Business formation and entity choice in the US

What are the most common types of businesses that can be established in the US?

Business formation in the United States is easy and businesses can be organised without regard to the citizenship or residency of the owner. There are many different types of legal entities available in most US jurisdictions. The entity type most often used by companies from abroad is the business corporation, but other entity types may also have a role. Other entity types include:

  • Limited liability company
  • Partnerships
  • Branch operations
  • Contractual joint ventures
  • Holding companies
  • Sole proprietorships

Consultation with an experienced international tax specialist is advisable and can often result in very significant, long-term global tax savings. A legal attorney/adviser should be used to perform this function and to advise on other legal requirements applying in the jurisdiction where the entity is established.

How long does it take to establish a legal entity in the US? 

Once an entity choice has been made, the process of registering the entity can be very fast—as little as one day.

Are there any laws or restrictions on business formation in the US?

There is no national law on business formation in the United States. New business entities are created under the laws of one of fifty states or the District of Columbia. The choices regarding jurisdiction and business entity type are up to the party forming the business.

Are there any negative tax consequences for any of these entity types?

Because of certain negative tax consequences, the limited liability company (LLC), another business entity form that is popular with US companies, is usually not recommended for foreign owners.

What final advice should a business consider before making their entity choice?

A difference between the United States and many other countries is the wide array of business entity forms available. But despite the wide range of choices, most foreign-owned companies set up in the United States as a business corporation.

Be careful if your attorneys recommend using an LLC. They may not be aware of the negative tax consequences that can result for companies with headquarters abroad.

General requirements

The requirements for incorporation can vary from state to state, but incorporation is usually simple, fast and relatively inexpensive in the United States. A corporate attorney/lawyer should be retained for these matters. The following principles generally apply:

  • Incorporation can be accomplished very quickly. If needed, expedited service can result in incorporation in as little as one day.
  • The filing fees and taxes charged for incorporation vary from state to state, but these are usually not excessive.
  • Minimum capital contributions are often required.
  • A corporation can have just one shareholder, which can be a company.
  • Corporations may have a board of directors and officers. Corporations can have as few as one director.
  • Shareholders, directors and officers can all be foreign citizens or residents.
  • Corporations may be required to have a registered agent located in the state of incorporation. An attorney can provide qualification details.
  • Corporations may be required to file an annual report; this would be filed with the appropriate secretary of state and the state of incorporation and is public information. Corporations may also be required to pay franchise fees.
  • Except in the case of listed companies and companies in certain regulated industries like banking, there is generally no statutory audit requirement and no public filing of company financial information.

Tax registration in the US

What are the tax filing requirements in the US?

New companies are required to register with the Internal Revenue Service (IRS) and with tax authorities of the states in which the company is incorporated or is doing business. New companies are required to apply for employer identification numbers. New companies also should complete an Electronic Federal Tax Payment System (EFTPS) business enrollment form that enables companies to remit payment to the IRS electronically.

Depending on the state in which operations are located, other registrations may be required. A company’s US professional legal advisors can provide full details.

The taxes include income taxes, gross receipts taxes, payroll-related taxes, taxes on transactions, property taxes (real estate, personal property and intangible property), estate and gift taxes, and excise taxes on certain goods and services. However, the federal government does not charge a sales tax or a property tax.

The United States is one of the few countries that does not make use of value-added taxes. However, most states impose a sales tax on retail sales of goods and certain enumerated services to customers within the state. The sales tax is generally based on the purchase price and is typically collected by the seller from the final consumer and remitted to the state. A seller who makes retail sales to customers in a state in which it has nexus must register with that state’s taxing authority and report and pay the sales tax due.

Most states also impose a use tax on the storage, use or consumption of goods and certain enumerated services within the state. The use tax is complementary to the sales tax and is only imposed when the state’s sales tax, or an equivalent tax at the same or a higher rate, was not collected by the seller as a sales tax collection agent for the state, which most often occurs when the seller does not have nexus within the state of use. The use tax is typically based on the cost of the taxable good or service, and the purchaser must report and pay use tax due directly to the state.

What is the tax authority in the US?

In the United States, almost any unit of government may charge tax. In fact, there are nearly 10,000 tax jurisdictions in America. Complying with all these laws and rules can be a monumental challenge.

What is the process of applying for a tax identification number in the US and what is it called?

The IRS issues the corporation a Federal Employer Identification Number (FEIN) which is used for federal tax purposes. This process can usually be accomplished electronically in a day or less. Most states have a similar tax identification number application process.

All new companies are also required to obtain an employer identification number.

Other registrations

Are there any other registrations required in the US?

Depending on the nature of the business, other federal and state registrations may be required. Legal counsel is recommended to determine this.

Key contacts 

frank_le_bhihan2_-_us_230x230 - Copy.png

Frank Le Bihan

Principal, International Services Office
E: [email protected]