Starting your own US Company as a Foreigner


It is possible to create a US company if you are a foreigner, without ever flying to the US and to operate it from your own country. For instance, I had two US companies (browseye and iFlikeU) and I am not a US citizen (technically I am a non resident alien). In fact, the process is surprisingly simple, although there are caveats and gotchas that specifically apply to foreigners. Some of them can be fatal. The problem is that the company formation process is explained very well for US citizens (for instance read this book), but not for foreigners.


"[...] there are caveats and gotchas that specifically apply to foreigners"
I had to make many telephone calls to the IRS and to legal experts, as well as to post questions in legal forums such as FindLaw in order to discover what applies to foreigners and what doesn't.

I'd like to share with you my findings, so that if you are considering starting your own company in the US you  won't make the mistakes I almost made, or the ones I definitely made.

I'll try to keep it simple and focus on the things that only apply to foreigners. I'll also give you some personal recommendations on decisions I've made or services I've hired. Notice that they constitute no legal advice, it's just my personal non professional opinion on the matter.


How much will it Cost?

One-time fee:
  • Company formation package: from $450 to $850
  • Employer Identification Number: $95
Recurring annual fees:
  • Registered agent fee: $50
  • Delaware franchise tax: $350
These numbers have been calculated assuming that you are using Harvard Business Services in order to create the company.

What Legal Entity to Choose

In the US you may have mainly three types of companies:
Gotcha: S Corporations may not include non-resident alien shareholders (i.e., you). So, forget about them. 

The questions remains wheather to form a C Corporation or an LLC. There are many web sites where you can check the differences between both, one of my favourites is this one

Recommendation: Choose a C Corporation. It provides you with a more scalable and formal legal structure (for instance, unlike LLCs, C Corporations can go public), and if you are looking for investors, they will prefer a C Corporation.


Where to Start your Company

California certainly has glamour, just think of Silicon Valley. However, it is not very foreigner-friendly and has higher taxes than other states. 

Recommendation: For foreigners, the favourite incorporation state is Delaware because it is foreigner-friendly. More specifically:
  • There is no need to have a bank account in Delaware
  • There is no need to have a physical address in Delaware (i.e., you can have your business address in your country)
  • There is no state corporate income tax on Delaware corporations that do not operate within the state 
  • Shares of stock owned by persons outside of Delaware are not subject to Delaware personal income tax 
  • There is no Delaware inheritance tax levied on stock held by non-residents 
Gotcha: In order to register your company in California you need to have a physical address there, which implies opening an office with its own zip code (no PO box).

Some other reasons to choose Delaware over other states:
  • Most venture capital investors insist on investing in a Delaware entity (The fact that holders of common  stock need to approve a merger of a California corporation is one reason why venture funds prefer Delaware. Venture funds don’t want common stock holders to have the ability to block a merger)
  • Delaware has a predictable, fair and well-developed body of corporate law
  • Directors of Delaware corporations are afforded a high degree of protection and Delaware corporate law allows for a corporation to indemnify its directors for losses that they may incur from being sued
  • Complying with procedural formalities is efficient in Delaware
  • The annual franchise tax is lower than in California

Opening a Bank Account

For a US citizen, this is a trivial step, but for a foreigner, it is by far the most problematic one.

Gotcha: You actually execute this step once you've created your company, but I put it here because it can literaly ruin your plans of having a US company.

Recommendation: Make sure that you can actually open a business bank account for your US company before engagin in the process of creating one.
"Make sure that you can open a business bank account for your US company before engagin in the process of creating one"
In fact, this step is so problematic and important, that I've dedicated a whole post to it. Read it first if you plan to start your US company.


Registering the US Company

OK, now we get to the point where you take out your credit card and create your US company online. There are many online services for this purpose, which you can easily google.

Gotcha: Look for hidden fees and particularly for the annual registered agent fee, which is the highest recurring fee these service providers charge you. Registered agent fees around $250/year are not uncommon. 

Recommendation: I've personaly had a great experience with Harvard Business Services. They are extremely efficient  and helpful, and have a registered agent fee of only $50/year which they claim to be the lowest in the market.

