Legal Implications of Opening a Business in the USA From Abroad

An average of 4 million businesses are created each year in the US. The country enjoys a high rating for ease of starting an enterprise with the World Bank attributing it a score of 91.6 out of 100. A stable political setting, skilled workers, fiscal incentives, and a favorable economic environment are just some of the factors attracting foreigners to invest or set up a company in the USA. However, before opening a company, it is also important to look at the legal implications of such a move. Defining the legal structure of a firm in America makes it easy to run a business as well as keep taxes and accounts in order.

Creating a Business Entity

The first step in establishing a company in the US or elsewhere for that matter is to form a business entity. To do this, the owner must select a state to create their business. Remember, there are 50 states and each one has its own corporate code.  It is up to the investor to decide which state they choose to do business in. Whilst the federal law sets the minimum standards for trading shares and governance rights, business entities are established at state level.  Therefore, laws that regulate corporate governance and the rights of shareholders are defined by the article of incorporation at the state level. There are also different types of companies that an investor may establish, each one determining the legal structure of a business. 

Legal Business Frameworks

Sole proprietorship is an unincorporated business owned and run by a single individual. There is no registration or application to do, but you might want to pay for a ‘doing business as’ (DBA) certificate. This document offers you the right to claim a particular company name. But, once you register a name, it is tedious to modify it. The main disadvantage of a sole proprietorship is that many commercial banks will not open their doors to you.

Another common legal structure is the limited liability company (LLC). It offers several advantages such as relatively low cost and the ability to include the financial performance of the company in the personal tax statement. In addition, the proprietors of an LLC are not responsible for the company’s debts and obligations. Professionals at LegalZoom say that the formation process is simple – it can be done by answering a few questions then providing payment of state filing fees and the company’s legal charges. After that, you will get a complete LLC package that is immediately operable.  LLCs have a few disadvantages though such as payment of self-employment taxes and possible dissolution if you lose a member. Furthermore, it is harder to attract investors with an LLC holding.

For those who want to benefit from incorporation, the S Corporation or S-corp is an attractive solution because you can pass revenues directly to shareholders without paying federal taxes. Unfortunately, S Corps are only limited to shareholders who are American citizens or residents, some trusts and agencies, or tax-exempt organizations.  Hence, this is not the optimal solution for foreigners looking to relocate their firm to the US.

The last type of legal structure is C Corporation (C-corp). Startups and many large companies in the US opt to incorporate as C Corporations. They are separate legal entities responsible for paying corporate taxes and issuing annual reports. Under the C-Corp, a board of directors will be appointed. It can also raise money and investments.

The Timing of Incorporation is Important

Owners, investors, and founders must incorporate their company or business straightaway to shield themselves against personal liability. Evidently, when you are a corporation, it will assume this risk so that your personal finances will not be hit by third party claims. Timely incorporation also enables you to freely transfer funds and shares. Another valid argument to incorporate as soon as possible is to secure funds of investors to put in your portfolio. However, note that any investor funds that you receive cannot go into personal accounts or be mixed with your personal funds. Thus, you will incorporate so that you can open a bank account in the company’s name, isolate funds, and maintain financial statements. 

After incorporation, you are faced with several tasks such as identifying an office or business location, applying for business licenses, and setting up a bank account. Perhaps, one of the most difficult parts of moving a business to the US is the visa or green card requirements. Although the foreign business can hire a resident or national to run the operations, you will need a visa to enter the US if you’re visiting. Additionally, incorporating immediately ensures that the intellectual property (IP) that you’re amassing such as patents, copyrights, trademarks, and secrets are yours. In other words, incorporating allows you to secure your assets and gain tax advantages in the process.

Founding a business abroad such as the United States may be challenging, but very doable. Finding the right type of legal structures whether it’s a single proprietorship, LLC, or an S-Corporation entails wading through the legal stuff and incorporating as soon as possible to benefit from the profits and windfall and protect against liabilities.