So, you’ve got a unique business start-up idea and want to develop it in the US? Or, you’re finally at a place where you’re ready to expand your business to the biggest economy in the World? But how would you like to do it, exactly? What are the legal requirements? What sort of documentation would you need?
Here’s a step-by-step process to help you through this process.
1. CHOOSE A LOCATION IN THE US
The United States is a national economy. This means that all the states have, more or less, autonomous trade laws, including individual tax landscapes and business restrictions. Registration, insurance, physical property rates, and license fees vary within the US, and these factors, in turn, have a direct impact on your business costs. Therefore, the first vital step is to choose a location wisely.
Some states, such as Wyoming and Nevada, are considered tax-friendly and, thus, more accessible for establishing a business. However, remember that your best option is to locate your business in your home state to cover extra costs if you’re a US citizen.
This is relevant only if you’re going to have a physical office in the US or have in-person meetings in the US. However, it is not as relevant if you’re going to conduct business online.
2. CHOOSE HOW TO INCORPORATE
US law recognizes several business entities:
A. SOLE PROPRIETORSHIP: This is a good choice for a small-risk, home-grown business under the control of one person. Sole Proprietorships pay tax through their owners, and no separate documentation is required. This also implies that you are entirely liable for your business’s debts and other losses as an owner. Note that if you don’t register as any other entity before conducting business in the US, you are automatically given the status of a Sole Proprietor.
B. LIMITED LIABILITY COMPANY (LLC): An LLC is one of the most popular options for a start-up. A significant advantage of the LLC is that it protects you from being personally liable for losses incurred and offers a much cheaper taxation structure.
LLCs use a pass-through tax structure, meaning you can pay tax through your individual income tax form without facing a separate (and much higher) corporate tax. Overall, LLCs are the best option for medium-risk, small-scale enterprises controlled by more than one person.
C. CORPORATIONS – C CORP: Corporations offer the most substantial protection to their owners, as they are separate legal entities independent of the persons running the show. One of their most considerable benefits is that key employees, shareholders, and directors can come and go without affecting the business.
C Corps requires high maintenance in terms of compliance and complex bookkeeping to be done by professionals. Opt for this structure if you aim for a high-risk business to scale up and eventually make it public or sell. You will need this model to attract investors and key employees, to whom you can offer shares instead of salary and get onboard, respectively.
While providing substantial legal benefits, C Corps suffers from double taxation. This means that the corporation is taxed as it generates profits (Corporate Tax) and again when the dividends are distributed to the shareholders (Capital Gains Tax).
In short, choose a C Corp only if you plan to go big.
D. CORPORATIONS – S CORP: First, S Corps are unavailable to non-US residents. With that out of the way, go for an S Corp if you are a US resident and your business meets the specific criteria for S Corp.
S Corporations are unique corporations available in some states of the US. These entities are structured to avoid double taxation as a C corporation. However, there are some limitations; for example, an S corporation cannot have more than 100 shareholders, and all of them must be US citizens. To get S corp status, S corporations also require a unique filing with the IRS (Form 2553).
Note that if you choose to do business in more than one state, you must register your business separately in each state through a process known as Foreign Qualification.
E. CORPORATIONS – B CORP: These are the same as C corporations regarding taxation, documentation, personal liability, and bookkeeping. However, they differ in that benefit corporations must provide a public benefit and financial gain to be considered B corporations.
3. BUILD YOUR WEBSITE
An essential part of creating your business is choosing a unique domain name and building your website to provide information about your services and products and stand out in the market. A well-developed website is a personality in your industry, even if your business is in-person or on-site. This involves choosing a unique name for your business, registering your domain name, and designing and developing your brand.
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4. REGISTER YOUR BUSINESS
Most business structures, be it LLC, C Corp, S Corp, or B Corp, must register with the State Department of each state where they operate. For this purpose, you need to contact a Registered Agent. That person receives legal documents for your business and will keep you updated on the annual compliance.
We recommend getting an expert to help you with the documentation and information needed for filing. Typically, LLCs must submit Articles of Association and LLC Operating Agreements to the authorities, while corporations need to submit Articles of Incorporation, bylaws, and Resolutions.
The entire process could cost between $300 to $3500.
5. GET YOUR TAX ID NUMBER
Now, it’s time to apply for an Employer Identification Number (EIN), also known as the State Tax ID and Federal Tax ID. The IRS issues this number. With the EIN, you can hire employees, file corporate tax returns, open a corporate bank account, and apply for the licenses (where relevant) needed to operate as a business in the US.
The IRS provides an online form on its website for US citizens seeking an EID number. However, if you are a non-resident, you must fill out a separate form, SS4, issued by the IRS. You must go to their office for further documentation if you don’t have a Social Security Number. Usually, this process is done while you are filing for your corporation.
6. LICENSES
Depending on their nature, businesses usually require licensing to operate in the US. The US government has issued separate lists that categorize businesses by type and whether they are controlled by the Federal government, State government, or, in some cases, both.
Here’s a brief to get you started: https://www.sba.gov/business-guide/launch-your-business/apply-licenses-permits.
Renewing your licenses should be a priority because it’s easy to forget. Having an agent comes in handy for this reason. With a dedicated agent, you never miss filing dates or renewing licenses, which can incur penalties or even lead to being shut down.
7. GET AN ADDRESS
Businesses in the US need a physical address so the authorities can contact you, and it is a mandatory requirement for opening a bank account. If you need a physical address in the US, a mailing address will solve this. Plenty of reliable mailing services, like Sasquatch, USAMail1, etc., come in handy as dependable business mailboxes.
8. OPEN A BANK ACCOUNT
Opening a business bank account is one of the most crucial steps after setting up your business structure. You can do this before you begin transactions, like purchasing equipment, hiring subcontractors, or investing in your business.
US citizens will need their EIN, business incorporation documents, agreements, and licenses for this. However, if they are non-residents, they can always hire a banking service that caters to foreigners opening business bank accounts in the US.
Alternatively, you can open an overseas business bank account through a US bank with a branch in your country, like Citibank. Another great option is a virtual account: these days, many virtual bank payment systems, such as PayPal, Payoneer, or Stripe, have also become a standard solution for businesses solely operating as virtual.
9. SOME IMPORTANT POINTS
Some businesses may be mandated to purchase insurance before they are allowed to operate in the US. It is worth checking beforehand if your business falls into such a category.
Suppose you are a non-US resident or don’t have an SSN (Social Security Number). In that case, You’ll need an ITIN (Individual Tax Identification Number) to set up your business in the US. You can get this through a reliable, IRS-accepted agent.
It’s also relevant to check out if the US has a tax treaty with your native country so that you can evade double taxation on your business profits. For example, the US has a double taxation treaty with India, under which Indian businesses in the US are liable to pay tax in only one jurisdiction.
However, keep in mind that while you may not be subject to tax in the US, you are still required to disclose your income to the US authorities. Therefore, you must report your income to the IRS through its various forms, e.g., Form 5472 for LLCs.
Now, you know the basic steps to opening a business in the United States. Good luck, and get cracking.
