Setting up of an entity in USA from India

Many investors and business firms are keen to set up a Company in United States of America to expand the horizon of their products and services in other developed regions like US, Europe, and South America. Setting up of an entity in US offers several advantages like enhanced credibility in international market, attraction of angel investors, taxation benefits etc.

To incorporate an entity in USA, you first need to appoint a ‘Registered Agent’ who is a person or company that must have a physical address in the state of formation, be available during business hours, and will accept and sign for official legal and state documents for the company. Business Nerd can help you get started with that.

Any Indian or foreign national can set up either C-Corporation (Company) or LLC (similar to that of LLP) in USA. There’s another entity type called an ‘S-Corporation’ but that entity requires all shareholders to be US Citizens. There is no restriction on the number of owners for a US Corporation or LLC, which country the owners are from or whether they are individuals or other companies.

Key consideration before setting up of an Company or LLC in US by Indians

> Choosing an entity 

Indian business should ask themselves first following questions before setting up of an entity in USA:

1. Whether the entity would be set up in USA, but the operation would be carried out in India.

2. Whether the entity would be set up in USA for marketing and brand building exercise and the rest of operation is carried out in India.

3. Whether the entity would be subsidiary of an Indian business firm, but would carry out full-fledged operations in USA.

You can opt for LLC in case for first two situations and C-Corporation. Both entities offer big benefits to your business. Incorporating a business allows you to establish credibility and professionalism. It also provides limited liability protection.

> Choosing a state 

In the United States, you can form a Corporation or LLC in any of the 50 States. Some US states are more “business-friendly” or “international-friendly” than others, especially Delaware, Nevada and Wyoming. Delaware, Nevada and Wyoming banks are more familiar with dealing with international clients without a local office than other states. This can make opening a bank account much easier. Moreover, after forming your company in these states, if you would like to operate from other states of US, it is still possible to do so through foreign qualification process.

If you simply want to form a US company because you need to open a US bank account and will not be opening a US branch or have a physical presence, then you might choose Wyoming which has lower annual state fees than other states. But if you want to form a company for the purpose of obtaining US investment or venture capital, you may consider a Delaware Corporation as this is the entity that is required by the vast majority of US investors and venture capitalists.

Differences between Corporation and LLC 

There are difference in Corporation and LLC. However, both have limited liability protection. Same like Company and LLP in India, Corporation and LLC in US works. Choosing an entity is depend upon many things like your business structure, scalability, turnover, requirement to set up physical office in US etc. Major consideration before choosing an entity is given below:

> Taxes

Corporations are responsible for paying tax on their profits and on dividends the entity distributes to its shareholders. Since dividends are not tax deductible, dividends are taxed twice. This is referred to as double taxation. While double taxation is seen as a disadvantage for businesses choosing to file as a corporation, this additional tax responsibility can often be offset by federal deductions that are only available only to corporations like advertising costs, operating expenses, employee fringe benefits such as medical and retirement plans etc.

As of 2018, corporations pay a flat tax of 21% on their profits, which is lower than the top five individual tax rates. While this is largely offset by double taxation, any income the corporation chooses to retain at the end of the year will be taxed only once at the new 21% rate. This allows the owners of the corporation to save on taxes by investing some profits back into the business.

An LLC is taxed as a pass-through entity by default. This means that the profits of the business are “passed through” to the owners (called members). Profits and losses are reported on the individual tax returns for the owners, and not at the business level. As a result, filing taxes is often simpler for owners of an LLC. Any losses or operating costs of the business can be deducted on personal tax returns, which can help offset other income. However, an LLC may elect to be taxed as Corporation while it is an uncommon choice but it may make financial sense for some businesses.

> Compliances

Corporations are required to hold an annual shareholder meeting each year and the proceedings and discussions must be recorded and prepared called corporate minutes. A corporation is generally required to file an annual report. Any actions or changes in the business will require a corporate resolution to be voted on at a meeting with the board of directors.

LLC is not required to keep minutes, hold annual meetings, or have a board of directors. While some states still require LLCs to file annual reports, others do not.

Process to incorporate a Corporation or LLC in the USA from India

Once you’ve decided what type of company you’d like to form and which state you will be forming the company, there are only a few basic requirements we need to form your company for you.

