Ask HN: What's the best way for foreigners to incorporate in the States?

https://news.ycombinator.com/item?id=1844221

by tpinto • 16 years ago

110 28 16 years ago

news.ycombinator.com

We're a design and development team with a company registered in Europe (Portugal). We have a product we've been selling worldwide (mainly to the US) for quite a while. We've had our problems with being non-US in the past, the main one being not having a merchant account and thus being impossible to signup for Authorize.net (or a similar service).

For the last couple of weeks we've been thinking about incorporating for different reasons: taxes and paperwork. We've been hearing about taxes and incorporating on Delaware, Texas, Nevada and the likes but we'd love to know what you guys on HN would suggest.

Where are your startups based? If in the US, what State? Where would you suggest us to register the company and where should I look into? We're looking for low taxes and almost no red tape, paperwork, invoice requirements, etc... We're developers and designers, we like to build awesome products ;)

We'd love to hear about not only taxing but also about monthly/quarterly/yearly paperwork one needs to fill in and submit on each example you guys know about.

Thanks for sharing. Feel free to link to any resources you know about.

nkassis2• 16 years ago

I've heard and I hope someone more knowledgeable can confirm that the easiest is to incorporate in Delaware for foreigners. To maintain the Delaware corp you have to pay a franchise tax on the amount of stocks you have issues (for C-corps at least). I'd have to look it up again but up to 5000 shares it's 75$ a year. If the company is not in Delaware then you won't have to pay income taxes.

fredoliveira• 16 years ago

This looks like it is indeed the case. See: http://corp.delaware.gov/frtaxcalc.shtml

There's actually quite a lot of helpful information and a pretty good introduction to incorporating, shares and taxes here too: http://www.tannedfeet.com/c-corp.htm

lrm242• 16 years ago

Delaware franchise tax is done two different ways. You pick the method you want to use. The first method is based on the par value of outstanding stock and the second is based on net assets of your company. Delaware will send you a bill using the method that maximizes the franchise tax. You should use the method that minimizes the franchise tax. You can have 10,000,000 shares outstanding at a par value of .0001 and still pay, essentially 0 in franchise tax (or the necessary minimum) if your assets are low.

WildUtah• 16 years ago

If paperwork is a concern and you don't really want a substantial USA presence but just a legal toehold and an official bank account, just google "incorporate in #{state}".

The one office you really need is a registered agent, the official place government and courts can get in touch with your corporation and you can pay an attorney to do that and forward you mail for a few hundred dollars a year.

For big businesses, the best state to incorporate in is Delaware because Delaware can handle masses of corporate acts and paperwork and claims and lawsuits efficiently.

For really small operations, the least cost and paperwork will be in Wyoming. You may well never file any paperwork there beyond annual renewal fees.

cmer4• 16 years ago

Delaware C Corp. Hands down.

I'm a Canadian and I have done it through DelawareIntercorp.com. They were great. I later sold that company to a publicly-traded company also incorporated in Delaware and everything went very smoothly. Make sure you talk to a lawyer and tax specialist before you do anything though. It could cost you a lot of money if things aren't done right.

patrickaljord2• 16 years ago

How about the corporate bank account? There are many sites that help you create a company but almost none allows you to create a corporate bank account for your company, which is needed. For that I think it is still needed to go to the US and do all the paper work yourself. Am I right?

nkassis2• 16 years ago

One way you can get around going to the US is if one of you is a US citizen. I discovered that US citizens can open a bank of america business accounts online. But it probably doesn't help you guys too much.

cmer4• 16 years ago

This has been very tricky for me. I know a few banks will do it but a) I forgot whom, b) the ones who did were all very inconvenient for me (ie: far). If I remember correctly, Wachovia was one of them.

I decided to try a few banks in upstate New York since it's not too far from here. I've been turned down by a few, namely Key Bank and Citizens Bank.

I ended up opening an account with RBC Bank in Virginia Beach, VA while I was on vacation. FYI, they have branches in Florida too. This is a great way to write off your vacation :) It was extremely easy, probably because they're mainly a Canadian bank and I'm Canadian.

You should call them and see if they'll do it for you. If not, look for an international bank such as HSBC.

On another note, I hired a lawyer to write a proper certificate of incorporation. The default one isn't usually suited for Internet startups that might require external funding, have an option pool, etc. You can see it here: http://bit.ly/9POOZe . Feel free to reuse it.

Everything was fine with it during the acquisition so I assume it is pretty darn good.

Hope it helps!

EDIT: The Certificate of Incorporation file also includes a note/warning from my attorney. I thought I'd include it because it is very important.

poet• 16 years ago

Messing up incorporation is something that is very annoying and time consuming to undo. Talk to a lawyer. I guarantee you the extra money you spend isn't going to make or break your business.

