders & the company itself
Apart from that, C- Corporation appears as the best choice for investors when incorporating business in USA, due to its legal structure that consists of elements of shareholders, board of directors and officers, which could be defined as standard components of an investment. In addition to that, LLCs or partnerships are not that suitable for new investors, since the rules and obligations regarding those company types vary from state to state.
Besides, ‘double taxation’ could be stated as one of the most important disadvantages of C- Corporations: The company is subject to tax due to its separate legal entity, and shareholders are obliged to pay a second personal income tax over the dividends earned when the company makes profit. Furthermore, C- Corporation has a more complex structure and brings along complicated requisites during establishment process, when compared to an LLC.
Contrary to a C- Corp and LLC, the foreigners and non-US citizens cannot be eligible to establish S- Corporation, nor can they retain share in an S- Corp. Indeed, just like LLCs, the S-Corporation type of company is more advantageous in case you intend to set relatively small business. From the point of tax implementation regarding incorporating business in USA, the S- Corp also enables the owner(s) apply pass-through taxing and benefit from reporting on tax return. Therefore, we can state that S-Corporation is a proper option if you want to benefit from the advantages of a corporate structure, while being eligible for a pass-through taxation system at the same time.
A corporation as default gains the typical characteristics of a C- Corp at first set up process. Nevertheless, the shareholders can always decide to shift to an S- Corp. If S-Corp structure is elected, it is mandatory for the company to fill IRS form of S-2553.
Step 2 - Naming Business:
When naming your legal entity, you should pick up one which may smoothly attract individuals and help your business brand to be recognized and identified among public opinion, and in the market, as well. Besides, the name you have chosen for your company shall be compatible with the restrictions of state & federal authorities and be available to use in terms of not causing confusion with any state agency (e.g. Treasury, State Department). Additionally the name shall not carry some certain restricted words (e.g. Bank, Attorney) without additional approvals when incorporating business in USA. Finally, the name should be distinctive from other registered corporations.
Step 3- Deciding Location:
When deciding for incorporating business in USA, you should remember that you are setting the company at state level, not countrywide. This means you are supposed to abide by the certain rules of the state in which you would start and conduct transactions concerning your entity. In this view, that would not be wrong to mention that Delaware, Nevada and Wyoming come forward as relatively more ‘business-friendly’ states. The laws applied in those states are less strict and offer more convenience especially for international companies and foreigners. Additionally, you would need to go through the process called “foreign qualification”, in case you plan to function in another state than the one of the origin in which you have established the company.
Step 4 - Selecting Managers/Creating Board of Directors:
The following step in incorporating business in USA is to determine who would be the official owners/partners of an LLC or who will be the members of board of directors in a corporation. The election of directors is significantly crucial for a company, since that step would impact all future activities and decisions. As an important point, the first board of directors meeting must be held prior to the official opening of the business. In this meeting, the topics of; the issuance of stocks among initial shareholders, the corporate seal, election of officers such as CEO & CFO, and adoption of articles of incorporation with state bylaws and regulations shall be addressed.
Step 5 - Filing Organizational Articles:
The LLCs are required to prepare an organizational article document, which deals with the details of the organizational structure and file it to the state authorities. The said document usually covers below information:
- The name and address of the company
- The length of the existence
- The name and address of the registered agent
- The purpose of company
Likewise, a corporation is obliged to provide the state offices with the document called Articles of Incorporation. This document covers almost the same information mentioned for LLCs, with such additional data of:
- Number and types of shares
- Name of the assigned officers
Step 6 - Preparing Operating Agreement and Corporate Bylaws:
Even though not mandatory, it is strongly suggested for LLCs, which is a type of incorporating business in USA, to write up an operating agreement which covers the type and details of the business. This document additionally specifies the topics of:
- Handling operations in terms of allocation of loses & profits among members
- Methods for dealing with payrolls
- Voting and other administrative rights & responsibilities of members
- Ownership interests
- Procedures concerning the dissolution of the company or the departure/decease of any member.
On the other hand, in line with the state regulations regarding incorporating business in USA, the corporations are required to prepare a document which lays out the overall structure and management futures of the organization. This paperwork would address the information such as the type and number of shares issued; details of shareholder, annual and board meetings; audit procedures; and content of transactions.
Step 7 – Assigning a Registered Agent:
In this stage of incorporating business in USA, it is required to assign a person or business, called Registered Agent, nominated to receive and send legal documents on behalf of your corporation/LLC. The registered agent shall be a person who has a residency of the state in which the company is operating, or a corporation which is authorized to conduct business in the same state. A registered agent is mainly responsible for receiving official documents and correspondences on behalf of your organization and conveying them to the appropriate person.
Step 8 – Obtaining an EIN (Employer Identification Number) or ITIN (Individual Taxpayer Identification Number):
At this step of incorporating business in USA, you would need to receive an EIN or ITIN. These IDs would assist IRS to identify your LLC or corporation among the legal system. EIN could basically be defined as a tax ID entitled to conduct tax related procedures. On the other hand, ITIN is the number provided to persons who are not eligible to receive a Social Security Number (SSN) but required to furnish a federal tax identification number or file a federal tax return. If you have one of the statutes below listed, you are required to receive an ITIN:
- Nonresident alien who is required to file a U.S. tax return
- Dependent or spouse of a U.S. citizen/resident alien
- Dependent or spouse of a nonresident alien visa holder
- Non-resident alien claiming a tax treaty benefit
- Non-resident alien student
- Professor or researcher filing a U.S. tax return or claiming an exception.
Step 9 – Opening U.S. Bank Account:
Although many foreign based companies find it tough to open a bank account in U.S. for their business operations and for incorporating business in USA, it is not that challenging when you appropriately follow the steps to fulfill the legal requirements varying from state to state. You may refer to our article for more details.