Understanding the Incorporation process Q: Can a Foreign Nationality Entrepreneur who is not a US Citizen or a Non US Resident be a shareholder of a US Corporation? A: Yes. U.S. laws allow a foreign nationality individual to incorporate a business in the US. You can be open your US business and be a sole shareholder of a LLC or Corporation. Q: Can a Foreign Company (Corporation) be a sole shareholder of a US Corporation or Limited Liability Company (LLC)? A: Yes. A Foreign Company can hold 100% of the shares of a US Corporation and/or a US Limited Liability Company (LLC). The US Entity will be a subsidiary of the Foreign Corporation. Q: What should I consider when choosing the type of entity in the US? A: U.S. and States laws offer several types of business entities for a Foreign Nationality Entrepreneur. When choosing your US Entity you should consider the following issues: 1) Ownership Structure (Who are the shareholders? Individuals or Corporations? U.S. Residents or Foreign Nationality? 2) Tax Planning (what type of entity will provide you with the most tax advantages in the U.S. and in your own country? 3) Business Purpose (what will be the nature of your U.S. Business activity Online Trading, Real Estate, Retail, Manufacturing, Consulting, R&D, Wholesale, Marketing. 4) Future plans for fund raising and/or adding new shareholders. Do you plan to raise capital by going public? Will you have more shareholders in the future (U.S. Residents and/or Foreign Nationality). 1
Q: What are my options as a Non-US-Resident when it comes to Entity Types? A: Non-US-Resident has the following options to setup a US Entity: 1. C. Corporation, known as Sample Company Name, INC. 2. Limited Liability Company, known as Sample Company Name, LLC. NOTE: There is another type of Corporation available in the US (S. Corporation). However, shareholders of S. Corporation must be us-residents. Q: What are the similarities between Corporation and Limited Liability Company? A: Corporation & LLC both have mutual advantages: 1. Separate Entity (from its shareholders) incorporate under State Laws. 2. Provide limited liability to its shareholders. The entity is liable not the shareholders. 3. Owners of the entity can be individuals or corporation even if they are non-us-residents. 4. There is no limit on the number of owners / shareholders. Allow the entity to "go public" or add unlimited number of shareholders. 5. Allow different classes of shares holders or ownership (preferred, common, etc') 6. Can be a U.S. Employer Q: What are the differences between Corporation and Limited Liability Company? A: One major difference between Corp & LLC is the Tax Treatment of the entity's profit and the way each entity reports its taxes to the tax authorities. Corporation is a "Separate Entity" in terms of liability and taxes. Profits of C. Corporation are subject to Corporate Tax Rate (Federal & State Level) and the corporation is liable for its own taxes. Dividends are subject to "dividend tax rates". Limited Liability Company is a separate entity in terms of liability BUT in the eyes of the tax authorities it is a "pass-through tax entity". Profits of an LLC are not subject to Corporate Tax Return at the LLC level. They are added to the owner's taxable income. If the owner is an Individual, the LLC's profits are subject to Individual Tax Rates and if the owner is a Corporation, profits will be subject to Corporate Tax Rates. For example: Limited Liability Company - LLC (Individual Owner) Annual Profit: $100,000 Individual Tax Rate: 26% Income Tax: $26,000 Net Profit: $74,000 C. Corporation (Individual Owner) Annual Profit: $100,000 Corporate Tax Rate: 34% Income Tax: $34,000 Net Profit: $66,000 2
Dividend: $66,000 Dividend Tax Rate: 15% Dividend Tax: $9,900 Owners net cash flow: $74,000 Effective Tax Rate: 26% Owners net cash flow: $56,100 Effective Tax Rate: 43.90% Tax reports: C. Corporation must report income, expenses and profit as a separate entity using Form 1120 (Corporate Tax Return). LLC must report to its members (owners) their share in the LLC's profit using Form K1. Each member will add his/her share to his/her taxable income. Individual Member will file Individual Tax Return (Form 1040), Corporation Member will file Corporate tax Return. Q: How do I choose the best option for my situation (Corporation or LLC)? A: As you see there are many considerations in choosing type of U.S. Business Entity. We strongly recommend consulting with our experts to achieve the best tax and business advantages to your individual circumstances. Q: Where do I incorporate my U.S. Business? Is it important in which State? A: United States Is a Federation. There are fifty states and one district (District of Columbia). When you incorporate a US Entity (LLC or C. Corp), you have to incorporate your business under state law - state of incorporation. Q: How do I know in which state I need to incorporate? A: There is a basic rule in choosing your state of incorporation "physical presence" or "nexus". Under State Law, if you have a physical presence in the State, you have to incorporate under it. The meaning of "Physical Presence" or "Nexus" is usually if you are going to have an office, showroom, manufacturing or retail facility, employ workers, deliver or install products. Q: Our Company is doing business using our website (online sales). We don't need office and we don't need to employ in the US. Where should we incorporate? A: If you don't have a "nexus" in any state, you are free to choose to incorporate in any state. Incorporating your business in Delaware State will provide you with a lot of tax, legal and financial advantages. 3
