It’s increasingly common that ecommerce companies in Europe and the Asia Pacific not only want to sell cross border to the US – but also sell within the country.
By incorporating in the United States, you can import and locally distribute products, for example via an Amazon fulfillment center (FBA) – even if you are based overseas.
In this article, John Gordon, founder of USA Corporate Services, explains what foreign ecommerce companies must know about the following:
- LLC or Inc?
- EIN Numbers
- Incorporation fees
- Required documentation
- How to open a business bank account
- Yearly maintenance costs
- US taxes (and penalties) for non-resident foreigners
John, please introduce yourself and USA Corporate Services Inc
I’m John Gordon. I started the business now known as USA Corporate Services two years after graduating college. I was working in a low-paid job for a boss I didn’t get along with, and didn’t want to work for another boss ever again.
That was 35 years ago, and although it took several years to really get going, it’s a pleasure to still be here.
Twelve years ago I signed up for the Global Executive MBA program at Columbia Business School and London Business School. This was a very eye-opening experience that taught me more ways to give value to our customers.
Since that time, we have leveraged our knowledge and experience to focus on helping foreign firms and entrepreneurs set up businesses in the US.
Let’s say that I’m based in Europe or Hong Kong, and want to import goods into the United States. Do I need to setup a company in the United States?
There are two ways for a foreign firm to bring their goods into the US:
1. Work with a distributor. They will take title to the goods, act as importer of record and pay any US taxes. They also will not pay much for the goods or services, and may or may not focus on maximizing your sales.
2. Set up your own US company, obtain a tax number and become an importer of record. This is more involved, as you will have to deal with the liabilities of being the importer of record (you’ll need product liability insurance), paying import duties and income taxes, as well as possibly being responsible for collecting sales tax from customers and paying it over to the appropriate state tax authority. On the other hand, you will retain complete control over your intellectual property, including trademarks, and will also have complete control over your sales and marketing.
What is most important for importers is to hire an experienced customs broker.
Customs regulations are as complicated as tax laws (both are administered by the US Treasury), and without expert help it is likely that your goods will be held up at the port of entry while arguing over the contents, the appropriate category, the appropriate duty to pay, and now we have to deal with new tariffs.
Can anyone incorporate in the US, or are there restrictions?
Almost anyone over the age of 18 can form a US company. Mainly, it is citizens of Iran, Cuba, North Korea and other sanctioned countries, along with those on the US Treasury OFAC list, to whom we are forbidden to help set up companies.
Assuming I want to sell using Amazon FBA from overseas, what kind of company entity should I setup?
The choice is between setting up an LLC or a corporation. Both have good and bad points. For a US resident, an LLC is likely the better choice. For a non-resident who will run the company from outside the US, and will rarely visit the US, then an LLC may be a better choice also.
For a non-US resident who will be coming to the US often or plans to live here, and who wants to simplify the visa application process, a corporation may be a better choice.
From a purely tax point of view, an LLC may be better.
The biggest downsides to using an LLC are that your US business may become subject to the Branch Profits Tax, and that the Members of the LLC become US taxpayers who will have to obtain ITINs from the IRS.
A corporation is its own taxpayer, so it is not subject to the Branch Profits Tax, and its shareholders can receive dividends without needed to get an ITIN.
On the other hand, the shareholders of a US corporation are subject to double taxation, since the corporation pays income tax on its net income then may have to deduct a withholding tax on the dividends sent to its shareholders.
A key point about LLCs and taxes is that LLCs do not directly pay income tax to the federal government.
If there is one member, that member becomes the taxpayer in place of the LLC. If there is more than one member, then the LLC is considered to be a partnership, and each partner is a US taxpayer.
On the bright side, any income earned by the LLC from OUTSIDE the US is generally not subject to US income tax. A US corporation, on the other hand, is taxed on its worldwide income.
All in all, using an LLC is probably less bad overall, unless you need to apply for a visa. The advantage of using a corporation for a visa application is that the tax, investment, ownership and management information of a properly-set up corporation is much more clear to the application reviewer than an LLC.
How does the US incorporation process work for non-resident foreigners?
Before the documents are filed, it is critical to have figured out the company’s name, state of formation, entity type, initial ownership and initial management.
Each owner and manager needs to provide two forms of identification, usually a government-issued passport and proof of address from a third-party, or in the case of a company then a Certificate of Incorporation or a Certificate of Good standing from its home jurisdiction.
When everything is ready, then the incorporation documents are drawn up and submitted to the state of formation along with the filing fee.
When confirmation of filing is received then it is time to obtain the company’s Employer Identification Number (EIN).
