Welcome to the non-US founders’ guide for international founders looking to set up a company and begin operations in the United States. The purpose of this guide is to provide founders with a list of important company tax questions that they should be aware of when registering a US company. We’ll also look at how to approach each tax question and include a useful checklist that covers company registration, tax matters, and accounting tasks.
In this guide, we will look at a typical founders’ journey through company registration, team member engagement, accounting setup, company and tax reporting obligations, and tax implications for revenue distribution to founders. We will also look at some specific cases concerning US residency certifications, CFC rules and price transfer rules, to understand when these situations may affect a non-US founder, and what actions they may need to take.
This guide is divided into the following five sections:
- Initial company registration and setup
- Team member engagement
- Company reporting
- Revenue distribution
- Specific use cases for US company setup
The guide is aimed to assist founders with a better understanding of the various aspects of tax matters related to the United States. Although it is not an exhaustive guide, it does provide clear and helpful information to make navigating United States tax laws and practices a little easier.
Please note that we will only be exploring company tax matters for non-US founders. We plan to release further guides for non-US founders with personal/entrepreneur tax matters in the US.
Part 1: Initial company registration and setup
At the very beginning of the founder’s journey, we start by assessing all the possible jurisdictions that might be suitable for establishing their new company. There are many factors to this decision, and each founder will likely have an entirely unique set of circumstances. Founders should take into consideration:
- The purpose of their new company (to raise funds, hire teams, hold assets, earn and distribute revenue)
- Their personal tax status (where are they considered a resident for tax purposes)
- Their global options of possible jurisdictions and entities that could satisfy their business goals with minimal tax implications
📚Learn more about how to choose a tax-friendly jurisdiction for company registration.
Once it has been decided that the US offers a suitable regulatory framework and ideal entity options for company setup and operation, we can begin the initial stage of company setup.
In this section, we’ll look at four key tasks that founders must take, from choosing an entity to engaging accounting services.
👉Get help choosing the right jurisdiction and entity for your unique business case
Choose a US legal entity for your company
Founders looking to establish a company in the United States may wish to undertake a “US tax feasibility study”, sometimes referred to as “LLC vs C Corp treatment”. Essentially, this is an assessment or analysis in which the tax implications are evaluated and the feasibility of using either a Limited Liability Company (LLC) or a C Corporation (C Corp) for a business entity are explored.
Notable differences between the two options include:
- Taxation: LLCs are often considered as pass-through entities, where profits and losses are passed on to individual members who report them on their personal tax returns. In contrast, C Corps face “double taxation”, where the corporation pays taxes on profits, and shareholders pay taxes on the dividends they receive.
- Ownership: Both members of LLCs and shareholders of C Corps have limited liability protection, however, members of LLCs enjoy fewer regulatory requirements compared to corporations. Also, C Corps can have an unlimited number of shareholders.
- Flexibility: LLCs offer more flexibility in management structure and governance.
- Investment: C Corps are preferred for attracting investors due to their structured hierarchy and ability to issue stock options.
Although these rules might make one entity more suitable or enticing, founders should always seek professional guidance when choosing which entity to register. This is because in some instances, LLCs may not be considered as “pass-through” entities, and founders should be fully aware of the implications of different entities.
👉Get a jurisdiction tax feasibility consultation (LLC vs C-Corp treatment)
Prepare to file an 83(b) Election for founders’ vested shares
Founders who choose to register a C-Corp will be able to issue shares to themselves. Consequently, founders will need to figure out whether it makes sense to file something called an “83(b) Election”. Under the Internal Revenue Code (IRC), the 83(b) election enables a startup founder or employee to pay taxes on the total fair market value of the restricted stock at the time of granting. When an 83(b) form is filed, it alerts the IRS that the stock should be taxed at the time of granting (in the future), rather than at the time of stock vesting.
The rules surrounding 83(b) election documentation filing are quite strict, with an obligation to file the necessary forms with the IRS within 30 days after the issuing of restricted shares.
📚Learn more about vesting in our Delaware Startup Founders Guide.
