Saturday, August 18, 2012

US Companies and US Bank Accounts (for Foreign and Domestic Clients)

Many US companies and individuals prefer to deal with US businesses. Also, forming a US branch of your foreign company will help protect the foreign parent company and you personally from liability for the US operations. Fortunately, incorporating in one of the US tax havens, such as Delaware or Nevada, is a relatively easy process. You do not need to be a US citizen or resident, or even be present in this country.


The most popular forms of business entities for foreign businesses are LLC, Corporation and Nonprofit. LLC stands for Limited Liability Company; its main advantages are simplicity of formation, favorable tax treatment, lenient ongoing filing requirements and personal liability protection.

Corporation is often a better choice for a more sophisticated business that anticipates venture capital investment. Professional investors generally prefer dealing with C-Corporations because corporations allow for different classes of stock (Preferred class for VCs and angels, Common class for others), stock options as incentives to employees/officers, it’s easier to transfer ownership and determine voting rights based on percentage of stock ownership. It is possible to start out as an LLC and convert it to a Corporation later. It is also possible for an LLC to adopt an Operating Agreement, internal resolutions and enter into investment contracts to allow your LLC to essentially operate as a corporation to satisfy the investors.

Forming a tax-exempt US Nonprofit is a two-step process. First, you need to incorporate at the state level, which is the easy part. After state-level registration, you can start holding fundraisers and accepting donations but they will not become tax exempt until you complete the second step, which is registering at the federal level to get a 501(c)(3) status. Second step requires filling out a complex form, paying several hundred dollars in filing fees and waiting several months but, once you get the 501(c)(3) approval, the donations you had accepted through your state-level nonprofit become tax exempt and your donors get to claim a tax deduction for them.

As a foreigner, you will need the following to register any of the above entities:
1)      Obtain a Registered Agent in the state of incorporation. They serve as an address you put on incorporating documents. When they receive official mail on your behalf, they scan it into your online account and/or email it to you. Registered Agent fee varies from $50-200 per year. 
2)      Get a free tax ID (aka TIN or EIN) from the IRS for banking purposes or if requested by the agencies. Best way is online.
3)      Fill out the Articles of Organization (also called Articles of Incorporation, Certificate of Formation, etc., depending on the state) and file them with the Secretary of State.
4)      Filing fees are usually about $100 (add $25-125 for expedited processing within 24 hours). Federal nonprofit 501(c)(3) status costs extra several hundred, depending on the level of activity.
5)     Fees. "Franchise tax" (annual fee, which doesn't have anything to do with the actual franchise, like McDonald's) in Delaware is $75-250 per year, depending on the entity type and shares, but you will not be paying any more if you do not actually conduct any business in that state, even though DE does have a corporate income tax, currently 8.7%, for businesses with some DE presence. Delaware does have corporate income tax but it does not apply to your Delaware company unless it actually does business in that state. Delaware has specifically ruled that maintaining a website by a Delaware company does not constitute "doing business in Delaware" for tax purposes, unless the actual server is located in that state. Therefore, a web-based foreign business will not have to pay any income tax to Delaware for maintaining a website registered to a DE company, unless the server is in DE. Nevada does not have a franchise tax or business income tax. The filing fee is $75, you also need to file the list of initial members ($125) and maintain a Nevada State Business License ($200/year).


Having a US bank account gives your business an extra layer of legitimacy and allows you to circumvent bad currency conversion rates and commission imposed by your home country bank or PayPal.
Many banks in the US offer free business checking accounts if the balance exceeds a certain minimum, usually $5,000 -15,000. Otherwise, the fees are about $30 per month. Opening a US business checking account will be more difficult than incorporating because US banks will require a combination of the following, in addition to incorporating documents: Social Security Number, Tax ID (EIN), US street address (not a P.O. Box), and/or a personal visit to the bank. However, you can solve these problems by:
1              1)      Dealing with a bank in your home country that has US affiliates, or
2              2)      Naming a US citizen or resident an officer in your company in the Certificate of Formation (Articles of Organization/Incorporation) or the Operating Agreement. These documents may state that this officer is a non-voting member with no ownership interest and can be removed by the President or other members at any time. Another common practice is to have such an officer sign an undated Letter of Resignation.