This can drag on for well over a week if the company’s “Responsible Person” on the tax number application is not a US resident and does not have a valid Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN).
With the EIN, the company can now open a bank account, file for other permits, licenses or registrations (including state sales tax registrations). If there will be a physical office in the US, now is the time to look for an office lease and perhaps hire local employees.
Got it. And how much does all this cost?
This can be very complicated to explain, since everyone’s business model is different.
A very basic set up in one state and few supplemental services can be as low as $1,000, whereas a more complete set of services, with registration filings spread across several states, can exceed $4,000.
Do I ever need to visit the United States during the process?
The company formation process itself can be done remotely. There is no requirement to be in the US to do so.
Do I need to visit a bank in the United States to open an account?
Yes, definitely. Federal law (the “USA-PATRIOT Act”) requires that banks have a process to know who their client is, and the primary way this is done is by having a banker meet a new customer in person, preferably in the customer’s place of business but often in the bank itself.
The only legitimate exception to this rule that I am aware of is through Silicon Valley Bank (SVB), in partnership with Stripe. SVB, though, is known for being very selective about who it will accept as clients.
As its name implies, it is looking for startups who will grow rapidly, so if you do not fit into its favored profile they may drop you.
All banks consider a foreign-owned account to be high-risk.
Even if you come to the US to open an account, you need to be extremely careful about which bank you go to, who is handling your account application and whether they actually have the authority to open such an account.
We are aware of many accounts that were opened by the bank’s sales rep, with assurances that everything is fine, only to have the bank’s Compliance Dept close the account within 30 days because the rep didn’t ask the right questions and was unable to provide proper documentation.
In this case, you will end up with insincere apologies from the sales rep and a useless paper check made out to your company but unusable until you can find another bank willing to open an account for you.
What kind of documents should I prepare to open an account?
This will vary somewhat from bank to bank, but in general bring in a copy of your identification documents (passport and proof of address), your incorporation papers with confirmation of filing and operating agreement or corporate minutes and bylaws, IRS tax number confirmation, copy of valid credit card, and proof of address of your US business.
Once the company is registered and the bank account is setup, can I start importing goods or do I need anything else?
This is something for the customs broker to answer. A lot of imports are subject to special licensing, including food, alcohol, tobacco, weapons, cars & trucks.
You would be surprised at how many rules there are.
As importer of record, you need to carry liability insurance because you will be responsible for any problems with the imported product anytime in the future.
Roughly, what’s the yearly maintenance cost for a US entity managed from overseas?
A very simple operation may be able to get away with annual expenses below $1,000. However you will have to also deal with tax returns.
Our advice to clients is not to go for the cheap solution for your accounting needs: to avoid heavy fines, penalties and unnecessary taxes, pay for an excellent accountant skilled in US international tax law.
You will save a lot of money even though it seems more expensive.
I assume this also means that I must pay taxes in the US. How does that work when I’m based overseas?
Income Tax: You will need to obtain an Individual Taxpayer Identification Number (ITIN).
This is because assuming that you are an individual (not a company) non-US resident owner of a US LLC, and you do not elect to have your LLC taxed as a corporation, then you yourself will become a US taxpayer.
The income from your US sales will be taxable at the federal level. As an individual, you will likely be filing IRS Form 1040NR. How much tax you will pay will partly depend on whether there is a tax treaty between your country and the US.
If you will own the US company through a foreign company, then that company will need to obtain an Employer Identification Number (EIN) and file Form 1120.
Disregarded Entity Compliance for single-member foreign-owned LLCs: Your LLC will have to obtain an Employer Identification Number (EIN), keep accurate books and records, retain these records for six years and file at least Form 5472.
The form requires you to list all transactions between the LLC and you as the owner. In any event, you will need to have an EIN to open a bank account and to transact business in the US.
If you use a corporation, this form will also need to be filed. Failure to file this form on time results in an automatic $10,000 penalty.
Sales tax. This is a state-level obligation, and each state makes up its own rules about whether to have such a tax (a few don’t), how much to charge, how often to pay it over, who to collect it from and how to calculate it. In practice, it is a bit more confusing than it sounds, but not something to scoff at -most state governments are dependent on sales taxes to fund their operations.
These are the main ones that an online retail site will definitely have to worry about. Depending on what goods and services you are selling, you may find out you even more tax obligations.
As an importer of goods, you may also need learn more about excise taxes, duties and tariffs.
Thank you John. Where can our readers learn more about your services?
USA Corporate Services specializes in helping foreign firms come to the US to set up business.
We not only file incorporation documents and related forms with various agencies of the federal
and state governments, we educate our clients on how best to set up their organizations with an eye on taxes, immigration and visas, banking and long-term planning.