By using this tax strategy, individuals can “pre-pay” their tax liability at a low valuation, regardless of whether the equity value increases in the subsequent years. The risk here lies in the possibility that the value of the company declines instead, causing a high tax burden as a result of making a prepayment based on a higher equity valuation.
To help founders understand more about the consequences of using an 83(b) election, tax specialists can provide analysis of founders’ shares, as well as other tax guidance and strategy advice.
👉 Get a tax consultation on founders' vested shares (83(b) Election)
Scope and plan for important US company and tax deadlines
Once a new company is registered, one of the best things to do is scope and plan all the important deadlines connected to company reporting, tax filing, and any type of company or tax payments. A large part of handling tax matters consists of complex administration tasks and founders should always have a clear understanding of the full list of tax obligations and deadlines applicable to them. By staying on top of tax reporting and making payments on time, founders can avoid financial penalties and make more informed decisions about their company’s taxes.
In some instances, filing and paying taxes can be done by an individual without accounting or tax specialist knowledge, however often it makes financial sense to employ professionals to help with these matters. This is especially important for entrepreneurs with global portfolios and founders of global companies. By connecting accounting services to your company’s financial operations, you can make sure that essential information is collected, properly documented, and submitted via the appropriate (and numerous) forms to the IRS on time. You can also get a better picture of the financial performance of the company and how business activities (including paying taxes) can impact your future cash flow.
👉 Get help scoping & planning deadlines for company tax & filings
Part 2: Team member engagement
Once a company has been successfully established in the US, the next step is to address tax responsibilities and burdens associated with hiring employees.
Set up and operate a US payroll system for your employees
For businesses that wish to hire a team through their newly incorporated US company, and plan to use the company to issue payroll, several important obligations arise. In particular, when assessing how the relationship with the team members could be structured, it is necessary to analyze what the tax burden would be if the team members were employees of the company and what obligations the company would then have.
In the United States, employers withhold payroll tax from the wages, salaries, and tips that are paid to their employees. This tax is then paid directly to the US government.
Many factors impact the rate of payroll tax that employers will withhold from their employees' paychecks, including the FICA taxes (Federal Insurance Contributions Act), which are the Social Security and Medicare taxes. Employers also pay a share of some payroll taxes for their employees too.
Whilst accountants are often able to assist with a multitude of company tax and reporting affairs, not every accountant will be able to advise on structuring relations with the team or help with setting up payroll. As a result, founders will often need to engage a separate specialist who has expertise in payroll taxes.
👉 Get a payroll tax rates analysis
Part 3: Company reporting
Companies are often subjected to a lot of bureaucratic administrative burdens, and many carry heavy penalties for non-compliance. In this section, we’ll take a look at several different reporting obligations that fall on US companies, and explore the necessary steps that founders may have to take in order in light of each obligation.
Prepare to file Form 1120 for US corporation income tax returns
In the US, companies must self-report to the Internal Revenue Service (IRS) with information on their tax matters. Form 1120 is used by domestic corporations in the US to report income, gains, losses, deductions, credits and ultimately figure out their income tax liability.
Completing this form accurately is critical, as it helps you identify any types of financial activity that could warrant the submission of additional forms. Failure to file this form after more than 60 days after it is due will result in a fine of either $485 or the tax due, whichever is smaller.
Tax returns must be submitted annually, however new companies can use a shorter tax year for their first tax period. The federal corporate tax rate in the US is currently 21%. Corporations can reduce their tax obligations using various practices such as tax deductions and tax subsidies.
To apply the correct tax deductions and avoid making errors or succumbing to penalties, accounting services can give you a clear picture of your US-registered company’s income liabilities and ensure you pay your taxes on time.
👉 Get help with your US Corporation Income Tax return (Form 1120)
Prepare to file forms for foreign-owned US entities
Along with corporation tax returns, there are a couple of additional forms related to company finances that foreign-owned US entities are required to file.
BE-12C form
The BE-12C form is part of the Benchmark Survey of Foreign Direct Investment in the United States. The survey is conducted every five years and helps understand the financial statistics and operating behavior of US affiliates of foreign multinational enterprises.
Although called a “survey”, this obligation should be taken seriously, as it is governed by federal law which provides severe civil monetary penalties if a company fails to file.
