Companies often form subsidiaries in order to exploit new business opportunities in the hopes of enhancing the position of the parent company, while not exposing the parent company to risk. In the US there are various types of company structures, beyond just ‘company’. Generally a Corporation (also called a “C-Corporation”, “C-Corp” or “Regular Corporation”) or a Limited Liability Company (“LLC”) are the most common, as owners/shareholders are not required to be US residents, these are the most likely form of subsidiary for a foreign company. There is another entity type called an “S-Corporation” but that entity requires all shareholders to be US Citizens.
Owners of the company are called “Shareholders” for Corporations and “Members” for LLC’s.
Requirements/restrictions
A subsidiary corporation must draft bylaws and articles of incorporation.
Neither C-corporations nor LLCs have restrictions on the number of owners the business can have or who can be an owner (in terms of residency). However many states require directors to be natural persons rather than legal entities (e.g. other companies).
For example, in Delaware, directors must be natural persons as per its General Corporation Law.
Advantages/disadvantages
According to bizfilings.com, C-corps are often the preferred for developing businesses because owners can hold and offer different types of stock interests (such as preferred and common stock), which allow for different levels of dividends. This is one reason why venture capitalists favour C-corporations.
C-corps are subject to higher administrative and reporting requirements. Corporations are also subject to “double taxation” if corporate profits are distributed to owners or shareholders as dividends. C-corporations pay tax on their profits at the entity level and then owners will pay taxes at the individual level on profits received as dividends, resulting in the double tax.
Registration Steps
1. Register an Office or Agent
When forming a company in a state, many will require either a physical presence or a Registered Agent for the purpose of receiving and signing business documents.
If a physical office is required or will be used rather than an agent, a company will require a physical US address for receiving business documents. Virtual office services can also often be used. If you use one of these, you need to submit a notarized form 1583 from USPS to authorize Virtual Post mail to open mails on your (and your company’s behalf).
If a registered agent is required, it can usually be a person or company with a physical address in the state in question that will be available during business hours to accept and sign official legal and state documents for the company. The Registered Agent has a statutory responsibility to accept official state documents and legal documents.
For example, in Delaware, a corporation or LLC requires the appointment of a registered office or agent. If an agent will be appointed it does not have to be an employee of the company, and there are many registered agent services in Delaware that can fulfil the role for a fee.
Time:
Office: n/a
Agent: if using an agent service, 1-14 days depending on agent service
Cost:
Office: no known registration charges (leasing and agent fees will apply)
Agent: prices for registered agent service firms can range from $50-$300 per year
2. Name Search and Reservation (optional)
Although it is not generally required to reserve or register a company name prior to incorporating, it is advisable to check that the company name is not already taken to ensure there are no problems when registering it. Many states have a DBA (Doing Business As) registration requirement to identify the stakeholders and owners of a company. Note that, as stated on the US Small Business Administration, even if a similar name exists, you may still be able to use it if your business and the existing business offer sufficiently different goods or services or are located in different regions.
Luckily, names can be searched at the federal level, so a search can be done from one source. The US Securities and Exchange Commission has a name search at https://www.sec.gov/edgar/searchedgar/companysearch.html. It should also be possible to contact the local state filing office to check if a company name is taken.
You might also want to search for any similar or conflicting trademarks. A business name is not automatically registered or protected as a trademark and the processes are separate, therefore it is possible even if the name doesn’t exist as a company name it may still be a registered trademark that could cause legal problems later down the track. The US Patent and Trademark Office’s (USTPO) has a trademark search tool where you can check to see if there is a similar name or term trademarked.
Finally, it is always good idea to find out if the planned business name has been claimed online, by doing a simple web search to see if anyone is already using that name. You can check whether a specific domain is registered already using the WHOIS database of domain names.
Some states may also allow the reservation of a company name prior to incorporation. For example, in Delaware, reservations can be made online for a fee of $75 per name, and will be held for 120 days. You can go here to check name availability and reserve a name.
Time: Instant (online)
Cost: No charges for search ($75 for name reservation in Delaware)
3. File incorporation papers
The main step of incorporating is the filing of incorporation papers with the local state department that handles the registration of new businesses. Naturally, company documents such as articles of association and constitution, and listing of shareholders will need to be created, usually by an attorney. You may have to pay a fee ranging up to $1,000, depending on the particular state’s fee structure.
