Choosing the Right Entity Structure for Your U.S. Location

Selecting an entity structure is one of the most critical steps of establishing a U.S.-based business. Your choice sets the stage for how your business is taxed, personal asset protection, day-to-day operations and more. We’ve summarized the basics, including the pros and cons, to help you navigate this important decision.

There are three primary categories of entity structure available to nonresident aliens: a U.S. branch, a C corporation, and a limited liability company or LLC. (A fourth entity structure, the S corporation, is only an option for U.S. residents.) The option you choose depends not only on your business goals but also your formation state (i.e., the state in which you establish your business). In the U.S., each state has its own tax and business laws in addition to those at the federal level.

Doing Business Through a Branch: The Simplest Option

A branch is an extension of a parent company. There is no formal registration requirement for the creation of a U.S. branch. You simply file for an employer identification number (“EIN”) with the Internal Revenue Service (IRS) prior to commencing business. You then register with the division of corporations or department of revenue of each state in which you have an economic presence. Local county or municipality registrations must be considered as well.

This ease of setup is the main advantage of the branch approach. It’s also the simplest to operate since management and controls stays with the main company. However, you’ll have increased liability exposure because the branch is not a separate legal entity.

C Corporation: The Bigger First Impression

When you incorporate your business you create a standalone taxpayer, an entity with its own income and tax obligations. As a result, a C corporation will have its own tax return, separate from your non-U.S. business. Additionally, in U.S. business culture the “Inc.” at the end of your company’s name also creates the impression of a larger or more established business.

The biggest advantage to C corporations is the multitude of tax benefits it affords.

With this structure, business income is currently taxed at the flat 21% federal corporate tax rate. This rate is lower than the progressive tax rates applicable to other tax structures.

C corporations also enjoy more tax deductions, such as charitable contributions and payroll taxes. You can also deduct 100% of medical premiums and other fringe benefits. Additionally, you’ll have greater flexibility on the dates of your fiscal year. This allows you to carry profits and losses forward or backward more easily to shift your business’ income — and as a result, your tax burden. Certain C corporations can also qualify for the benefits of Sec. 1202 (small business stock) that may produce significant tax savings when selling the appreciated stock.

The benefits don’t stop at taxes. C corporations are also allowed to issue stocks, with shareholders receiving profits in the form of dividends. This makes them more attractive to investors than LLCs, which can only provide membership interests (or units) that don’t have such payouts.

However, issuing stock also introduces one of the biggest downsides of C corporations: double taxation. As we mentioned earlier, your business would pay a corporate income tax on its profits. However, the dividends distributed from those profits to shareholders are also taxed at the shareholder level. As a result, profits are taxed twice. For non-U.S. shareholders, tax treaty benefits may sometimes alleviate the double taxation.

C corporations also have a slew of government-imposed requirements, such as holding annual meetings and publishing reports. They must also establish a board of directors to oversee operations and management of the company. This creates a significant administrative burden.

The C corporation structure is best reserved for larger companies interested in attracting investors or for growing companies planning to reinvest profits into further business growth. Not only will they benefit most from the advantages, they’re also more likely able to handle the requirements that come with this business structure.

LLC: The Middle Ground

LLCs are most commonly used entities for small to mid-size businesses. The interesting thing about LLCs is that the US has no tax code for them. Instead, LLCs need to identify how they want to be taxed.

An LLC can elect to be taxed as a C corporation and have many of the attributes described in the previous paragraph apply. Most LLCs, however, chose to be taxed as a pass-through entity. A pass-through entity is required to file a tax return but pays no tax itself. Instead, the income it makes is recorded on the owners’ individual income tax return. Hence, nonresident owners of pass-through LLCs are required to apply for a U.S. tax ID and file U.S. tax returns.

LLCs allow for easier management than a C corporation thanks to fewer state-imposed requirements for running your company. C corporations are required to have board meetings and minutes—a requirement that is often waived for LLCs.

Also keep in mind that forming your LLC in a state other than where you do business creates what is called a foreign LLC. You might do this if you find a state whose laws provide you a more favorable tax/business picture than the state of your physical presence. – this paragraph applies to all entities – we may want to make it into a general mention.
In this instance, the word “foreign” doesn’t refer to where you live. It’s merely indicating that your dealings are in a different state than the address you chose for your business. However, establishing a foreign LLC incurs additional annual fees and requires you to find a registered agent within that state.

A business man weighing coins and a house on a scales of justice.

Are Your Business and Assets Protected?

As a business owner, you face risks in building and growing the business. Risk comes in various stages of the business lifecycle, but lawsuits and bankruptcy are two that never seem to go away. However, there are effective ways business owners can protect their personal assets.

Closing Considerations

Depending on where you choose to establish your business, some entity structures might not be feasible — or even available. Make sure you take individual state restrictions into account before deciding on an entity structure and formation state.

You must also remember to take liability into account. The various business entity structures provide different levels of liability and asset protection. Consult an international attorney to properly evaluate your risks and make sure you protect yourself.

Many factors go into the decision of your business entity structure. Add the complexities of doing so as a nonresident alien, and making this choice can be daunting. Working with international tax CPA advisors is crucial to making sure your company is set up for success from the beginning.