Company Incorporation for US Non-Residents

Where to Incorporate

You are not required to incorporate in the state where your business operates. There are only two factors to consider when making the decision of where to incorporate:

• Location of physical business facilities.
• Advantages and disadvantages of each state's Corporate Laws and tax structure.

The decision is generally between the state of company operations or Delaware or Nevada. If the corporation does business primarily within a single state, local incorporation is often the best decision. The cost of local incorporation will usually be less than incorporating in another state and qualifying to do business as a foreign corporation in that state. A foreign corporation that qualifies to do business in another state is subject to taxes and annual report fees from both the state of incorporation and the qualifying state.

Three forms of business entities:

• Limited Liability Company - LLC
• Limited Liability Partnership - LLP
• Corporation

S-Corporation versus as an LLC

A Limited Liability Company (LLC) is like an S Corporation. Generally, business owners form an LLC rather than an S corporation if one or more of the following situations apply:

• Any owner of the company is another business entity or a non resident alien. A person is a non resident alien if he is neither a resident nor a citizen of the United States
• The company will be owned by more than 75 persons
• The company plans to issue more than one class of stock
• The state where your business is located imposes an entity level income tax on the profits of an S corporation and does not impose such a tax on the profits of an LLC

Generally, the LLC is treated like a partnership for tax purposes and there is no entity level tax. Under the recently approved IRS check-the-box regulations, an LLC will be taxed like a partnership unless the shareholders elect to have the LLC taxed like a C corporation. To be taxed like a partnership, an LLC could have no more than two of the following four characteristics of a corporation:

• Limited Liability.
• Centralised Management.
• Continuity of Life.
• Free Transferability of Ownership Interests.

Most LLC's have only the first two characteristics.

Formation of an S corporation or an LLC can offer many benefits including limited liability and tax savings. An LLC also provides liability protection like a corporation.

How 'C' Corporations differ from 'S' Corporations

If the above situations do not apply to you, then the corporation may apply for S corporation status by filing IRS Form 2553 within 75 days after the corporation first has assets, shareholders or starts doing business.

C Corporation

The term C corporation refers to the way in which the corporation is taxed. There is a corporate level income tax on the profits of a C corporation. In addition, if a dividend is paid to shareholders from retained earnings, the dividend is included on the personal tax return of each shareholder. Thus, the profits of a C corporation are subject to potential double taxation. Your corporation will be taxed as a C corporation this year unless you timely file IRS Form 2553 to elect tax treatment as an S corporation.

S Corporation

The term S corporation refers to the way in which the corporation is taxed. An S corporation is a pass through entity. There is no corporate level income tax. Instead, a pro rata portion of the annual profit or loss of the S corporation is included on the personal tax return of each shareholder. If IRS Form 2553 is filed within 75 days after incorporation, the corporation will be treated as an S corporation for tax purposes. Many startup businesses benefit by making the election to be taxed as an S corporation.

Limited Liability Company

An LLC or a Limited Liability Company is a separate legal entity (business structure) utilized for the purposes of incorporating a business. An owner of an LLC is frequently referred to as member. In "corporate" lingo, this is the equivalent of a shareholder.

An LLC is frequently referred to as a hybrid of a corporation and a partnership. The shareholders of a limited liability company are shielded from personal liability and profits and losses may pass directly to the shareholders without taxation of the LLC itself. That's another way of saying that an LLC is not double taxed.

An LLC is similar to a corporation because it has

• Limited liability.
• Free transferability.
• Continuity.
• Centralised management.

Difference between a Corporation and an LLC

Corporations are incorporated pursuant to state law and have shareholders, are managed by a board of directors, and the daily affairs are administered by officers. Similarly, a limited liability company (LLC) has shareholders and may be managed by one or more managers. Most often, both entities must pay franchise taxes, but may have different federal tax liabilities.

Generally, most people form corporations or limited liability companies in order to shield the shareholders and officers or managers from personal liability. There may also be various tax advantages to incorporating these entities which may not be available for sole proprietorships and general partnerships