The annual registered agent fee is the highest recurring fee you'll have to pay to your online business specialist

Once you've chosen  your online business specialist, you may proceed to register your company. This takes the following main steps:

Step 1: Choose an Available Company Name

Harvard Business Services provides a free name check here.

Step 2: Choose Number of Shares and Par Value

For high-tech startups it is normal to authorize of few millions of shares. The par value is how much each share costs when the company is created. This is the money each founder will have to pay for each share they get. 

Gotcha: For Delaware, some combinations of authorized number of shares and par value will lead to higher franchise tax fee than others. Check out the franchise tax calculator before choosing these numbers.

Note: The franchise tax is an annual tax that you have to pay to the state in which you registered your company.

Recommendation: Authorizing 10 million shares, with a par value of 0.0001$ is a rather common choice for high-tech startups that want to be legally designed to scale. Usually around 20% of these shares are not issued and are saved for investors and future employees.

Step 3: Employer Identification Number (EIN)

It is not mandatory to have an EIN when you register the company. For this reason, the EIN is typically offered as an extra to the company formation packages offered by online business specialists.

Gotcha: But you will need an EIN in order to fill in your tax declaration for the IRS, and it is also mandatory for opening US bank accounts, obtaining loans, hiring employees, or conducting business in the United States.

Recommendation: Get an EIN when you register your company.

Conclusions

After paying the company formation service fee you should have your company registered. This fee ranges from $400 to over $1000, depending on the online business specialist and the package you have chosen. And you'll soon get the legal documents per post, congratulations!

However, you are not done yet. There is still work to do before your US company can be considered to be properly formed. Here too, there are particular things that are different and that you should bear in mind if you are a foreigner starting your own US company. 

In my next post you can read about them.

In this other post you can have a look at the process for creating a company in the US.


The Online Course

Due to the large number of people interested about this subject, I have created an online course that teaches you how to easily create (and dissolve) a US business from the comfort of your home, be it in the US or elsewhere, avoiding expensive legal fees.


The course contains 37 lectures with videos, instructions, quizzes and checklists to help you navigate through the process of setting up your US company, avoiding common pitfalls inexperienced entrepreneurs usually fall into. You will also find templates for all the necessary legal documents, which you can freely download and use right away.

As a special thank to my blog readers, I've created 100 coupons to access this course with a 70% discount. Click on the link below to redeem your discount code before I run out of invitations!




For an in-depth understanding of how to form your business in the US I recommend you this book by Constance E. Bagley.

Enjoy creating your US company!



23 comments:

  1. Hi friend your blog is very nice and full of information. actually i got the answer that i was searching for.
    so thanks for this post..
    NY CPA License

    ReplyDelete
  2. Hello,
    I'm trying to find out what percentage of US listed companies are held by foreigners (non-US residents). There seems to be loads of information on foreign holdings of all other countries, but I can't find any information for the US. Failing this, it would be great to know what percentage of stocks traded on the NYSE are held by foreigners. Your help is greatly appreciated.

    regrads,
    hvac training in Delaware

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    Replies
    1. Hi Maria Susan,
      I'm sorry but I don't know where to get those numbers.
      Regards,
      Miguel

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  3. Excellent post!, just what I was looking for, but I have one question. In the very begining of the post you state "It is possible to create a US company if you are a foreigner, without ever flying to the US and to operate it from your own country.".
    But this doesnt include opening the business account right?, to open one you do need to be in the states.

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    Replies
    1. You are right, it's very hard to open a business account without flying there. They need to identify you to know who you are. This implies meeting you in person (with your passport). You can arrange this on a trip to the States (don't need to be a US resident). There is another possibility I'm aware of: if you are a customer of a US bank in your home country (say, HSBC), you may identify yourself at your local branch and then ask them to forward this information internally to the US branch. This may save you the trip.

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    2. Update: I just got an email from Delaware Business Incorporators saying that they've just received notice that they can open U.S. corporate bank accounts without non US residents having to personally come to Delaware. More details: http://www.delawarebusinessincorporators.com/US-Bank-Accounts-Merchant-Accounts.

