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:
Limited Liability Compnay (LLC)
C Corporation
S Corporation
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!
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