Q: What are the requirements for a non-us-resident to incorporate in Delaware? A: In order to Incorporate in Delaware (or in any other state) you should follow these steps: 1. Fill out our Incorporation Application Form at: Incorporate Now 2. You should have available: Copy of your passport (with photo ID and a proof of address in your country) 3. You need to provide us two name suggestions for your US entity. We will verify with the State that the name is available. 4. There is no amount of Share Capital required by the state. Q: What happens after you receive my Incorporation Application Form? A: Our Processing Department reviews your application and gives an initial approval. Your application now goes to our Incorporation Team to proceed with the Incorporation Process. At this point you will receive your Incorporation invoice and a Credit Card Authorization form to fill out, sign and forward back to us. After processing your payment we will email you a confirmation and continue with the process. Q: What are the Incorporation Steps? A: Here are the steps included in the Incorporation Process: 1. Name Check: We run a name check with the State. If the name you requested is available we will move forward with the incorporation. If the name is unavailable we will ask you to provide a new name suggestion. 2. File your Incorporation Application with the State: We prepare your incorporation application to the State. One of the major documents every state requires to include in the application is Article of incorporation (if you setup a Corporation) or Article of organization (if you setup an LLC). As part of the process we will prepare the Articles and make sure they are complied with State Laws & Regulations. 3. Resident Agent: We engage a Resident Agent for your entity, which 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. The registered agent's address may also be where the state will send the paperwork for the yearly renewal of the business entity's charter. 4. Tax ID Number: We retrieve from The Internal Revenue Service (IRS) an Employer Identification Number (EIN), which known also as Tax ID Number. The EIN is a statutory requirement if you need to conduct business in the US, Open a Bank Account, File Tax Return, Apply for Credit or Employ workers. 5. Business Address: Your entity will be assigned a Business Address in the State of Incorporation. The business address will be used to receive mail items and forward to you anywhere in the world. You may also 4
use the business address on your letterheads, official corporate correspondence and legal documents. 6. Corporate Kit: We prepare a Corporate Kit for your US Entity which includes necessary documents: Certificate of Incorporation / organization, State Filling Proof, Share-Holders Agreement / Member-Ship Agreement, Share Certificates / Member Certificates (Proof of ownership) and Shares Registered Log. Q: How long it takes to complete the Incorporation Process? A: We prepare and file your incorporation application within 24 hours upon receipt of your payment. Most States will take 24-48 hours to process and approve the application. It will take another 24-48 hours to retrieve your EIN and prepare the Incorporation Kit. Q: Are there annual fees to keep my corporation in good standing? A: Every State requires to maintain the corporation or limited liability company by paying annual fees. The annual fees vary from $50 to $800 depending on the State of Incorporation. We will notify you on the due date and assist you with the proper filling and payment of the annual fees to keep your entity in good standing. Q: Do I need to file an annual Tax Return? A: Yes, Every entity required to file an annual tax return to the IRS and the State which it is doing business in. Some States also require Franchise Tax Return. Our Tax Specialists will assist you with preparing and filing the required tax return. Q: Can my Corporation / LLC employ workers in the US? A: Yes. Every US Entity can be an employer. You will have to register the entity in the State of Employment as an Employer and make the proper Payroll Arrangements. Our Payroll Department will assist you in registering your entity as an Employer and make the necessary payroll arrangements to allow you employ workers in the US. Q: What do I do, if I have questions about taxes, accounting and business transactions related to my US Corporation / LLC? 5
6 A: Our CPAs are ready to assist you with any questions you might have. Login to our website and click on CPA Consultation service.