Here Are the Complications for Foreign Companies Setting Up a US Subsidiary
If you’re running a company from outside the US as a non-American citizen and want to expand into the US, you may want to consider setting up a local American legal entity. However, setting up a US company is a long and arduous process, fraught with legal and financial complications, and you may be better off working with a local expert like Alariss to do it for you so that you do not inadvertently run afoul of labor laws or the Internal Revenue Service (IRS). You don’t have to set up a US legal entity if you work with Alariss; we’ll take care of vetting and employing US talent on your behalf because we provide Employer of Record (EOR), payroll, and benefits services. If you want to consider working with us, book a call with us today.
If you wanted to explore setting up a legal entity yourself, here are some complications that you may face as you try to do so:
You may be unable to obtain an Employer Identification Number (EIN).
You need an Employer Identification Number (EIN) from the IRS in order to be able to hire people, open a business bank account, pay taxes, or get a business license. However, if you don’t have a Social Security number, it will be difficult to apply for an EIN. You need to be a US citizen or living in the US to have a Social Security number. You won’t be able to apply online for an EIN without a Social Security number, and Form SS-4 for applying for an EIN asks for your Social Security number. “All EIN applications (mail, fax, electronic) must disclose the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the true principal officer, general partner, grantor, owner or trustor,” the IRS writes.
You may be unable to open a business bank account.
You need a US business bank account to be able to accept or spend money in the US as a business. But if you weren’t able to get an EIN because you don’t have a Social Security number, you probably won’t be able to open a business bank account. In most cases, you need an EIN to open a business bank account in the US. Banks also will ask for your Social Security number and a photo ID issued by a US or state government entity, which you won’t have if you’re a non-American citizen living outside the US. They will also ask for your business formation documents, ownership agreements, and business license.
You may be unable to sponsor visas.
You need an EIN to be able to sponsor US visas for your employees. You may want to sponsor a visa for an executive to temporarily move to the US to open a branch in the US, or you may want to sponsor a visa for an immigrant in the US that you would like to work for your company. However, if you don’t have a Social Security number, it will be hard to get an EIN, and without an EIN, you won’t be able to sponsor US visas.
You need a Social Security number to obtain an EIN, open a business bank account, and sponsor US visas, and if you don’t have a Social Security number because you’re based outside the US, it will be very hard to open a legal entity in the US. Working with Alariss would make things much easier, since we’ll take care of employing US talent on your behalf as the Employer of Record (EOR). If you’re ready to work with us, book a call with us today.
If you still want to try to set up a legal entity in the US, here are the steps that you need to take:
Choose your company structure
If you’re running a tech company, you most likely want to set up a C-corporation to be able to issue stock. You can also set up a partnership or LLC. You won’t be able to set up an S-corporation because all shareholders must be US legal residents. You probably don’t want to set up an S-corporation anyway, because S-corporations are unable to issue preferred stock. C-corporations have a number of advantages, such as a separate legal identity from the owners, limited liability for the owners, separation between ownership and management, no restrictions on who can own shares, well-established legal precedents, and widespread acceptance among investors.
Choose a state to register in
Your company needs to be registered in a particular state in the US. Most major US companies are set up as Delaware C-corporations. 68 percent of all Fortune 500 companies are incorporated in Delaware. That is because Delaware has business-friendly rules toward corporations, and most legal precedents around corporations have been set in Delaware courts. Incorporating in Delaware offers tax benefits, business filings are processed quickly, there is a corporation court that specializes in corporate cases, you don’t need to disclose your directors’ names to the state, and investors will prefer that your company is incorporated in Delaware.
Register your company
Once you choose a state to register your company in, then you register it in that state. You need to choose a unique company name and search the state’s database of companies to ensure that your company name isn’t similar to anyone else’s. Then you need to select a registered agent in your state who is able to receive legal documents for the company and fill out a certificate of incorporation. You’ll need to include your business name, location, ownership, and the number and value of your shares.
Obtain an Employer Identification Number (EIN)
You need to apply for an EIN from the IRS, but as discussed, if you don’t have a Social Security number, it will be difficult to get an EIN, since the IRS requires your Social Security number.
Open a business bank account
You’ll want to open a business bank account to be able to accept and spend money as a business, but as discussed, if you don’t have an EIN or a Social Security number, it will be difficult to open a US business bank account.
Obtain state tax registrations and file for foreign qualification
You’ll need to obtain state tax registrations from the states where your employees reside or where your company does business. You’ll also need to file for foreign qualification in states where your company does business but is not incorporated. Filing for foreign qualification is a legal requirement, and failing to do so can lead to fines and penalties, liability for back taxes, and loss of access to that state’s court system.
Apply for a trademark
You’ll want to apply for a federal trademark to protect your company name and logo from being copied by others. A trademark primarily would protect you from being copied by other people selling the same kinds of products. By registering a trademark, you prevent others from using the same trademark for related goods and services without your permission.
Obtain business licenses
You’ll need to obtain business licenses in order for your company to legally operate. You may need licenses at the local, state, and federal level. A business that is caught operating without a license can be forced to close, face fines, or face lawsuits.
As you can tell, setting up a US legal entity requires a lot of steps and takes months, and it will be difficult if you’re based outside the US. Without a Social Security number, it will be hard to obtain an EIN, open a business bank account, or sponsor US visas. If you work with Alariss, we make it much simpler for you to hire and do business in the US. We’ll match you with top US sales talent and serve as the Employer of Record (EOR) so that you don’t have to worry about incorporating in the US. If you’re ready to work with us, book a call with us today.