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Forming a U.S. Business
There are a number of options and considerations to take into acount when forming a business in the U.S., many of which are covered in the following frequently asked questions:
Incorporation can provide many benefits. Incorporation can help limit your personal liability as a business owner. In general, creditors of your corporation must satisfy their claims by seizing the assets of the corporation rather than your personal assets. In contrast, as a sole proprietor or partner in a partnership you are financially responsible for all liabilities of the business, and your personal assets are subject to seizure or lien by creditors. Other benefits of incorporation can include greater tax deductions for health insurance and medical expenses, lower payments for social security tax and medicare tax, and greater opportunity to raise capital for the business through the issuance of stock. |
Generally, you should incorporate in the state where your office is physically located. If you incorporate in another state such as Delaware, you may need to submit an application to qualify as a foreign corporation in the state where your office is physically located. We can assist you with the foreign qualification application. Most states have revised their corporate laws based on the laws of Delaware. For companies that are privately owned (not publicly traded), generally there are no substantive differences any more between the corporate laws of Delaware and those of other states. If you incorporate for the purpose of owning and operating a business, the general rule is that you should incorporate in the state where your main business office is located. |
Under state law, every company is required to have a registered agent located in the state of incorporation and in all states where the company is qualified to transact business. The role of the registered agent is to receive legal papers (called service of process) and government notices on behalf of the company. We also arrange to file the annual reports, which are generally required by most states of the corporations or limited liability companies existing under the laws of the state. |
Yes. In general, corporations file an annual tax return (IRS Form 1120 or 1120S) and a simple one page annual state report that updates information such as the address of the corporation and the names of its current officers and directors. (The names of the shareholders are generally not listed in the annual state report.) Note that annual tax returns are also filed by sole proprietorships (Schedule C to IRS Form 1040), limited liability companies (IRS Form 1065) and general partnerships (IRS Form 1065). |
In most states, one person is enough to form a corporation. The same person may hold the offices of President, Secretary and Treasurer and may be the only person on the Board of Directors. The officers manage the daily business of the corporation based on the instructions of the Board of Directors. |
The corporation is owned by the shareholders. A corporation may have one or more shareholders. In general, since the shareholders elect the persons who serve on the Board of Directors, the corporation is controlled by the shareholders. The shareholders who own more than 50% of the corporation’s common stock get to make the ultimate decisions about running the corporation. |
Generally, there are no restrictions on foreign ownership of a company formed in the United States. The procedure for a foreign citizen to form a company in the United States is the same as for a U.S. resident. It is not necessary to be a U.S. citizen or to have a green card to own a corporation or limited liability company formed in the United States. To receive pass-through profit distributions, a foreign citizen may form a limited liability company. In contrast, all profit distributions (called dividends) made by a C corporation are subject to double taxation. (Under U.S. tax law, a nonresident alien may own shares in a C corporation, but may not own any shares in an S corporation.) For this reason, many foreign citizens form a limited liability company instead of a C corporation. A foreign citizen may be a corporate officer and/or director, but may not work in the United States or receive a salary or compensation for services provided in the United States unless the foreign citizen has a work permit (either a green card or a special visa) issued by the United States. Some work permits allow a foreign citizen to work only for a sponsoring employer. Such work permits generally do not enable a foreign citizen to also work for a new, unrelated company formed by the foreign citizen. The foreign citizen would need to obtain a separate work permit to work for the new company. We will be glad to answer your immigration questions. |
The process to form a "for profit" versus "nonprofit" corporation is similar, but the text of the articles of incorporation is different. There are no owners in a nonprofit corporation. Instead, a nonprofit corporation is controlled by a board of directors. The profits of a nonprofit corporation may not be paid to the "founders" of the nonprofit, except that the founders may receive compensation for the fair market value of actual services provided to the nonprofit. In general, a nonprofit corporation is exempt from federal income tax, except with respect to unrelated business income. If a nonprofit corporation will seek charitable contributions from the public, the nonprofit must apply for 501(c)(3) status, which is a separate application that should be filed within 15 months after incorporation of the nonprofit. |
The term C corporation refers to the way in which the corporation is taxed. There is a corporate level income tax on the profits of a C corporation. In addition, if a dividend is paid to shareholders from retained earnings, the dividend is included on the personal tax return of each shareholder. Thus, the profits of a C corporation are subject to potential double taxation. Your corporation will be taxed as a C corporation this year unless you timely file IRS Form 2553 to elect tax treatment as an S corporation. |
The term S corporation refers to the way in which the corporation is taxed. An S corporation is a pass through entity. There is no corporate level income tax. Instead, a pro rata portion of the annual profit or loss of the S corporation is included on the personal tax return of each shareholder. If IRS Form 2553 is filed within 75 days after incorporation, the corporation will be treated as an S corporation for tax purposes. Many start-up businesses benefit by making the election to be taxed as an S corporation. |
A limited liability company (LLC) is like an S corporation. Generally, business owners form an LLC rather than an S corporation if one or more of the following situations apply:
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Some start-up companies benefit by starting out as an S corporation, while others remain as C corporations because the owners desire to deduct 100% of medical expenses, the corporation fails to qualify for S corporation status, or the shareholders desire to have the opportunity to exclude from gross income 50% of the gain from the sale of "qualified small business stock" (explained below). Generally, a corporation fails to qualify for S corporation status if one or more of the following situations apply:
In 1993, Section 1202 of the Internal Revenue Code was enacted to provide a 50% exclusion of any capital gain from the sale of "qualified small business stock." For shares to qualify for the exclusion, several tests must be met. For instance:
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With an S corporation, the distribution of S corporation profits is exempt from the 15.3% social security/medicare tax that is imposed on wages. The shareholder of an S corporation saves about $1530 for every $10,000 profit distribution ($10,000 x 15.3% = $1530) because the entire profit distribution is exempt from the social security/medicare tax. This tax savings strategy is commonly called "wage reduction." Remember to pay a reasonable wage if you implement the wage reduction strategy. By contrast, in a sole proprietorship, all self-employment income is subject to the 15.3% social security/medicare tax (called self-employment tax in the context of a sole proprietorship). If you are the sole owner of a business that has not incorporated, your business is considered a sole proprietorship. The 15.3% security/medicare tax is comprised of a 12.4% social security tax and a 2.9% medicare tax. Wages higher than $80,400 in the year 2001 are exempt from the 12.4% social security portion of the tax. Note, however, that the 2.9 % medicare portion of the tax is applied to all wages (and self-employment income), without an upper limit. In addition to the tax savings benefit explained above, there are liability protection reasons for choosing to run your business as an S corporation. With an S corporation, your liability is limited to the money you invest in the business. With a sole proprietorship, you have unlimited personal liability and all of your personal assets are subject to the rights of creditors to seize or place a lien against your personal assets. |
For state income tax purposes, the following areas do NOT recognize S corporation status and treat the S corporation like a C corporation: District of Columbia, Louisiana, Michigan, New Hampshire, New York City and Tennessee. In those areas, business owners generally benefit by forming an LLC rather than an S corporation. Texas does not recognize S corporation status either, but Texas does not have a corporate income tax measured by net income for any type of corporation. Source: 1997 State Tax Handbook (CCH Incorporated, Chicago). |
Our firm practices business immigration law, as well as employment-based and family-based immigration law. We can assist you in getting settled in any U.S. state. Also, we will gladly form your U.S. corporation in the state of your choice.
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© 2003 Anthony Olson, P.A. All logos and trade marks or names are the property of their respective owners and are used for identification purposes only. Page uploaded 02/28/2006.
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