MicahWedemeyer• 16 years ago

Talk to a laywer and/or accountant, your questions are very common, and any competent professional could answer them.

If you need a referral to a lawyer or accountant, ask friends and colleagues who have a business presence in the US.

swombat• 16 years ago

You don't need a US-based merchant account to get a credit card processor. There are lots of UK-based ones, like SecureTrading... surely there must be some Portugese ones?

ashleyreddy• 16 years ago

I've used legalzoom to setup a Nevada LLC. Easy and cheap.

radu_floricica• 16 years ago

I know it's not your question, but to the same problem I found http://www.2checkout.com/ to be the answer. It's roughly comparable to the US based ones... more choice would have been awesome, but it works. Also PayPal.

adamgries• 16 years ago

Hey Guys,

In practical terms, unless you become microsoft it probably doesn't matter which state you incorporate in tax-wise. We received advice saying that Delaware is favorable to business in a variety of legal precedents. Also, Delaware runs incorporation as a business, which makes it easy to take care of things online etc..

Somebody mentioned Wyoming as having less paperwork but I have to say I've never felt there was much paperwork with Delaware.

Without anybody physically present in the US you may need to furnish a bunch of docs - not sure how that would work since we always had one permanent US resident in the company.

In our situation we looked at mixed ownership (US and non US) of a business that had worldwide income (mainly from the US).

Here are the implications of the different US incorporation strategies we came up with. Remember LLCs are flow through (i.e. the LLC does not pay taxes, but it's owners) vs. C-corps that are not flow through (the company itself has tax obligations). Foreign residents cannot own an S-corp (a corporation with flow through treatment).

Incorporation scenarios

1. Clean US C-Corp

Pro: easy to sell company or assets transparent stock exit is good and clean ability to issue stock options

Contra: Gain on asset sale allocable to U.S. taxed at 35% U.S. federal rate double taxation for asset sales, for U.S. owner (no such problem for foreign owners although there may be tax in your own country) If no asset sale but stock sale instead, purchaser will likely want to reduce purchase price (due to loss of tax benefits) some double taxation for operating profits (some profits from operating income can be offset by bonuses and licensing payments). Double taxation meaning that there is a federal tax on the company and then a tax on any dividends. U.S. corp subject to tax on worldwide income.

How to handle regular operations: Use bonuses and pay for services to zero out operating profits. Compensation paid to non-U.S. persons for work performed outside the U.S. is not subject to U.S. tax. Any dividends paid to non-U.S. shareholders would be subject to U.S. withholding tax - 30% (or less if an applicable treaty applies).

2. US LLC with Individual Owners

Pro: easy to sell company or assets transparent on asset sale, U.S. owners and Foreign entitled to U.S. 15% capital gains rate for most gain. One level of tax only. for US owners, profits flow to owners as income and charged regular income tax (+ social security and medicare :( ). One level of income tax. "Profits" interests can be issued tax-free, which can share in future distributions and appreciation. Can be referred to as LLC units - equivalent to shares.

Contra: inability to issue stock options (but can issue profits interests as above) If there are operating profits going to Foreign owners, those owners will be treated as US residents for tax purposes and will be liable to pay full income tax on the profits allocable to the U.S. Also, before any profits are distributed to Foreign owners, the LLC will need to pay to the IRS a 35% withholding tax. However, the Foreign owners can file U.S. tax returns and receive a refund to the extent they are entitled to it. On a sale of assets or LLC units, Foreign owners would be required to pay tax on gain (most at low federal 15% rate)

How we would handle regular operations: Use bonuses and pay for services to sink zero out operating profits.

3. US LLC with Foreign C-Corp owners (i.e. your Portugese C-corp would own the US LLC)

Pro: Same as in 2.

Contra: inability to issue stock options (but can issue profits interests as above) any tax issues would shift to these C-corps. Each c-corp would owe regular U.S. corporate income tax at a 35% rate on any income allocated to it by the LLC (unless offset by expenses). C corp would also owe a second-level of tax, called the U.S. "branch" profits tax (could be 5% or 15% if C Corp is organized in Cyprus; 30% in BVI or any other country with no tax treaty with U.S. - combined 54.5% rate). But on an exit event and liquidating distribution by the LLC no branch profits tax would have to be paid (this is in comparison with dividends). LLC still has to withhold profits allocated to Foreign C corps at 35% rate.

How we would handle regular operations: Same as in 2.

