ESTABLISHING A BUSINESS IN THE US
Zara Law Offices
111 John Street Suite 510 New York, NY 10038
Tel: 1-212-619 45 00
Fax: 1-212-619 45 20
www.zaralawny.com
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Introduction
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The recent weakness of the US
Dollar may present foreign
companies with the best
opportunity in years to invest in
the United States.
•
We have prepared this short guide
to highlight some of the most
important issues that foreign
companies face when establishing
a new business in the United
States.
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Establishing a Business in the US: the Planning Stage
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Establishing a Business in the US: the Planning Stage
The most important initial considerations and preparations
before forming a new business in the US:
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Which type of entity best suits your needs and where to
register that entity
Depending on the type of entity, the applicable tax
implications, both corporate and personal
Name of the new entity
Analysis of the costs involved
Immigration and visa requirements for the individuals
involved in the business
Drafting a good business plan
Finding and renting office space; obtaining phone and
Internet access, advertising and developing a website;
registering a domain name
Hiring an accountant
Opening a bank account and deposit of funds for initial
expenses.
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How to do business in the US
• You may register your foreign company in the US as a foreign
entity authorized to do business here
Advantages:
1. Convenient with respect to bookkeeping, audits, etc.
2. All income and expense accounts will be at the
same location
Disadvantages:
1. US Tax System
2. Liability exposure of your foreign company
• In most instances, the better option is to form and register a new
entity under US law
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US Tax System
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US Tax System - Income effectively connected with a US
Trade or Business
• If you choose to register your foreign company in the US, you
are generally obligated to pay US taxes only on “income
effectively connected with a US Trade or Business.”
• However, the interpretation of whether a foreign entity’s income
is effectively connected with a US trade or business is quite
broad. The Federal tax authorities in the US (called Internal
Revenue Service) may include such business activities that are
only marginally connected to “US trade or business.” In other
words, may be taxed in the US on your foreign company’s
income even the income is only slightly related to your US
business.”
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Other Tax Considerations – The importance of hiring a
good Accountant
• The US tax system is complex. Your entity will require the
services of a good accountant, fully versed in all the applicable
tax laws and their ramifications.
• While the US is often regarded as a country with low taxes, bear
in mind that taxes are not only imposed by the Federal
government, but also at the state and local government level.
Moreover, companies are liable not only for income tax, but also
for other types of taxes (e.g. capital gains tax, real property
taxes).
• In general, US companies are taxed on their world-wide income,
but to avoid double taxation, tax treaties exist between the US
and a number of countries.
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Liability
• If the foreign entity you registered in the US gets sued in the US,
its assets overseas may be at risk in the lawsuit.
• However, if you establish a new entity in the US, a plaintiff may
sue only the US entity and collect only on its assets.
• To reduce your litigation risk, it is therefore advisable to conduct
your activities in the US through a newly formed US entity.
• However, bear in mind that if you establish a company in the US
and start business activities without sufficient capital, or if you
fail to keep proper business records, the shareholders, owners,
etc. of your US company may be personally liable for the
company’s debts (the underlying legal concept is often referred
to as “Piercing the corporate veil”). This includes the foreign
company if is one of the owners of the US business entity.
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Main entities available under US Law*
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The establishment of business entities is governed by the
applicable laws of the state in which an entity is formed.
Depending on the type of entity, differences in filing
requirements, tax treatment for state taxes, etc. may exist from
state to state.
– Limited Liability Company
– Corporation
– Partnership
* Please see our Guide on “Creating a Commercial Entity in New York” for details on
the features of each type of entities and the specific filing requirements under New
York law.
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Limited Liability Company (LLC)
• This is the entity that we most often recommend for foreign
clients that want to form a company in the US.
• The owners of an LLC, called “members” are generally shielded
from liability for the company’s debts. Only the members’ capital
contribution to the LLC can be used for the company’s liabilities.
Unless the members personally guarantee the LLC’s debts, they
will not be liable with their personal assets.
• A significant feature of the LLC is the single level of taxation (as
opposed to a corporation): The income of the LLC is not taxed,
but instead each member of the LLC is taxed based on his or her
pro rata allocable portion of the LLC's taxable income,
determined by the member’s membership interest. Conversely, if
certain circumstances are met, the members may deduct the
LLC’s losses on their personal tax returns.
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Limited Liability Company (LLC) - 2
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Members of an LLC are not required to be American citizens or permanent
residents (i.e. green card holders).
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Foreign nationals who are not US residents and do not have a US Social
Security Number must obtain an Individual Taxpayer Identification Number
from the US tax authorities so that they can file US Tax Returns.
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Unless they have obtained a proper visa as well as a work permit, foreign
nationals are not allowed to work for the company (this includes members
of an LLC).
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In a number of states, an LLC cannot be formed to conduct certain types of
businesses (e.g. banking, insurance).
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In addition, when the rendering of certain professional services is involved
for which state laws usually prescribe licenses (e.g. medicine, engineering,
legal services), the formation of a Professional Limited Liability Company is
required. This generally means that the members of the Professional
Limited Liability Company have to be licensed in that profession.
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Corporation
• Subject to double taxation:
– Gross Profit minus Necessary and Reasonable expenses =
Taxable Net Profit. Every corporation is subject to this first
degree of taxation.
– The secondary level of taxation is the tax collected from the
salaries and bonuses paid to the shareholders, board
members, and employees.
• A corporation may avoid double taxation by electing to be taxed
as a Partnership under Subchapter S of the Internal Revenue
Code. An entity treated this way for tax purposes is commonly
referred to as “S-Corporation.”
• However, there are certain requirements to qualify as an SCorporation; for example, all of the shareholders have to be US
citizens or permanent residents.
