If you operate a business in Australia, New Zealand, the United Kingdom, or elsewhere, you may have considered doing business in the United States as well. With 322 million people and a GDP of $17.62 trillion per year, the United States is a very attractive market for businesses from other countries.
Perhaps you’ve saturated your local market and are looking for new sales opportunities, or maybe you’re seeking to gain access to U.S. capital markets. Either way, given the common language and relatively similar cultures, it seems that it should be easy to bring a product or service to the United States from abroad. Unfortunately, this is frequently not the case.
The unique nature of the American federal system of government has resulted in a myriad of laws and regulations that differ among the federal government, the 50 state governments, and even at the local level. Sales tax jurisdictions, for example, number in the tens of thousands. The rules and rates may be different for all of them.
The good news is that getting started in the U.S. has never been easier. Thanks to cloud technology, businesses around the world are now able to effectively and affordably manage an international workforce. And firms such as HPC are able to collaborate with clients based all around the globe. All of this makes it more cost effective than ever for small businesses abroad to tap into U.S. markets.
Still interested in coming to the U.S.?
This guide is designed to help you get an idea of what it will take to do so. To be clear, this guide does NOT cover everything. Every business is different and it is essential that you consult with qualified advisors from a legal, accounting, and tax perspective.
Here’s what we’ll cover in this guide:
If you’re interested in talking to HPC, you can schedule a complimentary consultation. HPC offers all-inclusive packages to get you started in the United States with an accounting team that will support you as you grow.
There are three primary reasons we’ve identified at HPC as to why businesses abroad might want to do business here in the U.S.
If you’ve exhausted the opportunities in your local markets, or simply want to expand as fast as possible, getting access to U.S. consumers and small businesses is one way to grow.
To understand the potential, let’s use Australia as an example. The United States has 322 million people compared to 23.5 million in Australia. That’s about 14 times more potential consumers! And real GDP is nearly 16.7 times greater. (Source: WolframAlpha)
You may also benefit from being a U.S. business when selling to U.S. consumers because consumers in the U.S. are more likely to buy on the internet from a "local" company.
Big businesses often want to do business with a U.S. entity. And they can use their financial muscle to require it. One reason big business likes to work with other U.S. businesses is that they can more easily enforce contracts.
Forming a U.S. entity also makes it a lot easier for you to get paid.
Due to regulations on foreign payments from U.S. firms, you may be subjected to withholding. U.S. companies are required to collect W8BEN forms from foreign vendors. Many small businesses don’t comply with this rule, but large businesses are much more likely to do so. Come to the U.S. and you potentially eliminate this hassle.
United States investors want to finance a United States entity, period.
Their goal (and likely your goal) is to go public in the U.S. or get acquired by a U.S. company. This could mean anything from Angel Investors, to Seed Rounds, to Series A and so forth. Venture Capital, Private Equity and virtually anyone looking to invest will demand it, and if you are lucky enough, you can even become publicly traded on a U.S. exchange with unprecedented access to capital.
Some good news: U.S. citizenship and/or residency are NOT necessary to incorporate in the United States. The process is pretty much the same for you as for someone inside the country. But before going to the legal and administrative hassle of setting up a U.S. entity, it’s a good idea to make sure you actually need one first.
You need to set up a U.S. entity if you plan for your business to have a physical presence in the U.S.
Here are some examples of what constitutes a physical presence:
You might not need to set up a U.S. entity if:
However, you want to be careful about this. If you do inadvertently develop a U.S. presence you may open your foreign corporation to U.S. reporting requirements.
The safest course is to carefully review your U.S. activities and consider creating a U.S. entity. The rules regarding physical presence are complicated and you should consult with a tax advisor here.
There are three ways you can organize in the U.S.:
It is very important to consider these choices carefully. We have seen many U.S entities formed either incorrectly or formed and then have unintended income tax consequences for the owners. The last thing you want to do is make a non-U.S. citizen or resident subject to U.S. personal income taxes, especially when you don’t even realize it.
We can cross the S corporation off of our list right away because the owners of S corporations must all be U.S. citizens or residents, and can’t be other corporations. This means that you can’t set up an S corporation as a subsidiary of a foreign corporation.
LLCs are very flexible when it comes to management structure and require relatively little work to maintain from an administrative standpoint. They can also elect to be taxed as either partnerships or corporations. LLCs in certain cases can be treated as disregarded entities if there is a sole owner.
Being taxed as a partnership means that the owners escape double taxation. One downside of LLCs is that it can be more difficult to raise capital, since the sale of additional interests is subject to operating agreement restrictions. Basically, it can be more of a hassle to figure out from a legal perspective because each LLC operating agreement is different.
