I. Procedures for Establishing a Company in the United States
The overall process for forming a company in the United States does not vary significantly from state to state, though there are specific details of applications and fees to keep in mind. Here we will provide an overview of the company establishment procedures that are common to each state. Unless otherwise specified, we assume the establishment of a joint-stock company, which is the most common case when foreign companies establish a business entity.
The main types of companies that can be established in the United States are:
・Corporation / INC
・Limited Liability Company: LLC
・Limited Liability Partnership: LLP
・Limited Partnership: LP
・General Partnership
Accounting Firm / Law Firm
When carrying out the procedures for establishing a company in the United States, generally an accounting firm, law firm, etc. is requested. It is a good idea to consider in advance how much time it will take to prepare and apply. The accounting firm may provide company formation (incorporation), entity advisory, and agency representation included in the full accounting service retainer. Accounting firms provide company formation service similar to legal firms, however law firms do not perform accounting and tax services. Requiring both professional services, accounting and legal, may vary depending on the case.
US Corporate Law
Corporate law in the United States is a state law. The state that a company is established in and holds legal jurisdiction may differ than where it actually conducts business. Therefore, the state jurisdiction that determines the internal matters, such as the company’s articles of incorporation and operational procedures, will be governed by the company law of the state where the company is established, so be sure to understand the state laws.
Business Form (Entity Selection)
There are several options for a foreign company or individual to conduct business with U.S. customers. Businesses should consider the “permanency” of the arrangement, whether they will have U.S. employees, the type of sales and flow of income, the legal jurisdiction, taxation and compliance requirements.
(1) Branch — Register as a “branch of a foreign corporation” with the government of the relevant state, including documents stipulated by the relevant state, as well as registration fees and fees. If a company conducts business activities in a state other than its state of establishment, it must be registered as a foreign corporation with the government of that state.
(2) Representative Office – In the United States, business entities called “representative offices” are not recognized in terms of registration, so in many states they do not need to be registered with the state government. On the other hand, representative offices are not recognized as business establishments and cannot carry out commercial activities. A representative office is defined to the extent that it is not considered a “permanent measure” under the Japan-U.S. tax treaty, and its activities are generally limited to the following.
・Use facilities for the management and delivery of goods or products owned by the Japanese parent company in the United States
・Purchase products or collect information for the Japanese parent company
・For the Japanese parent company Performing activities of a preparatory or auxiliary nature
Exempt from federal corporate taxes, but subject to payroll-related (personal income) and property taxes and filing annual reports with state tax authorities and the IRS Must. Therefore, it is necessary to obtain an EIN from the IRS. Under state tax law, they are treated the same as ordinary business entities engaged in commercial activities.
(3) Out-of-State Corporation – The basic idea is to establish a company in the state where the business is headquartered. After establishing a company in any state, If you obtain an Authority to Transact Business, you can operate in other states within the United States. Therefore, by focusing on the differences in corporate laws between states, for example, establishing a company in Delaware, which has corporate laws that are advantageous to the company, and establishing offices and factories in the actual business headquarters (in another state). There are quite a lot of cases.
II. Details of Company Establishment Procedures
1. Reservation of Company Name
First, secure the name of the company to be established. You may not use a company name that already exists in the state in which you are incorporating or that is similar or reserved. In many states, you can search for existing business names on the website of the Secretary of State or Department of State. In some states, company name inquiries can be made by phone or by sending a designated form to the appropriate department. Some states have a fee. If the company name you want is not in use, you can reserve it for a small fee in most states, however reservation fees, reservation periods, and whether reservations can be extended vary by state. Additionally, some states do not have a company name reservation system.
2. Application for Establishment
Submit the articles of incorporation signed by the incorporators to the state affairs department. There are many requirements for incorporation promoters, such as “one or more natural persons over the age of 18,” and “natural persons over the age of 18, corporations, and non-residents are also acceptable.” You can check the company laws of each state to see how they are regulated. Articles of incorporation may have different names depending on the state, but they are often referred to as “Articles of Incorporation.” The essential items would include the company name, business purpose, number of authorized shares, and agent (in many states, this is called a Registered Agent, and is carried out by an individual or corporation with an actual address in the state where the company is incorporated). A template for the articles of incorporation is often published on the website of each state’s department of state affairs.
3. Submission of Articles of Incorporation
Some states allow you to submit your articles of incorporation online from the state affairs department website, while others only allow you to submit them by mail or in person. Some states recommend using online application for faster processing. Articles of incorporation fees range from a few tens of dollars to a few hundred dollars in many states, and may vary depending on the number of authorized shares. The application process for many states take anywhere from a few days to a month and provide a fee for expedited processing.
Several companies may not need a physical location in the current or long term. Therefore many foreign companies opt for a Delaware corporation because of its pro-business legal system. Additionally, Nevada and Wyoming are often chosen due to no income tax. However, businesses will still need to register in each state they conduct business in. Each state will require a physical location and registered agent, which foreign and out-of-state companies often use a third-party.
4. File Form SS-4
To obtain a federal Employer Identification Number (EIN), file the form SS-4 with the Internal Revenue Service (IRS). One thing to keep in mind is that the social security number (SSN) of the person in charge of the company is required. For foreign non-residents, you may not have an SSN and must apply for an ITIN, in which the process may take 4-6 months or more. It may be needed to appoint a third party with an SSN as the Third Party Designee and obtain an EIN. However, the application process for EIN may take less than 1 week.