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General Partnership
• A General Partnership is made up of two (2) or more individuals
who contribute assets or services to a commonly–owned
business, act with full personal liability and share the profits and
losses of the business.
• The profits or losses of a General Partnership are passed on to
the General Partners without taxation at the General Partnership
level. Moreover, under certain circumstances, some general
partners can deduct from their personal income tax returns, their
share of the business losses of their General Partnership.
• A General Partnership does not have the formal organizational
hierarchy of a Corporation, and all general partners are entitled
to a share in the management of the Partnership. Each of them
is authorized to contractually bind the General Partnership.
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Limited Partnership (LP)
• Two (2) kinds of partners exist: Limited Partners and General
Partners.
• A Limited Partner is only liable for the LP’s debt to the extent of
his or her capital contribution.
• A General Partner has unlimited liability: He or she is liable for
the LP’s debts not only to the extent of his contribution, but also
with his or her personal assets.
• Limited Partners may only contribute money or other property to
the LP. They may not contribute services, or do work for the LP.
If a Limited Partner performs work for the LP, the LP’s creditors
may be able to argue that such partner should be deemed a
General Partner, and therefore be fully liable for the LP’s debts.
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Joint Ventures (Business partnerships)
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A Joint Venture is a contractual agreement joining together two (2) or
more parties for the purposes of executing a particular business
undertaking. All parties agree to share in the profits and losses of the
enterprise.
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Like the Partnership, Joint Ventures can involve any type of business.
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A Joint Venture has most of the elements of a Partnership such as
shared management, the power of each member of the venture to bind
the others in the business, division of profits, and joint responsibilities
for losses. However, unlike a Partnership, a Joint Venture anticipates a
specific area of activity and/or period of operation, so that after the
purpose is completed, bills are paid, profits (or losses) are divided, the
Joint Venture is terminated.
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A Joint Venture may be formed as “C corporation (corporation)”, a
“partnership” or a different legal structure. When choosing the type of
entity, it is advisable to focus on taxation and liability issues.
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Written Agreements
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Never sell your products in the
US without a well-drafted sales
agreement
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Secure your transactions with
your customers (e.g. security
agreement, personal guaranty)
Please see our Guide on “Managing Export
Risk” for more details on these and on other
related matters.
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Hiring Staff
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Hiring Staff
• Unless there is a particular employment contract, employees in
the US are deemed to be "at will“, which essentially means that
they may quit or be fired at any time without notice and/or
without particular cause.
• There are, however, various federal, state, and local laws that
you will have to comply with as an employer, ranging for
example, from minimum wage to workplace safety laws.
• Be aware that the US has specific laws prohibiting
discrimination, and you may not ask an employee, during the
interview and at any other time, about their age, marital status,
sexual preference, religious affiliation and certain other personal
information.
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Hiring Staff - 2
Situations where you should have a written agreement with an
employee:
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If you want to bind your employee to your company for a certain
amount of time.
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If there is confidential information about your company that you
want to protect.
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If you want to prevent your employee from working for any of
your competitors in the future.
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Employee & Independent Contractor distinction
• For tax as well as other reasons, the distinction between an
“employee” and an “independent contractor” is a critical one.
• If you hire a person for a specific project, and the person is not
under your control, and performs the project on his or her own,
that person is generally deemed to be an independent
contractor.
• If you hire somebody to perform general duties in your company
and you supervise or manage the job he or she is doing, this
person is usually considered your employee.
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Employee & Independent Contractor distinction - 2
• Employers pay their employees’ taxes by deducting the amount
from their salaries.
• If you hire an independent contractor, that individual pays his or
her own taxes.
• This factor alone should not determine whether you hire an
employee or an independent contractor.
• Generally, the more control over the worker you have, the more
likely it is that he or she will be considered your employee.
• The IRS uses its own criteria to determine who is an employee
and who is an independent contractor.
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The criteria used by the IRS in determining the
Worker/Subcontractor distinction
• Whether there is a written agreement between the parties and
the terms thereof.
• Whether the employer has the authority to direct the person how
to do the job, and to check on his or her work.
• Who owns the tools and equipment the worker uses to do the
job.
• Whether or not benefits such as health insurance are given to
the worker.
• Whether the employer pays the worker’s business expenses.
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Renting office space
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Renting office space
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It is generally not advisable to use your home as your office since:
– It may leave an unprofessional impression on
clients/customers.
– It may not be possible to deduct the rent for your home as office
rent expense.
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If you do use your home as an office, you may only deduct from
your taxes that portion of the rent proportionate to the room that
you use as an office.
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When calculating the rent of the room, the length of the daily
occupancy of the room as an office will be considered, and the tax
authorities may also investigate whether you also use the room for
living, etc.
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In contrast, the rent for a separate space leased as an office is fully
deductible from your business taxes.
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Renting Office Space - 2
• It is a good idea to have a lawyer review your lease before you
sign it.
• Keep in mind that lease agreements are usually drafted by
landlords’ attorneys to serve their interests, and your lawyer
may be able to negotiate better terms than you can on your own.
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Conclusion
• Unless there is a good reason to use your foreign entity in the
US, for liability and tax reasons, it is usually preferable to form
an entity under US laws.
• Never sign anything that you do not fully understand, e. g. a
lease, agreement with a supplier or any corporate document,
without having the document first reviewed by a lawyer.
• Insist that all agreements with suppliers, buyers and others be in
writing.
• Unless you receive payment in advance from your buyers,
obtain security agreements that give you a security interest over
the goods you sell, and/or request third-party guaranties.
• Prepare a good business plan, including marketing information.
Since you might have to present the business plan to banks
and/or potential investors, it is better to have it prepared by a
professional.
• Good luck!
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