C corporations require more formalities to maintain, but are preferred by outside investors. Investors prefer corporations because the rules allow owners to hold different classes of stock, such as preferred and common stock. If you plan to seek investors or go for an IPO (Initial Public Offering), you should form a C corp.
Incorporation in the U.S. is done at the state level, not at the federal level. This means you can choose from among all of the 50 states.
However, there is one state that stands out above the pack as the place to start your business: Delaware. Over 50% of all publicly-traded companies in the United States and 64% of the Fortune 500 are Delaware corporations [Source].
Close to 100% of our international clients use Delaware to incorporate.
Delaware is popular for a variety of reasons:
If you form a Delaware C corp, you’ll be following the norm and won’t raise any eyebrows.If you’re seeking investment, this is a good thing.
Many investors will require you to be a Delaware C corp anyway, so by forming this way to start, you're ensuring you won’t have to go through the hassle of converting to one down the road. There is no reason to even be discussing the legal structure or formation when attempting to raise capital. If you're doing that, then you aren’t talking about your business.
There are some reasons why you might choose a different state, but the vast majority of foreign businesses will want to set up a Delaware C corporation as their U.S. subsidiary, so we’ll use that as our example as we proceed through the guide.
There are three ways to set up your new entity:
We strongly recommend seeking the advice of an experienced attorney before forming your U.S. entity. Every business is different, and a good attorney will ask the detailed questions to determine exactly what is needed. Your accountant and/or tax advisor should work closely with the attorney so that the tax issues can be appropriately discussed and resolved.
As a less costly alternative, you can use an incorporation service. Here are a few to consider (in alphabetical order):
Lastly, you can do it all yourself — a path that we do not recommend.
Delaware law requires that every business entity maintains a Registered Agent with a physical street address in the state . A Registered Agent is a business or individual designated to receive service of process (SOP) when a business entity is a party in a legal action such as a lawsuit or summons.
While not required, it is a good idea to reserve your entity name so you don’t find out that it is taken before your application is approved. For $75, you can reserve your entity name online.
The Certificate of Incorporation lists the following:
The Certificate of Incorporation is a one page document that must be either mailed or faxed — it can’t be submitted online. PDF fillable forms are available online here: http://corp.delaware.gov/newentit09.shtml. A cover sheet is required and can be accessed here: http://corp.delaware.gov/cvrmemo.shtml.
The Delaware Certificate of Good Standing is a letter provided by the Secretary of State that declares that a corporation is in good standing. You’ll typically need one to open a corporate bank account, obtain a loan, and more. Usually, these forms are good for up to 60 days from the date of issuance.
You can order a Certificate of Status or Certificate of Good Standing by submitting a request in writing. The fee is $50. The Secretary of State has provided a template with instructions here: http://corp.delaware.gov/certmemo.pdf.
For more information, visit this page: http://corp.delaware.gov/directweb.shtml
The corporation’s bylaws are its internal rules that govern how it operates (for example, the rights and powers of the directors, officers, shareholders, and employees). These documents are not filed with the state, but are kept on file by the corporation.
Properly listing the ownership and directors in the corporate bylaws is important for banking and tax reasons.
For tax purposes, you want the U.S. entity to be a fully owned subsidiary of your “foreign” entity, not you or any of the individual owners. If you form it correctly, the individuals will probably not have an individual filing requirement in the US, unless they come here. If you incorrectly form as a pass-through entity with the individuals as owners, you probably have a personal U.S. filing requiremen (which you want to avoid).
For ease of establishing banking in the U.S., it is best to have just one director listed for the U.S. entity. Banks usually require the directors to be present when opening a bank account, and if you’ve listed multiple directors who live abroad, it may be difficult to open a bank account in the U.S. as a result.
All corporations are required to file an Annual Report and pay the Delaware franchise tax by March 1 of each year.
The Annual Report filing fee is $50. The minimum franchise tax is $175. For more details, see Franchise Taxes on the Division of Revenue website.
While this filing can be done on your own, we recommend you hire a professional to assist. That is especially true if you have a complicated legal structure of different classes of stock.
You can apply for a federal EIN (Employer Identification Number) online. The person applying online must have a valid Taxpayer Identification Number (SSN, ITIN, or EIN).
Because the person applying must already have an ID number, we recommend that you obtain a U.S. agent to register on your behalf (it can be us or your attorney), or use one of the incorporation companies listed earlier in this guide.