The deadline for the 2022 BE survey has passed, so founders should be mindful of future survey deadlines and proactively look for professional help to complete the BE-12C form on time.
Form 5472
Foreign-owned United States corporations or foreign corporations engaged in a US trade or business must complete an information return using Form 5472.
This information filing discloses details on reportable transactions with related parties, like royalties, loans, sales, purchases, and other transactions.
👉 Get help with filings for foreign-owned US entities
File a Beneficial Ownership Information (BOI) report
Under the Corporate Transparency Act (CTA) in the US, companies are obligated to file a BOI report and disclose information about the beneficial owners of a company to the Financial Crimes Enforcement Network (FinCEN).
The FinCEN uses this information to identify and prevent illegal activities like money fraud or the financing of terrorism. In particular, the BOI report requires companies to report on any individuals who hold substantial control over the company, and those who own or control at least 25% of the company.
Currently, companies that are registered before January 1, 2024 have until January 1, 2025 to file their initial BOI report, with a 90 calendar day extension applicable to companies registered in 2024.
File and pay the Delaware Franchise Tax
Every for-profit corporation incorporated in Delaware, regardless of whether they conduct business in the state or earn income there, is subject to the annual franchise tax requirement. Filing this tax doesn’t mean that a company is a franchise, nor must a company be a franchise to be obligated to file.
Both the report and the payment are due on or before March 1 each year, and failure to report and pay on time can result in a $200 penalty with a 1.5% interest rate applied each month on any unpaid tax balance.
👉 Get help with Delaware Franchise Tax filing & payment
Get a financial audit
Audits play a crucial role in keeping your company’s finances in order and enabling effective tax management. An auditor can review your financial statements and help effectively scope and plan tax strategies so that your company operates compliantly and avoids any harsh penalties.
Financial audits can also help to identify errors and improve financial processes and controls. An effective audit can help spot signs of fraud and ensure that financial practices and records are being performed in accordance with regulatory requirements.
Regular audits can also be attractive for investors undertaking fundraising due diligence; they can easily review transparent, accurate, and well maintained financial information and get a clear picture of the company’s financial health.
Founders can check with their accounting service providers as to when a financial audit might be most beneficial in their case.
👉 Get an audit of your financial statements
Part 4: Revenue distribution
What is the withholding tax rate for non-US residents?
In the US, only a company's shareholders are entitled to receive "dividends”, which is a term to describe the distribution of the company's profits. Directors may receive their fees, commonly referred to as directors' fees, but they are not entitled to participate in the distribution of profits. Directors’ fees are one of the ways in which directors are compensated for their work as directors of the company. Directors’ fees are like a salary or payment under a contract as a consultant, whereas dividends are a distribution of profits.
Both the payment of dividends to non-US shareholders of the company and the payment of directors’ fees to non-US directors, are generally subject to withholding tax in the US. Therefore, it is worth analyzing the tax burden on these types of income, not only in the country where the shareholders and directors are located, but also in the US.
When paying both directors’ fees and dividends, the company paying the income is responsible for withholding tax on any payments to a foreign person who is considered the beneficial owner of the payment, such as a non-US founder, and for reporting the payments to the IRS. In some instances, beneficial owners can claim lesser tax rates in accordance with tax treaties, however, the company is still responsible for correctly reporting payments, regardless of whether tax treaties apply or not.
👉 Get an analysis on withholding tax for non-US founders dividends
Part 5: Specific use cases for US company setup
Some founders may have to embrace additional obligations and procedures in some circumstances. In this section, we’ll look at US Residency Certifications, CFC rules and transfer pricing rules to understand when these might apply to certain situations.
When should you consider applying for a US Residency Certification?
Non-US founders may find US Residency Certifications particularly useful in cases of double taxation. For example, if certain payments are made in favor of a US-registered company, then the US Residency Certificate can help reduce the tax rate in the country from which the payment was made. This is because the certificate triggers the application of a double tax treaty.
Tax residency certificates are available for both individuals and entities. Founders can find out if they can eliminate double taxation by assessing their company’s eligibility for certain tax treaties. Applying for a US Residency Certification starts by submitting Form 8802. If certification is granted, then a computer-generated letter (called Form 6166 by the IRS) is issued, certifying that the individuals or entities listed in the letter are residents of the United States for purposes of the income tax laws of the United States.