In the US, there are also many websites that provide online DIY incorporation services, such as http://www.incorporate.com and http://www.legalzoom.com
In the example state of Delaware, the process is as follows:
Sample forms with instructions and fees are available on the Division of Corporation’s website at http://corp.delaware.gov/newentit09.shtml. A cover sheet with the company name, return address and phone number is required and an example can be downloaded on the website also, at http://corp.delaware.gov/cvrmemo.shtml. Once completed the forms can either be mailed or faxed to the Division of Corporations office.
The mailing address is:
Division of Corporations, John G. Townsend Building, 401 Federal Street, Suite 4, Dover, DE 19901.
All filing fees must be paid upon submission of the request.
Time: 1-14 days (can vary depending on state)
Cost: Depends on the state, but in Delaware, it is $89
4. Obtain a Tax ID/Federal Employer Identification Number (FEIN)
All US corporations will require a Federal Employer Identification Number (FEIN or EIN) for tax purposes even if the corporation will have no employees, and it is also said to be required to open a commercial bank account. It is a nine digit number issued by the IRS.
The quickest and easiest way to obtain an EIN is online, however for this method the corporation’s principal officer must have a US social security number (SSN).
If the principal is a foreign national, then they probably do not have an SSN (or Taxpayer Identification Number), and the process is more difficult. In this situation, according to the IRS itself, it involves filling in form SS04 Application for Employer Identification Number and contacting the IRS.
International applicants may call +1 267-941-1099 (not a toll-free number) 6:00 a.m. to 11:00 p.m. (Eastern Time) Monday through Friday. While they will take the application over the phone, a blog by a US attorney confirms that the IRS will still require the sign and fax the forms afterward before the number will be officially granted.
Apparently, the IRS Philadelphia center (+1 267-941-6800) is apparently the main office in the US that processes EINs for US business that are incorporated from foreign countries. According to small business website Chron, fax applications are sent to +1 267-941-1040, and all mail applications to:
Attn: EIN Operation, Philadelphia, PA 19255-0525.
In either case it is generally necessary to retain a lawyer or qualified person to act as a representative for the corporation and help prepare:
- Form SS-4 (Application for Employer Identification Number)
- Form 8821 (Tax Information Authorization)
- a copy of the Articles of Organization
Once approved, the IRS should fax an EIN confirmation letter to the representative.
Time: 1 week (if done by phone then faxing – otherwise 4-5 weeks)
Cost: no known charge (not including any lawyer/representative fees)
5. Open Commercial Bank Account
Opening a commercial bank account if you are not a US citizen has reportedly become more difficult in recent years due to various US anti-terrorism laws. It may take research and time to find and establish an account. In some states, a registered agent is not allowed to open a bank account for a foreign company directly. This creates another potential major hurdle for non-U.S. businesses, as typically US banks will want to work with their potential clients directly, but dropping everything to appear at the US bank in person may not be an option.
It will of course depend on the state and bank; one account of starting a business mentioned that if you are not in the US at the time of wanting to set up an account, certain banks can accommodate this. Silicon Valley Bank was one example, allowing the person to open an account direct from India. As part of this however, they were asked to submit their business plan to the bank.
In either case, if you select a bank that has both a presence in your US state of formation and your home country, it can help make the process easier. Generally, a bank may require a certified copy of company formation documents, a “Banking Resolution”, and proof of a physical address, which has become a strict requirement and decreases the use of virtual mailboxes. The bank may also require the Employer Identification Number.
Even within Delaware, “no two U.S. banks are exactly the same, and their specific policies and procedures for opening a business bank account for a Delaware corporation can be drastically different”. However, typical requirements for Delaware banks include copies of:
- Proper identification, such as a passport
- Certificate of Incorporation, stamped by the Delaware secretary of state
- Articles of Incorporation (included on the Certificate of Incorporation)
- Federal Employer Identification Number (EIN)https://www.delawareinc.com/ourservices/tax-id-ein/
- Banking resolution with corporate seal (often provided by the bank)
In Delaware, registered agents are prohibited from opening up bank accounts for companies they form.