You’ll also need to register your corporation in the state where you are doing business. For example, if you formed a Delaware corporation and will have your office in San Francisco, you’ll need to register as a foreign corporation with the California Secretary of State and pay the appropriate filing and annual fees.
If you are not familiar with the rules and regulations, we recommend you get assistance from an attorney or tax advisor.
You might also need to register your corporation at the local level. For example, anyone engaged in business within the City of Los Angeles is required to obtain a Tax Registration Certificate (TRC) and pay the required business tax. For more on that, read HPC's Guide to City of Los Angeles Business Tax.
Make sure to check with the local government if there are any requirements such as this in jurisdictions where you have a presence. Some local jurisdictions collect payroll taxes, which we’ll discuss in the section below on payroll tax.
Banks have varying and often strict requirements when it comes to corporations with foreign shareholders.
You may be required to show up in person at the bank branch to provide a “wet signature”. Some banks require all the officers and directors to be present. Others do not. Additionally, some banks may require you maintain minimum balances for specified periods of time, or be part of a particular industry.
Make sure to check with the bank about their requirements before you begin the process of opening your accounts.
Most banks require a U.S. business street address to set up a corporate bank account. P.O. boxes and UPS Stores, etc., will not work as a business address for most banks.
Earth Class Mail will provide a registered U.S. physical address for your business, scanned copies of your mail so you can access it 24/7, peace of mind that your unwanted mail has been shredded, and checks deposited to your bank account automatically. This will also help you (and providers like HPC) receive and address important IRS or state notices in a timely manner, or receive and pay bills too.
Most banks will require that an officer of the U.S. entity come in person to the bank branch to open the corporate bank accounts.
Some banks require all officers to be present, so you should be careful about who you name as an officer of the U.S. entity. We recommend that you name just one officer to prevent any issues in this regard.
It’s likely that many of your key personnel will not be in the United States much of the year. Therefore, it’s important to set up your accounting and other “back office” systems using cloud applications that your team can access from anywhere.
When choosing an accountant or bookkeeper in the U.S., you’ll need to decide what sort of relationship you’re looking for.
In this country, accountants provide a wide range of services. Some only do taxes. Some do both taxes and advisory (virtual CFO), but not bookkeeping. Some firms, such as HPC, provide a full service solution that encompasses everything from bookkeeping to tax to advisory — and even insurance services.
Whatever you do, don’t try to do your U.S. income taxes yourself. Hire a professional!
At HPC, we love using Xero for accounting for our international clients because it is built from the ground up for global business. Many global small businesses are already on Xero, so it’s easy to copy and adapt the existing chart of accounts in the parent company to use with the U.S. subsidiary.
We recommend retaining the assistance of a U.S. accountant (we’re happy to help!) in setting up your Xero organization (org).
If you want to do it yourself, here’s what you’ll need before you get started:
Xero has a detailed Getting Started Guide to help you out. However, we highly recommend you seek the assistance of a U.S. accountant in setting up your U.S. Xero org. Details such as sales tax settings and payroll are quite different than abroad. You want to make sure that your org gets set up right from the start.
Two Xero add-ons we frequently recommend to our global clients are Receipt Bank and Spotlight Reporting.
Many of our clients are already using these tools abroad, so it makes sense to use them and keep things consistent with the U.S. entity.
Many of our global clients are already using Receipt Bank, which automates the entry of receipts and invoices into Xero. Receipt Bank makes it easy for our clients to submit documents to us from anywhere in the world via email, Dropbox, the mobile apps, or direct upload from a desktop computer.
Receipt Bank saves us lots of time by automatically extracting the following information:
We can then sync this data into Xero as transactions with the document image attached. That’s what we call “audit proof”.
Spotlight Reporting makes beautiful visual dashboards and reports. It also allows us to instantly consolidate up to 50 organizations with multiple currencies. With both the parent and subsidiary on Xero, we and your accountants back home can easily collaborate to produce a set of consolidated financials.
Setting up payroll presents a unique challenge to global businesses, mostly due to the complexities of setting up health benefits for U.S. workers.
When you first expand to the United States, you may only need to hire one employee to start. But one employee doesn’t qualify as a “group” for most benefit providers (and even some PEOs).
This means that you can set up payroll, but you won’t be able to provide health benefits to your first employee until you hire your second employee. That’s not ideal.
For this reason, selecting the right payroll provider is important. See below for more on choosing a payroll provider or PEO (and what that is).
It’s important to determine ahead of time if the person you’re hiring should be treated as an employee or an independent contractor. Paying independent contractors provides significant benefits to the business, but can also result in serious legal and tax problems if the contractor is later determined by the authorities to be an employee.