Through tax treaty schemes, tax rates can be lowered significantly, even to 0%. These reduced taxation rates apply to certain types of income, and are just one of several tax treaty benefits made possible through this certification.
What are the CFC rules and when might they apply?
CFC stands for “Controlled Foreign Corporation”. CFC rules are tax rules in the United States that are designed to prevent US taxpayers from shifting profits through foreign corporations to low-tax jurisdictions. These rules help to prevent something called tax base erosion and profit shifting (BEPS). They also stop large amounts of income from being held offshore for indefinite periods to avoid taxation in the US.
In the United States, a controlled foreign corporation is considered to be any foreign corporation that has US shareholders who hold more than 50% of the total combined voting power or value of the stock. Should this 50% threshold be reached at any point during the foreign corporation's taxable year, the US will consider the company as a CFC.
What happens if CFC rules apply to me?
If CFC rules apply to a person or business, they must adhere to the strict and complex reporting obligations to ensure that they disclose their financial information and details of their ownership to the relevant US authorities. Founders will have to work out where they stand on matters such as Subpart F Income, GILTI (Global Intangible Low-Taxed Income), and other CFC rules to ensure compliance and avoid any penalties.
What is a CFC analysis?
A CFC analysis can be undertaken by a tax professional who can assess your circumstances and advise you of suitable tax planning measures that are compliant with United States (and any other relevant countries’) tax laws. A CFC analysis can help you understand if and when you may need to address CFC taxation obligations, and what tax obligations you may need to anticipate as your situation evolves.
👉 Get a CFC analysis from Legal Nodes
What are the transfer pricing rules?
In the US, the transfer pricing rules are designed to ensure that transactions between related entities are conducted at “arm's length”. In other words, these transactions must reflect fair market value.
What is the “arm’s length principle”?
Transfer pricing rules are based on the arm's length principle, which states that transactions between connected parties should be priced as if they were conducted between independent parties under similar conditions.
What are the consequences of breaking the transfer pricing rules?
If a company fails to either record or preserve transfer pricing records, penalties can be issued for each violation. These can be severe, so the first step to remain compliant is to assess if the transfer pricing rules apply to your business operations. If they do, founders should seek professional help to avoid tax penalties.
👉 Get a transfer pricing analysis from Legal Nodes
US Company Taxation Founder’s Checklist
- Initial company registration and setup:some text
- Choose an entity with help from a jurisdiction tax feasibility consultation (LLC vs C-Corp treatment)
- Find out about tax options for Founders’ vested shares (83(b) Election)
- Set up accounting services for the new company
- Scope and plan company reporting and payment deadlines for tax and other company admin matters
- Team member engagement:some text
- Set up payroll with the right payroll tax rates
- Company reportingsome text
- Prepare and file your US corporation income tax return (Form 1120) and pay your taxes
- Prepare and file reports on foreign-owned US entities (BE-12C, Form 5472)
- Prepare and file a Beneficial Ownership Information (BOI) report
- Prepare and file a Delaware Franchise Tax report and pay the tax
- Audit your company’s financial statements
- Revenue distributionsome text
- Assess the withholding tax for non-US founders (for directors’ dividends)
- Specific use case queriessome text
- Do you need a US Residency Certification (Form 8802) to benefit from tax treaties and avoid double taxation?
- Do CFC rules apply to your business?
- Do transfer pricing rules (arm’s length principle) apply to your business?
Build a robust tax strategy with help from Legal Nodes
Managing taxes for global companies and keeping on top of reports, filings, deadlines, payments and accountancy tasks can be a headache, especially for global entrepreneurs. At Legal Nodes, we work with tax and accounting professionals situated in jurisdictions across the globe, who are well versed in their specialist areas and experienced at working with globally operating organizations.
We assist established scaleups with the maintenance of their tax and accounting matters, including for US-registered entities or US-linked business operations. We also support startups looking to register companies in the US or who need help understanding their global tax and company registration options.
For help with tax reporting and accounting tasks, whether in the US or around the globe, speak to us to get started.
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