Time: 1 day – 2 weeks (estimates)
Cost: Generally no charge (may require minimum deposit)
6. Register for Payroll Tax
A US company must register for payroll tax in its state of formation. As with most other things, payroll tax is state-based, so the exact procedure will depend upon the state. However, most withholdings from payroll are federal income tax, Social Security and Medicare, so there are IRS rules to comply with as well.
Most states should have similar systems, but of course will need to be checked prior to incorporating.
In Delaware, a company can also register as an employer online, by filing Form CRA (Combined Registration Application for Business License and/or Withholding Agent) at: https://onestop.delaware.gov/osbrlpublic/Home.jsp.
In Delaware the ‘One Stop Business Registration and Licensing System’ allows a company to cover registration with the Division of Revenue, the Division of Unemployment Insurance and the Office of Workers Compensation and also link the IRS. It also can link to the Division of Corporations to access incorporation forms and reserve a legal entity name.
Time: 1-3 days
Cost: no known charges
7. Workers Compensation Insurance
Workers compensation insurance is mandatory for all US companies. It insures the employer from its employee’s claims for job related injury and illness.
In general there is no statutory insurance package; instead you must arrange an appropriate insurance policy through lawyer, insurance broker, etc. and the package offered must meet certain statutory requirements. However, depending on the state it may still be required to formally register the company with a state workers compensation department.
In Delaware, the ‘One Stop Business Registration and Licensing System’ covers registration with the Office of Workers Compensation.
Time: Instant (online)
Cost: No charges
8. Unemployment Insurance
Some states may require the company to also register and contribute to an unemployment insurance fund. Each State administers a separate unemployment insurance program within guidelines established by Federal law.
Generally a form must be submitted to the state’s Department of Labor, after which the employer is assigned an employer account number by the Department of Labor.
For example the ‘One Stop Business Registration and Licensing System’ in Delaware covers registration with the Office of Workers Compensation.
Time: instant (online)
Cost: no charges
9. Publish a notice in local papers
In some states it is required to publish a notice in local papers indicating you have formed a company. The state may designate specific newspapers for these notices. You will generally have to pay to a fee charged by the paper to publish the notice, and in some localities this can cost more than the filing fee.
For example, in Georgia, according to Northwest Registered Agent Inc., corporations must publish a notice of intent to incorporate in a newspaper of the county where the initial registered office of the corporation is to be located. The notice should be published once a week for two consecutive weeks and it should contain the name of the corporation, the name of the registered agent and the address of the registered office in Georgia.
It is not required in all states. In Delaware, for example, it does not appear to be a requirement and is not mentioned on the Companies Division website.
Time: 1-2 weeks (depends on the state)
Cost: publication fee charged by the papers – varies
10. Register Trading Names (optional)
If the company wants to do business under a name other than the existing corporation name, it will need to register a trading name, usually known as a “Doing Business As” name (DBA). Registering a DBA is generally done with the state government, depending on where the business is located. There are a few states that do not require the registering of DBA business names.
In our example state of Delaware, DBAs are registered in the Prothonotary’s office in the county in which you are doing business. You can download the required form from the Delaware Courts website at http://courts.delaware.gov/forms/.
Time: 1-7 days (estimate)
Cost: No known charges
11. Register to Do Business in Other States (optional)
Generally, if formed and operating within one state but performing business transactions in other states, it is a requirement to register with that state’s government for permission to do business there. What counts as doing business in another state varies and can be complicated, and is discussed in detail in the “Things to Consider” section at the beginning of the report. As a summary, simply selling goods to other states does not usually require registration, but activities such as setting up an office or warehouse in other states will.
Registering to do business in other states is known under various terms, such as registering as a foreign entity, foreign qualification, a certificate of registration, or certificate of authority. Every state has its own registration requirements, fees and timelines.
For example, in Delaware, its Department of State specifies that Delaware law requires every corporation that is “doing business” in that state but is formed in another state to submit a completed “Foreign Qualification” form to the Delaware Department of State, along with a copy of the Certificate of Existence (e.g. certificate of incorporation) issued by the state it was formed in with the Delaware Division of Corporations.
Time: varies (estimate: 1-2 weeks)
Cost: varies (Delaware: $245)