Do You Have to Be an American Citizen to Own a US Company?

The short answer is 'no'

Do You Have to Be an American Citizen to Own a US Company? - Both resident and non-resident aliens, as well as foreign persons and entities, may own a business within the United States. The process of incorporating a business does not vary based on citizenship status and the US market is open to (nearly) all who want to participate from a business perspective.

With a population of nearly 400 million, the US offers a large consumer marketplace for domestic and overseas investments. The annual growth rate of U.S. GDP is 2.6% and with GDP at about $19.39 trillion in 2018, it represents 30% of all global economic activity.

But the size and scale of the country can also represent significant challenges to the unwary.

With 50 different states, the federal system means that legal requirements vary across state borders, so maintaining compliance can be a real hurdle to a business entering the market for the first time.

Establishing a US Presence

Before you take the leap, careful focus needs to be given to establishing the most suitable business entity. Each state has its own rules for business entity creation as well as specific annual requirements for these entities to maintain their good standing.

Within the US, the most common types of business entities are corporations, limited liability companies (LLCs), and partnerships. Each type has its own benefits and the choice depends on case-specific legal and business factors. Each type of business entity must be formed according to the laws of the state in which the entity is formed. All entity types other than partnerships require organizing documents to be filed with the state government.

US law treats these business entities as legal persons and in case of insolvency, the entity can declare bankruptcy without risking the owners’ personal assets.

Types of US Company Entities

Corporation

Many foreign companies do business in the US as corporations. These are organized un-der state law and each state has its own rules. In the US, a corporation may be created under the laws of one state and have its principal place of business in a different state. It makes most sense to incorporate in the state where the business intends to locate its operations. A certificate of incorporation must be filed with the Secretary of State in the chosen state. In most states, the shareholders elect di-rectors, who set company policy and elect officers. The directors of a US corporation can be foreign nationals and must be natural persons and not foreign companies. The internal structure and bylaws of corporations are similar across jurisdictions but can be customized to meet individual company needs.

The most common corporate form is a C-corporation, which is taxed at the corporate income tax rate separate from the company’s owners. This means that profits distributed as payments to the owners are taxed twice—first at the corporate level and second at the owner level. This double taxation can be avoided by US companies by electing to be treated as an S-Corporation, which is a “pass though” entity for federal tax purposes. A foreign company, however, cannot elect to be treated as an S-Corporation.

• C-corp income is taxed twice, once to the business and once to the shareholder.
• C-corp have no limit on shareholders and also allows you to bring in foreign investors.
• C-corp shareholders get the benefit of preferred stock, should the corporation choose to distribute them. Preferred stock may not come with voting rights, but it can include guaranteed dividends.
• S-corp income is taxed once to the shareholder.
• For S corps, you can't have more than 100 shareholders and they must be U.S. citizens or permanent residents.
• An S-corp can only issue common stock because common stock shareholders get voting rights. No one has preferred status—all shareholders are treated equally.

Branch Office

A foreign entity can open a branch office in the US instead of conducting business through a US entity. As it represents an entire organization operating in the US and is liable for taxation, it is not an advisable option unless a US attorney specifically recommends it.

A branch office is not a separate legal entity of the parent corporation. Instead, a branch office simply means that a foreign parent corporation is operating in the USA. As a result, setting up a branch office in the US is likely subject your parent company to taxation on its entire corporate income – rather than just the branch’s income earned in the USA.

This could have huge implications for your bottom line, and means you may have to pay far more tax than you otherwise would if you’d instead set up a subsidiary company.

Limited Liability Company

An LLC is run by ‘members’ who own the business. It can elect to be taxed as a corporation or to have income ‘pass through’ to members and be taxed at the member level. The personal liability of members is limited to their investments.

• An LLC stands for a Limited Liability Company.
• The main reason for forming an LLC - whether you are starting a new business or formalizing an existing one - is to separate your personal affairs from your business.
• When done properly, and kept compliant, an LLC means you are not responsible personally for debts or liabilities of your business: invaluable protection.
• An LLC is also very flexible about who can own and manage the business and how you decide to manage its tax affairs.
• An alternative is a Corporation: that is often preferred by companies who are seeking external investment or plan to take the company 'public'. This comes with greater formalities such as requiring a Board of Directors, issuing stock and creating bylaws.
• If you decide to create an LLC, it is possible to convert it to a Corporation in the future if your needs change.