1. Appoint a Registered Agent 

To incorporate an entity in USA, you first need to appoint a ‘Registered Agent’ who is a person or company that must have a physical address in the state of formation, be available during business hours, and will accept and sign for official legal and state documents for the company. Registered Agent is the link between you and US Government. They will accept documents, scan them and email them to you, and if necessary, forward documents via International Mail that cannot be scanned or require a physical signature.

2. Choose a Company Name

Registered Agent will search the name whether it is available in your chosen state or not same like here we do.

3. Provide Names and Addresses of the Directors, Members etc  

You should provide details of Directors, Members of proposed Company/LLC alongwith its KYC documents like Passport, Address Proof, ID Proof etc. After successful documentation and form filing, your company or LLC can get incorporated in 1-2 days.

 4. Federal Employer Identification Number

The Federal Employer Identification Number (FEIN) also known as an “EIN” or simply “Tax ID Number” is a number issued by the United States Internal Revenue Service (IRS) that is somewhat like an identification number for companies. Once your company is formed, Registered Agent assists you in obtaining this number from the IRS. The EIN will be needed to open a US bank account.

5. Apostille or Certificate of Authentication (Optional) 

If you intend to open a bank account in India or if a local company or government office will require proof of the formation of your US Corporation or LLC, you may need to have the company formation documents certified with an “Apostille”. You can ask your registered agent to send apostille certificate of formation through international courier.

 6. Open a US Bank Account 

US Bank Account is compulsory for following:

• To accept US payments;
• To open a US merchant account;
• To open a physical branch office in the US.

Most banks will require you to have physical address in the United States and which must not be your Registered Agent’s address. Some banks may accept your Registered Agent address for opening the bank account, but you will need to arrange to have your bank statements etc. routed through either a mail forwarding service or have them delivered electronically.

You should open an account in the bank that has presence in both US and in India like city bank has branches in India and in US.

 7. Open a Bank Account in Your Home Country

If you need to open a bank account in your home country, the bank will more than likely require the above-mentioned “Apostille” certificate of formation. Contact your local bank for more details on what is required to open a bank account in your country.

 8. Get a US Phone Number, Website etc.

Getting a US Phone number and creating a website provides digital space in US. People nowadays visit your website instead of your physical office. So, create professional looking website and arrange for local US phone number. There are many phone number providers in US who will provide routing to forward your calls to any Indian number you wish as well as VOIP service where calls can be routed over the internet instead of standard voice lines.

Annual Compliances 

Maintain a Registered Agent

You must have a Registered Agent in US to fulfill the requirements of laws. Registered Agent is the middle man between us and US Govt.

 File an Annual Report

The “Annual Report” is simply a document that updates the state on the owners, addresses and Registered Agent for your company. In many states it can be filed online. Your Registered Agent will receive and forward the required report to you before it is due. Failure to file this report can result in your company becoming inactive, be assessed late fees and eventually be administratively dissolved.

 Pay US Taxes

Your company or the individual owners may have to pay taxes on any US-based income. There are 2 type of taxes one is state level and another is federal level. In addition many states are charging franchise tax. You should be in touch with your registered agent for tax compliances.

Franchise tax

A franchise tax is charged by a state to businesses for the privilege of incorporating or doing business in that state. Franchise taxes, like income taxes, are usually imposed annually. Failure to pay franchise taxes can result in a business becoming disqualified from doing business in a state. Different state have different rates. You should comply accordingly.

Business Income Taxes

All businesses must pay income taxes. These income taxes are based on the profit of the corporation. Corporations may pay both federal income tax and state income tax if the state has an income tax. Some states require businesses to pay both income tax and franchise tax.

The USA is the globe’s largest national economy. It offers clear policies and regulations for encouraging startups and at the same time attractive taxation system too. In their market-oriented economy, private individuals and businesses make most of the decisions, and the federal and state governments buy needed goods and services predominantly in the private marketplace. US business firms enjoy greater flexibility than their counterparts in Western Europe and in decisions to expand capital plant, to lay off surplus workers, and to develop new products. Any business man if wants to enter into global scenario, then setting up an entity in USA is must.

Author is a Corporate Law Consultants based in Mumbai. Author has studied laws of various countries and guided clients to expand their business in different jurisdiction like Singapore, US, UK etc. He can be reached at [email protected]