It’s advantageous for a business to pay workers as contractors because the business does not have to make payroll deductions, withholdings, or pay the employer share of Social Security and Medicare (FICA). As of 2016, the employer share of FICA is 7.65% of the first $118,500 of earnings, and 1.45% above that.
Often the independent contractor vs. employee determination is clear and easy to make. For example, the attorney who you engage to prepare your incorporation documents is clearly a contractor, not an employee.
But sometimes this is more difficult to determine. What about a bookkeeper who comes to your office three days a week? This person could be paid as a part-time employee or a contractor by different employers for the same type of work.
According to federal law, the determination is made based on three factors:
Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or an independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
As you can see from the above excerpt, federal law is not clear cut on this matter, and state laws complicate things even further.
For example, in 2015 the California Labor Commissioner’s Office determined that a driver for the ride-hailing service Uber should be classified as an employee, not an independent contractor. Uber now faces class action lawsuits in California from drivers claiming they were wrongly classified as independent contractors. However, in other states there seems to be no issue with the independent contractor classification.
In most cases where there is potential for confusion, the safest approach is to pay your worker as an employee.
Often, you only need to hire one employee to start. Because one employee doesn’t qualify as a “group” for most payroll providers, you’re limited in your options if you want to provide health benefits to your employee.
If you will have two or more employees to start, you have many options. The decision of which provider to choose is complicated by the fact that some payroll providers offer health benefits as well. You can also “mix and match” payroll providers with benefits providers. We suggest to consider the following:
Like the big payroll players (Paychex and ADP), Gusto automatically calculates, impounds, and remits payroll taxes to the proper authorities. But unlike those providers, Gusto is completely online and easy to use. It also syncs seamlessly with Xero to send in the necessary accounting entries after each payroll.
In 2015, Gusto began offering integrated health benefits and workers’ compensation insurance alongside payroll. As of January 2016, health benefits are available in California only.
One way to avoid having to deal with setting up payroll or benefits entirely is to use a PEO (Professional Employer Organization).
When you work with a PEO, it becomes the “Employer of Record” and is responsible for payroll, benefits, HR services, workers compensation, unemployment insurance claims, and other compliance activities.
The benefit of using a PEO is that you can spend less time on compliance because they handle everything for you! The downside is that PEOs can be expensive and difficult to get out of.
One great example of a PEO solution is Justworks.
Register with the IRS using EFTPS (the Electronic Federal Payment System) to pay:
To enroll, you’ll need the following:
You’ll need to register with any state where you have employees who live or work.
We’ll use California as an example because so many foreign startups open their first U.S. office in San Francisco or Los Angeles.
In California, you’ll need to register with the EDD (Employment Development Department) for:
Note that your payroll provider may handle this for you, so check with them before you start.
Some local jurisdictions also collect payroll taxes. Make sure to register and pay these taxes as well. For example, The City of San Francisco collects a Payroll Expense Tax. All businesses with a taxable San Francisco payroll expense greater than $150,000 must file a Payroll Expense Tax Statement for their business annually by the last day of February for the prior calendar year (Jan. 1st - Dec. 31st).
In most states for most companies, you are required to carry workers’ compensation insurance. Workers' compensation insurance protects your business against claims for injuries, death, and illness that could occur as a direct result of the work done while your employees are on the job.
The easiest way to manage a workers’ compensation insurance policy is to purchase it through your payroll provider. Gusto partners with AP Intego offer “pay-as-you-go” insurance. Pay-as-you-go insurance is preferable because insurance premiums are deducted throughout the year based on actual payrolls run.
Under the traditional method, you pay a premium amount up-front based on an estimated payroll for the whole year. At the end of the policy, the employer then has to file paperwork to reconcile the difference between the estimated and actual payroll amounts. Pay-as-you-go insurance eliminates this hassle.
Employers from other countries are often surprised to learn that the United States relies extensively on employer-provided insurance. 56% of the United States population get their health insurance through their employer (Source: U.S. Census).
If you do not provide health benefits, your employees will be forced to purchase insurance themselves, likely on one of the health exchanges set up under the Patient Protection and Affordable Care Act (ACA, known colloquially as "Obamacare"). Depending on your industry, this may put you at a significant disadvantage when recruiting.
To save themselves the trouble of setting up a company health plan, some employers reimburse their employees for insurance the employees have purchased individually on the exchanges. Beware that as of June 30, 2015, doing this may result in a fine of $100 per day per employee. Therefore, we do not recommend this option!