4. US C-Corp that licenses an Offshore company's Technologies

Pro: U.S. profits offset by royalty payments to offshore entity (this may be hard to do, since profits might fluctuate wildly, and having accompanying fluctuations in royalty payments would be suspect - could base royalty on U.S. revenues). IRS requires that any royalty be based on fair market value rates. To be protected, an outside appraisal would be obtained. A royalty rate of 10% of gross revenues may be in the ballpark, but would have to be confirmed by an appraiser/industry expert. Maybe your business could justify higher rates. But IRS audits this area closely. Profits of Foreign corp not taxed in U.S. (so long as no services for it are performed in the U.S.) and distributions to non-U.S. owners not taxed in U.S.

Contra: more legal and credibility problems when exiting Difficult to sell assets U.S. has withholding tax on royalties - 30% unless reduced by a tax treaty. Withholding rate for qualifying Cyprus entity - 0%. (For all purposes of qualifying for U.S. treaties, the entities must qualify. For example, if the owners of the Cyprus entity are not Cyprus residents or the entity does not conduct an active business in Cyprus, the Cyprus entity likely would not qualify. In that case, 30% withholding would be required to be paid by the U.S. licensee (if it does not, IRS can impose penalties). (Same for BVI, which does not have a treaty with the U.S.). Bad tax result for U.S. seller of original technology. Under IRS tax rules, a permanent royalty would be imputed. Each year, the U.S. seller would report income based on the performance of the technology (generally, sales revenues) If Foreign corp develops and owns the technology, and licenses it to U.S. company in exchange for royalty, U.S. owner should not hold 50% or more of the stock of the Foreign corp. If it does, 50% of the royalty would pass through to the US owner (called subpart F income). If U.S. owner owns 10% or more of the Foreign corp, and the Foreign corp is not in an active business, then distributions to the U.S. owner will carry a painful interest charge (called PFIC income). If profits are distributed each year, this aspect would not be too harmful (so the profits could not stay in the company to avoid taxation beyond the end of the tax year since the U.S. owner would be liable for them). If an active business and U.S. owner owns less than 50%, these passive income rules do not apply. Key is to determine whether Foreign corp would be treated as having passive income. Both U.S. and Offshore companies have to employ people. The money flowing to the Offshore company is profits only, and will likely not be sufficient to cover significant employee salaries and other expenses; therefore it should be kept to a minimum. However, the Offshore company must employ one or more people to show that it is actually developing that technology for which it is receiving these massive royalties.

How we'd do it: BVI entity holds IP, U.S. entity operates C Corp pays royalties to reduce US profits

Hope this helps. Hit me up if you want to discuss further.

philiphodgen3• 16 years ago

The legal part of this is trivial. Form a corporation somewhere. Delaware. Meh. (It is actually slightly more complex than that, but not MUCH more complex).

The tax side of this is nontrivial.

You sound like you are doing this because you have problems extracting money from your customers. In other words, you have a business process problem. If at all possible I would suggest finding a business process solution to your business process problem.

Here's why. You are solving a business process problem with a legal solution. You are pounding nails with a screwdriver. It is going to create a tax problem for you.

A U.S. corporation (formed in Delaware or anywhere else) is a taxpayer. The Federal government will be looking for a tax return from this corporation. (Form 1120, if you want to look at it). Your money collected from your customers will be flowing into that corporation. That looks like taxable income to the U.S. government.

Now you have replaced your business process problem with a U.S. government tax problem. That's an order of magnitude worse. You can solve tax problems, but it takes time and money to do so. That means lawyers and accountants and paperwork.

So now you have replaced your business process problem with a tax problem, and you have solved your tax problem with an "accountants and lawyers and paperwork and overhead and brain damage" solution.

Is it cost-effective? Maybe.

Then the next thing to consider is State income tax. The U.S. has a peculiar set-up for income tax. The Federal government imposes an income tax. Most of the States impose an income tax. Some cities also impose an income tax (stay the F away from Philadelphia and New York, for instance).

Your Delaware corporation must be doing business SOMEWHERE. "Must be somewhere, can't be nowhere." So you need a physical presence somewhere for your corporation, even if it is only a glorified Post Office Box. You put that in a tax-free location. More money.

In summary: sub-optimal.

OK. If you absolutely have to solve a business process problem with a legal solution, look at this as a possible solution:

1. Check with your tax advisor in Portugal. What type of entity is your company? You want it to be taxed as a corporation as defined in U.S. law. THIS IS ABSOLUTELY ESSENTIAL. (It doesn't matter how your company is taxed in Portugal. We're doing U.S. tax engineering here).

2. Form a Delaware limited liability company. If necessary, file Form 8832 to have the LLC treated as a disregarded entity.

