1. Incorporation
2. Process of Incorporation
3. Business Types
4. Qualifications
5. Two Types of Income
6. Tax Treaty
7. Other Considerations
8. Foreigner Owns At Least 25 Percent of a U.S. Company

Updated July 13, 2020:

C corporation for foreign shareholders is the most commonly known entity. Different structures exist as sole proprietorship, partnership, limited liability, and corporation. Regulation is conducted at the state level.

U.S. citizenship is not required when incorporating businesses in the U.S. since everyone applies for the same process. Nevertheless, incompatible languages and methods can be difficult.

Incorporation

Incorporation can attract more buyers. Even if travel is not necessary due to wholesaling and the internet, customers in the U.S. are more likely to shop for services in the U.S. However, many other variables are present, such as state tax/trade laws, employees, leases, and company size.

Process of Incorporation

  • Register with state(s) a physical, not legal, address. The owner or another authorized individual who has access to legal documents is the qualified agent. There are descriptions regarding Service of Process (Notice of Litigation), annual reports or statements, taxes, and availability during business hours.
  • File formation documents (Articles of Incorporation or Certificate of Incorporation) with the Secretary of State. LLC documents are named Articles of Organization or Certificate of Organization.
  • For U.S. residents, SSN or Federal Tax Identification number is required. For foreigners, Individual Taxpayer Identification number is required

Business Types

  • LLCs
    • Advantages
      • Non-U.S. citizens own shares
      • No limit to the number of investors
      • No company tax
      • Flexible profit and loss allocations
    • Disadvantages
      • Quarterly income is taxed at the highest graduated rate (35 percent for corporations, 39.6 percent for individuals) when profit is distributed to foreign partners
      • Form 8804 (Annual Return for Partnership Withholding Tax) must be filed
      • Personal U.S. tax returns must be filed
  • S Corporation
    • Advantages
      • Prevents company taxes via personal income tax returns
      • Reduces self-employment tax
      • Real estate investing
  • C Corporation
    • Advantages
      • No U.S. personal income tax returns
      • Ownership of LLC, regardless of partnership
      • Double tax a non-issue if home country complies with U.S dividends laws.

Qualifications

  • Resident Alien
    • Green Card (I-551)
    • Or, substantial physical presence in the U.S. for 183 days or more in a given year

Two Types of Income

  1. Trade or business
  2. Not trade or business: there is more withholding. Rents, interests, dividends, royalties, and wages are for investment purposes (fixed, determinable, annual, or periodic). Unless there is an agreement between the foreign country and the U.S., the rate is 30 percent.

Tax Treaty

Foreign countries decide on the amount of tax credit and inspect the kind of tax paid in the U.S. Example of earning ordinary income in the U.S. include:

  • Canada
    • If the owner is a resident alien instead of a non-resident alien, S-Corps are favorable.
    • LLC is not favorable due to double taxes without foreign tax credit from C corporation. Limited partnership or limited liability limited partnership (LLLP) is favorable.
  • Australia
    • If the owner is a resident alien instead of a non-resident alien, S-Corps are favorable.
    • An LLC may be more favorable due to similar laws to the U.S.

If a foreign partner designates the partnership as C corporation, tax returns are affected for the other. The other can do business as LLC, LP, or LLP while having the foreign partner as their S corporation.

Other Considerations

Resident Status: U.S. residents are taxed worldwide while non-residents only pay for U.S. income. Foreign businesses pay annual state fees.

States: The home country's approval is required and may select the entity.

Financing: A two-year performance in the U.S. is required for capital.

Ownership Tax: The tax rate is same as that of a domestic company with withholding of distribution. Partnerships act as one in matters of tax.

Foreigner Owns At Least 25 Percent of a U.S. Company

“Reportable transaction” means money (royalties, rents, sales, interests, not dividends) or property exchange and Form 5472 is required. Part IV describes more about this transaction. If many foreigners own together at least 25 percent, the form is not mandatory. If every individual in the group owns at least 25 percent, then the form is filed individually.

If the company has to pay loan interest to the shareholder, tax can be withheld at 30 percent or less unless there is interest exception (portfolio interest) under Form W8 B EN. The "Applicable Federal Rate” is used if the interest is absent or lower than market rate. The company is not able to subtract dividends and therefore taxed 30 percent or less. An annual $10,000 is fined to each individual jointly and severally for any incomplete or non-filed Form 5472.

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