5. Obtaining a Business License & Permits
In addition to the company formation procedures listed above, a business license and permits are required from the state, county, and/or city to operate business. Confirmation is required with the department in charge of the local government where the company will be established. Each location will require an operating license and pay annual taxes and fees.
6. State & Local Reporting Obligation
Once a company is established, it is required to regularly report to the state government. Note that some states require an initial report to be submitted within 30 days of company establishment. In many cases, there is a company annual or biennial report, but the deadline for submitting may vary by state. Please note that if your report is late, you may be subject to penalty fee and interest.
7. Tax & Revenue Registration
It is necessary to register in the prescribed form with the tax department or revenue department of the state in which it is established. Also, depending on your state, you may be required to pay taxes by county or city tax authorities based on the sales and service provide, the industry, and addition of employees and contractors. For example, other taxes may include property tax, retail sales tax, multi-state sales & use tax (particularly for e-commerce online sales), MTS telephony tax, tariffs on import and export of goods, excise taxes on specific industry goods, etc.
8. Visa application and HR procedures
After consulting with an immigration attorney to obtain a visa, it is needed to consult with tax accountants for both the company and employee.
(1) Expatriate Investment Visa (E-2) – Typically, you will apply for an Expatriate Investment Visa (E-2). To obtain a visa, apply to the U.S. Embassy in Japan. When acquiring a company, it is necessary to invest a certain amount in the United States, establish a local subsidiary (separate from the parent company in Japan), and explain that the business will generate a certain amount of profit. The fixed investment amount varies depending on the company size, industry, and types of products and services handled.
(2) Intercompany Transferee Visa (L-1) – In addition to the Investment Expatriate Visa, you can also apply for an Intercompany Transferee Visa (L-1). Even in the case of an L-1 visa, a certain amount of investment is required for the visa application. In this case, we will show the payment of office rental expenses, personnel expenses, etc., and prove that we will generate a certain amount of profit. In general, establishing a local subsidiary is considered to be more advantageous in terms of taxation and risk management. Branches also have disadvantages, such as being considered the same corporation as the Japanese head office under tax law, and the effects of litigation, etc., directly impact the Japanese head office.
(3) Visa Renewal
E-2 Visa: Usually valid for 5 years initially. Renewal is every two years, and there is no limit to the number of renewals.
L-1 visa: Usually valid for 3 years (initial 1 year for newly established visas), with extensions allowed for 5 to 7 years.
III. Tax procedures
There are three layers of corporate tax: federal, state, and local.
The Corporate Tax Return is typically an annual filing comprising of forms filed to the federal and state.
At the federal level, a domestic or foreign owned company is currently taxed at 21% on the net profit. Note that the taxable income may differ than the book income, such as difference from accelerated tax depreciation, limitations on business interest, business meal and entertainment expenses, etc.
State corporate income taxes vary widely from state to state. Some states have no income tax, such as Texas, Nevada, and Washington, that opt for gross receipts tax instead. Many corporate income tax varies between 4 to 12%, though some states may be higher. For having sales, employees/contractors, and property in additional states may lead to additional tax return requirements on a case basis. If filing in multiple states is required, the tax calculation would be based on an allocation formula including the sales, payroll, and property, while in most cases, the double taxation across states can be avoided.
Initial Tax Filing
If you are planning to establish a U.S. company near the end of the year, you may consider waiting until the new year to avoid a short period for tax filing with no activity. There may be additional requirements within 30 days of establishment, so it is recommended to consult with the accounting department.
Capital Requirements
The Federal and State laws do not require a minimum capital to establish a U.S. trade of business. However, note that various deductions, such as interest deduction, may be affected with a high debt to equity ratio.
Financial Statements
There is no statutory requirement to provide financial statements for private companies. However, the financial statements are often required by the parent company, employee visa applications, and/or financial-lending institution.
IV. Reporting Compliance
FinCEN (Financial Crimes Enforcement Network of the US Department Treasury) requires a Beneficial Ownership Information Report unless qualifying for an exemption starting from January 2024.
(1) The Corporation Transparency Act (CTA) was enacted by Congress on January 1, 2024, and commences from January 2024. Unless qualifying for an exemption, new companies must provide the BOI report within 30 days of registration or change of information. Non-compliance penalties may include $500 per day, up to a maximum $10,000 and possible to face criminal charges.
The US Department of Commerce has established “INWARD INVESTMENT REPORTING REQUIREMENTS” regarding foreign direct investment in the US. The two underlying laws are the International Investment and Trade in Services Survey Act (IITSSA) and the Agricultural Foreign Investment Disclosure Act.
(1) The International Investment and Trade in Services Survey Act (IITSSA)
is administered by the Bureau of Economic Analysis (BEA), Department of Commerce. Depending on financial size, quarterly balance of payments report (BE-605), annual balance of payments report (BE-15A, 15-B, 15(EZ), BE-15 Claim for Exemption), balance of payments every five years. Reporting (BE-12(Long Form), 12(Short Form), 12 Bank, 12 Mini, 12 Claim for Exemption) is required. This is to understand direct capital transactions between U.S. subsidiaries and overseas parent companies.
(2) The Agricultural Foreign Investment Disclosure Act (AFIDA)
According to this law, which is administered by the U.S. Department of Agriculture, if a foreigner owns agricultural land, a document called the “Agricultural Foreign Investment Disclosure Act Report” (document number FSA-153) must be submitted. Requires submission to the Secretary of Agriculture within 90 days of the effective date of possession.
