Setting Up a US Branch of Your Foreign Company: Key Factors You’ll Need to Know

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During this informative conversation, Chugh, LLP Partner and Attorney Jaymen Chavda discusses some of the most important factors to consider when setting up a branch of your foreign company in the United States. This event was recorded live on August 12, 2021.

Choosing an entity type

Foreign nationals can incorporate a business in the United States as either a limited liability corporation (LLC) or C corporation. Only US citizens and green card holders may own S corporations.

Both LLCs and C corporations offer liability protection, which means that owners are not personally liable for business obligations. However, there are some important differences between the two entity types.

 

C Corporations

Limited Liability Corporations (LLCs)

Governance

Governed by a board, which makes major decisions for the company.

Subject to many administrative requirements, described below.

No requirement to have a board.

Flexible management and equity structure. 

Taxation

Double taxation:

  • The corporation pays taxes on its income.
  • Shareholders pay tax on their dividends.

Corporations can offer benefits for taxation in other countries, based on tax treaties between the United States and your country. LLCs don’t have that advantage.

Pass-through taxation:

  • Owners are taxed on their share of the company’s profits, even if they don’t receive income or dividends.
  • LLCs are not taxed at the entity level.

Stock Issued?

Yes: Multiple classes.

No.

Specific requirements for your business vary by entity type and the state where you incorporate, and may include:

  • LLC:
    • Annual reporting requirements to the state.
  • Corporation:
    • Filing articles of incorporation.
    • Filing initial reports and statements shortly after completing incorporation.
    • Providing stock to shareholders.
    • Recording all stock transfers.
    • Permitting shareholders to appoint a board of directors.
    • Conducting annual shareholder and director meetings.
    • Submitting financial statements to the local secretary of state.
    • Producing and following bylaws.
    • Filing an annual report with a filing fee (in most states).

Selecting a state for incorporation

In the United States, companies are authorized and governed by the laws of each state, not by the federal government. You will need to select a state to incorporate in based on your company’s needs.

Laws of the state where you incorporate will impact the business affairs of your company, including corporate governance, fiduciary duties, and the appointment and election of directors. Additionally, taxation rules for your company vary based on where you incorporate.

Delaware is considered one of the most business-friendly states in the US, while a few other states have favorable tax policies.

Delaware offers a variety of benefits, including:

  1. Modernized corporate law and specialized courts which handle business disputes.
    • These factors are generally more important for larger corporations with many shareholders.
  2. Popularity with venture capital funds.
    • Venture capitalists (VC) prefer to invest in companies that are incorporated in Delaware, because they are familiar with the state’s laws and court system. It may be wise to incorporate in Delaware if you are seeking venture capital.
    • It’s difficult to invest in an LLC. Convert to a C corporation if you want to attract VC funding.
    • Other states are VC-friendly, such as Nevada and Wyoming.
  3. Anonymity when it comes to disclosure of names of officers.
    • You only need to provide the name of your registered agent when incorporating.

South Dakota, Nevada, and Wyoming each provide:

  • Lower incorporation fees.
  • Fewer taxes.
  • Faster incorporation.

Businesses must register for foreign qualifications if they conduct business in states outside of their state of incorporation. While the definition of conducting business varies by state, it may include transacting business above a certain dollar amount, hiring an employee, purchasing property, operating a facility, offering services or products, applying for a professional license, and more. If your activity in a state is limited to conducting e-commerce there, you generally will not be required to register for foreign qualification.

Businesses that incorporate outside of their home state must register for foreign qualifications in the state where they are based. These businesses are subject to taxes and annual compliance requirements in both states. It may not be advantageous to incorporate outside of your home state unless you expect to face complex litigation, or you plan to seek venture capital funding.

Setting up your company

Work with your trusted attorney to set up your business and ensure that it fulfills all associated legal requirements. Although the processing time to set up an entity varies by state, it generally takes about two weeks with a standard incorporation fee. Certain states may offer an expedited fee for incorporation.

You will need a registered agent in the states where you do business outside of your home state, and you may also want one in your incorporation state. Registered agents accept official mailing, legal documentation, and service on behalf of your company.

Foreign business owners also need to open a bank account in the US for their business. If you bank with a large international bank, try to set up an account with them first. You will need the following documentation to open a business bank account:

  • Articles of incorporation provided by the Secretary of State. You will need to provide information on:
    • LLCs: Members and registered agent.
    • C corporation: Shareholders, directors, and registered agent.
  • Internal governance document (for LLCs):
    • Who the members are.
    • Capital infusion.
    • Bylaws.
  • Employer Identification Number (EIN): You can get one for your business if you have an Individual Taxpayer Identification Number (ITIN).

Immigration Status

There is no requirement to be a US citizen or green cardholder to open a C corporation or LLC in the United States. Regardless of immigration status, foreigners can form a US business if they have registered for an ITIN. This process takes about 18 weeks.

Although anyone can own a C corporation or LLC, you will need to get a proper visa to actively work for the organization in the US as a shareholder or member.

If you need to send an executive to the US to set up a local office, you may want to consider the L-1 visa. This visa allows you to transfer professionals from your foreign company to the same company in the US. The L-1A visa is designed for executives and managers, while the L-1B visa is best for those who have specialized knowledge of an organization’s processes, products, services, and equipment. Contact your trusted Chugh, LLP immigration professional for help getting an L-1 visa.

Employment laws: employees versus independent contractors

Many foreign national entrepreneurs may not be familiar with the difference between employees and independent contractors in the United States. When the time comes to hire workers in the US, you will need to clearly understand how to classify them to avoid big penalties. While classification rules vary by state, there are some similarities across states.

Employees are at-will. This means they can be fired for any reason that is not discriminatory. They are entitled to unemployment benefits if fired for certain reasons. Employers withhold taxes from employee pay, including income, social security, and Medicare taxes. Employees may receive benefits, time off, and retirement savings accounts such as 401(k). They are also entitled to overtime pay if they work more than 40 hours per week.

Independent contractors do not work regularly for an employer. Employers does not withhold taxes for independent contractors, and no overtime pay is available.

When trying to determine whether your worker is an employee or independent contractor, consider:

  • Does the company have the right to control the worker and how they do their job?
  • Does the company control the business aspects of the job: pay, expense reimbursement, tools, supplies, or training?
  • Does the worker get benefits?
  • Is there an ongoing relationship with the employer?

If the answers to the above questions are yes, then the worker is more likely an employee. Consult with your trusted attorney for help classifying your workers in the United States.

conclusion

Starting your own company in the United States can be exciting – and complex. Be sure to contact your trusted Chugh, LLP attorney for help with all your start-up needs, including legal compliance, tax law, and immigration.

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