If your employees are all in California, you can use Gusto for health benefits. This is easy if you’re already using Gusto for payroll.
If you'll be operating in other states, we can refer you to a broker who can help you set up health benefits.
Now that you’ve set up your U.S. business, you’ll likely want to start building some credit history.
The first thing you need to do as a foreigner is to obtain a Social Security Number. The credit reporting agencies use SSNs as their primary identifier, so it is impossible to build credit without one.
To get a SSN as a non immigrant, you’ll first need papers from the Department of Homeland Security (DHS) showing your U.S. immigration status and authorization to work in the United States.
After obtaining your papers, you can apply for a Social Security number by visiting a Social Security office with a completed Form SS-5. The Social Security Administration recommends waiting 10 days after arriving in the U.S. to make it easier for them to verify your DHS documents online.
Once you’ve obtained your SSN, check with your bank to see if they will give you a secured loan or a secured credit card. With a secured loan, you put money in a deposit account with the bank as collateral. Secured credit cards work in a similar way.
If you have a family member already in the United States, you have another option. Ask your relative to make you a cosigner on a new loan or a credit card. Your cosigner will be liable for any debt if you don’t pay, but you will start building a credit history right away.
Once you’ve got a loan or credit card, it is essential that you both use your credit and that you pay the bills on time every month. Over time you’ll build up a history of positive payments, which will lead to a good credit score. Just know that it won’t happen overnight.
The credit history issue cannot be understated. Many of our clients come here and can’t even lease a vehicle.
To say that sales tax in the United States is complicated is an understatement. In 2014, the Tax Foundation counted nearly 10,000 sales tax jurisdictions.
Knowing when to collect sales tax and how much to collect is a big problem for many sellers in the United States, particularly online sellers.
The key to knowing when to collect sales tax is nexus. If you have a sales tax nexus in a state, then you must collect sales tax from all customers in that state (for taxable items).
Different states have somewhat different definitions of nexus, but usually physical presence is enough to trigger nexus.
Having an office, employee, warehouse, affiliate, or inventory in a state usually counts as a physical presence. If you think you might have a physical presence in a state, you should consult with a tax advisor and/or state’s tax authority to find out for sure.
Different states and taxing authorities require sales tax compliance on different things. For example, professional services or SaaS products may be taxable in some places, but not in others.
Thanks to online accounting tools, it’s easy to find out how much sales tax to collect for a given address. Just head over to Avalara Sales Tax and enter the address.
The tricky part is knowing which address to use.
Some states are “origin-based”. This means that you charge the amount of tax at your own business location regardless of where you ship taxable items in that state.
Additionally, some states require different rates depending on whether it is your home state or whether you are a “remote seller”.
The IRS requires you to file a Form 1099-MISC for each contractor you paid $600 or more during the tax year.
In order to do so, you'll need the contractor's mailing address and Social Security number or Employer Identification Number (EIN) – information they provide on a W-9 form. That's why it's best to have contractors complete a W-9s when you first hire them.
The deadline to send out 1099s to your contractors is January 31st each year. The deadline for filing your 1099s with the IRS is February 28th. However, the deadline is extended to March 31st if you file electronically.
For each 1099 form that you don't file, the IRS can charge you a penalty fee equal to 10 percent of the unreported amount or $250 – whichever is greater. As if that isn't bad enough, the state of California can also disallow the entire deduction.
Here’s a list of the various filing requirements due to federal and state authorities for a Delaware C corporation that is foreign owned, operating in California with a 12/31 fiscal year end:
Deadline: April 15
If you receive a W-2 from a United States business or have spent more than 183 days in the US over the last 3 years, you have a requirement to file an individual income tax return to the IRS and the state and/or city you are located in.
It is important to remember that if you bring an employee from your country to the U.S. and he or she has spent time here to launch your business, they could have a filing requirement, even if they are paid by the foreign entity.
Deadline: June 30th
If you individually or your U.S. company have any assets outside the U.S., or have signatory authority over a foreign bank account, you have an additional filing requirement to file a FINCen form by June 30th each year.
There is no tax due on these assets, but the US will want to know descriptions and amounts.
The full line item instructions are located at FBAR Line Item Instructions.
Local jurisdictions may collect additional taxes. For example, the City of Los Angeles imposes imposes a tax on gross receipts for any person conducting any business within city limits. Don’t forget to register with any local jurisdictions that require it and remit the appropriate taxes.
Internal Revenue Service 2016 Tax Calendar: https://www.irs.gov/pub/irs-pdf/p509.pdf