3. Get your authorize.net or whatever account in the name of the Delaware LLC.

4. <the moment of magic> I don't know if this will work or not but if it does, then you win. You want the Delaware LLC to NOT be a "permanent establishment" of your Portuguese corporation as that phrase is defined in the income tax treaty between Portugal and the United States. See Article 5 of the Treaty if you want to be confused. :-)

5. The impact of NOT having a permanent establishment in the USA? Only Portugal can tax your profits. The USA cannot tax your profits even though they are earned in the USA.

6. The objective you are aiming for is this:

- you have a Portuguese corporation deriving profit from U.S. sources.

- The money pipelines through a Delaware LLC which is disregarded for tax purposes, so it is as if the Portuguese corporation is doing business directly in the USA for tax purposes.

7. You file Form 1120-F for the Portuguese corporation, and attach Form 8833 claiming the benefits of the treaty.

- By doing this you are saying to the U.S. tax authorities: "Yes, I have U.S.-source profits but the U.S. can only tax those profits if they are derived from a permanent establishment in the USA and my Portuguese corporation does not have a permanent establishment in the USA. So go bite tires."

That's what I would do.

(I do this in real life but I am not your lawyer, this is not legal advice, you'd be a damn fool to rely on random postings on a website to make critical financial and business decisions, etc. etc.)

Phil.

tpinto2• 16 years ago

Thanks a lot, Phil. That's a good piece of advice.

The Authorize.net was just an example where we felt like we couldn't relate to everyone else in the industry when searching for a solution for that problem. Now, we've solved that and "replaced" Authorize.net for one of the european companies that do pretty much the same.

So, my post wasn't focused on that specific problem, but on incorporating in the US, mostly because that's where our clients are and if doing it on Delaware would allow us to save a lot on taxes: great ;)

So, the company we have in Portugal could even not relate to the one we would create in the US, by now it is just the common umbrella under which we're been doing business (both client work and that specific product I've mentioned).

sebi• 16 years ago

what European company is that?

ojbyrne2• 16 years ago

So I don't really know how this would work, but isn't this whole approach predicated on the idea that US corporate tax rates are higher than Portugal corporate tax rates (which on the face of it seems unlikely)? If the opposite is the case, and it's advantageous to the business to build up a US presence, wouldn't it be better to have as much income as possible taxed as US corporate income, and repatriate as little as possible to Portugal?

philiphodgen3• 16 years ago

Yes you want profits to be earned in the lower tax-rate jurisdiction. What you describe is the typical tax strategy: direct profit to the lower-rate country then leave it there.

The economic value is in deferral of tax. A dollar of tax paid next year has a lower present value than a dollar of tax paid today.

You need a lot of deferred tax to make this cost effective. If you are postponing the payment of $100,000 of tax that means you have $100,000 of extra cash in the bank that would have gone to the tax man. What can you do with it? Earn 1% in a bank? Whee! That won't pay for much of Phil's legal fees. :-)

It is a game for big companies.

For most companies, keep it simple is the strategy. Deferral won't generate a big enough economic benefit.

cmer4• 16 years ago

US LLCs are usually a pain in the ass for non US residents. At least, it is for Canadians and I was strongly adviced not to do that by my tax specialist. C Corp is the way to go for non residents afaik.

philiphodgen3• 16 years ago

CRA says LLCs are taxed like corporations. The IRS says they are disregarded or taxed as partnerships (I.e., passthrough). This mismatch causes great pain. :-)

A lot of times this mismatch (an entity is treated as a corporation in one country and something else in another country) can be used for fun and profit. These are called "hybrid entities" and they bedevil the government.

I like that. :-)

trizk• 16 years ago

You can probably use a website such as http://bizfilings.com to incorporate Delaware C-Corp. No affiliation.

shibataism• 16 years ago

I think the only option is to set up a C-Corp in Delaware, if you want to be a fast-growing venture business (rather than privately-held small business).

Paperwork is not a big issues because you can find attorneys easily.

8ren• 16 years ago

If it's just for accepting US currency, you could try http://worldpay.com. It's expensive to setup, and they charge about 4.5% of the transaction, and you have to wait a month after the transaction to get your money... but US customers can and do make purchases via it for us (in Australia).

But most will also happily wire the money. We're selling to enterprise customers mainly (banks etc), so it may be a different situation to you. Actually, I suspect the main reason some of our customers prefer credit card is to circumvent internal purchasing procedures.

Have customers told you precisely what their problem is? (or, can you identify them and ask them?) There may be a simpler solution that incorporating in the States (though I've heard that's helpful to being acquired, that doesn't sound like a concern in the present instance).

Ask HN: What's the best way for foreigners to incorporate in the States?

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