Partnerships

Foreign companies can enter into partnerships by agreeing with another entity to do business together in the US. A written agreement is suggested, though it is not binding and can be formed by oral agreement or by conduct without any documentation or filing with the state.

Every new company operating in the U.S. is required to obtain an Employer Identification Number (EIN) from the Internal Revenue Service. This is needed for filing taxes and for company identification.

• A partnership is an arrangement between two or more people to oversee business operations and share its profits and liabilities.
• In a general partnership company, all members share both profits and liabilities.
• Professionals like doctors and lawyers often form a limited partnership.
• There may be tax benefits to a partnership compared to a corporation.

Tax

With a complex system of federal, state, and local levels of taxation, understanding business obligations can be overwhelming for newcomers to the system.

The recent enactment of US tax reform moves the United States from a ‘worldwide’ system to a 100% dividend exemption ‘territorial’ system, with significant implications for global businesses with US operations. Notable changes include:

• A new, permanently reduced US corporate rate from 35% to 21% for tax years beginning after 2017
• A base erosion and anti-abuse tax (BEAT) that targets certain ‘foreign’ payments by imposing an additional corporate tax liability
• Interest expense deduction limitations
• New ‘hybrid’ financing rule denying deductions for certain interest and royalties paid to related ‘foreign’ persons
• Sale of partnership interest rules that affect a non-US partner’s gain or loss from the sale or exchange of a partnership interest.

US corporations are susceptible to federal income taxes on all their income earned anywhere in the world. Foreign companies doing business in the US can experience ‘transfer pricing’ in which a foreign parent company may charge the US subsidiary high prices for goods or services. This can be investigated by the IRS and significant penalties may be imposed for non-compliance. It’s worth noting that the US has many tax treaties with other countries. If the investor’s home country has a tax treaty with the US, expert guidance is needed.

Foreign individuals or entities conducting business in the US are also subject to the Foreign Investment in Real Property Tax Act (FIRPTA). This applies a tax to the disposition of real property in the country regardless of the taxpayer’s residency or the existence of a ‘permanent establishment’ in the US.

Legal Requirements

Some areas of law, such as patent and copyright, are governed exclusively by federal law. Many other laws, including ones governing employment relationships, and sales transactions, are primarily set by individual states. Many other areas are governed by both federal and state law. When doing business in the US, foreign companies should understand that they are subject to these parallel systems of laws, which often differ from state to state.

Contracts are governed by state law. Usually, if parties enter into a written agreement, courts interpret that agreement based on the written words used, the parties’ conduct, industry custom, and applicable laws. However, all 50 states have adopted some variation of the Uniform Commercial Code, which generally applies to any contract for the sale of goods over $500. When interpreting such contracts, courts look to the UCC to address gaps that the parties did not address in their agreement.

All contracts must include a ‘choice of law’ clause stating the state’s laws to apply, with a ‘choice of venue’ clause designating the state in which a lawsuit may be brought to implement the contract. Product liability laws are unique to the US and require expert interpretation. The US also has vigorous intellectual property laws, governing patents, copyrights, trademarks, and trade secrets.

Employment law needs careful clarification. Foreign business coming to the US must comply with US law when hiring employees who will be working in the US. US laws distinguish between “employees” and “independent contractors.” Employees are subject to tax withholding requirements and protected by federal labor laws. Independent contractors, on the other hand, are not subject to tax withholding requirements and are not covered by many labor laws, such as federal minimum wage. Companies doing business in the US need to be aware of these distinctions and accurately classify workers.

Obtaining Finance

It can be difficult for a foreign entity to open a bank account in the US without a US presence. And even when a foreign individual or company has created a US entity, it is not unusual for banks in the US to be more willing to lend money to US businesses than to foreign entities. However, once a foreign business has been successfully doing business in the US for a while, that business often has increased access to capital through US banks and VC investors.

About Yondaa, Inc.

Yondaa was formed on the premise that it shouldn’t be complicated to start a business. In an age of increasing globalization, we believe that setting up a business in the largest market in the world should be simple and free of red tape. That’s why our core service is removing bureaucratic complexity and packaging company formations into an easily manageable process where clients utilize our online platform to establish a business.

We provide companies, individuals and entrepreneurs with an online, automated platform that provides the ability to setup a company in the US remotely from anywhere in the world. This includes all the necessary periphery services such as obtaining a US business address, filing articles of organization or incorporation with the state where you intend to setup your business, obtaining the necessary EIN Tax ID's from the IRS and ultimately delivery of your fully incorporated business documents to you anywhere in the world.