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    3. Hmmm, I just checked the link above (http://www.delawarebusinessincorporators.com/US-Bank-Accounts-Merchant-Accounts) it says Non U.S. Citizens and Non-U.S.-Residents: Travel IS required to our in Delaware office. Full assistance provided to open Delaware corporate bank account. The bank officer will come to our office and setup your account. We provide all corporate documentation, employer identification number, and office lease.
      Any other travel-free links you could share?

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    4. They must have changed their service. I'm afraid I don't have any other link. It's been a while since I researched all this. It looks that it's getting increasingly difficult.

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  7. Hi, I'm a US citizen trying to start and LLC with a friend in China. Is it possible to do so with one member a non US citizen? Would it be easier for me to create an LLC in the US and she an LLC in China? it will be an internet store with items sourced from China

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  8. I think it'd be easier to start a single LLC in the US since I believe it's fully compatible with one founder being a non US citizen. But I'm no legal expert, so it would be a good idea to ask the same question here http://www.findlaw.com/

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  9. Hi
    After I create the company, any idea what kind of visa I can get to enter U.S and live there with my family?

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  10. Hi Miguel

    Great article.

    I'm in the process of setting up an LLC and I want to pay you to consult with you.

    If you're interested how do I get in contact with you?

    Thanks
    Wynne Pirini

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    Replies
    1. Hi Wynne, thanks for the offer, but I'm afraid my advice wouldn't be worth your money since I'm no legal expert. I would definitely ask a business lawyer.

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  11. Hi Miguel,

    Love the info! How did you find Nevada to start up and company?

    Thanks
    Jay

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    1. This comment has been removed by the author.

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    2. Hi Miguel,
      Thanks for the reply, no I was wondering in your research if you found it hard for a foreigner to register a company in Nevada compared to Delaware?
      Thanks Jay

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    3. Hi Jay,

      You're welcome!

      A few states—including Nevada—are trying to replicate Delaware’s success, hoping to attract business owners to their states. I haven't done it myself, but I've heard from other foreign entrepreneurs that it's practically as easy to register a company in Nevada as it is in Delaware.

      Nevada has some tax advantages compared to Delaware, particularly appealing to small businesses: http://www.bizfilings.com/learn/incorporate-delaware-nevada.aspx.

      However, not everything is about tax. It's also about trust and reputation. And Nevada is a long way from having Delaware's reputation and inspiring the kind of trust investors have in Delaware.

      Miguel

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  12. Any foreign national can start a business in the United States while in the
    United States as a business visitor. The business visitor (B-1) visa
    regulations permit a person to establish a business in the United States and
    attend board meetings as a director. As a business visitor, you can gain
    entry to the United States for up to six months on each entry using a B-1
    visa (although the admission period could be shorter), and three months using
    the Visa Waiver Program. However, you could not manage or direct the
    operations of the business as a business visitor on a B-1 visa.
    Romy B. Jurado, Esq. | Business & Immigration Lawyer passionate about helping small business owners and entrepreneurs grow and protect their business.| JURADO & FARSHCHIAN, P.L. (305) 921-0440 Romy@jflawfirm.com www.JFLawFirm.com

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  14. Hi Miguel!

    Thanks for your useful info! But i'm still having some questions. I need to register my eBay business ( as LLC sole proprietor) and I'm not citizen. I could't decide where to do it; if Delaware (D), Nevada (N) or Wyoming (W) ... Can you help me to decide answering the below questions?

    - LLC sole proprietor isn't taxable on itself, so the government taxs them on the personal income. What State hold the lowest rate of personal income tax?

    - As in D, can I open an bank account in any state if I do the registration in N or W ?

    - Where are the lowest Franchise Taxes? D,N or W?

    - If I'm selling around USA and there's some States that have Income tax on LLC, do I have to pay them when I do a sale? Or not because I'm online business?

    - I'm confuse about what you said: " There is no need to have a physical address in Delaware (i.e., you can have your business address in your country)" So, what about the registered address needed to set up a business? I know there's some service business that provides an address but I thought they are quite expensive ( like 125 USD /month?)

    Thanks a lot for your info!

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