Employing in United States: What You Need to Know
According to XpertHR, state and federal legal requirements can address the same subject matter but set varying levels of obligation on the employer. For example, federal law may impose a higher minimum wage rate than state law. Or, state law may require employers to retain certain records for a longer time period than federal law. In general, employers must comply with both state and federal law, which basically means following the law that offers the greatest possible rights or benefits to the employee.
Often, there are areas that are not explicitly outlined in either federal or state law. In such a case the terms will depend more upon the employment contract. HR Daily Advisor comments that in these areas, employers must be careful to set out the terms clearly to avoid ‘implied agreements’. For example, having a probationary period may be an implied agreement that there will be an increased level of job security after the period ends.
allBusiness states that because laws regulating the employment relationship can come from different federal, state, or local sources, and it can be confusing to figure out which ones are applicable to employers. It depends on a range of factors such as where offices are located, how many people are employed, annual revenue, and the minimum number of employees specified in the particular employment law statute. Claims made and lawsuits (or arbitrations) brought by employees against their employers or former employers are among the most prevalent types in the USA----maybe number one, according to GBD Law. Thus, before entering any employment contract with an employee, the employment law of the particular U.S. state(s) concerned should also be considered before any agreement should be drafted by a state lawyer.
Key Factors to Consider When Employing in United States
There are several key areas to be aware of within the USA’s employment regulatory framework, especially for companies that plan to initiate a full local office and human resources department. These challenges can be mitigated by use of a locally sourced payroll provider who is familiar with all of the local laws and rules for both local employees as well as foreign nationals.
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Contracts
Contracts are not required for employment, but may be offered to senior level employees or specialists with specific compensation requirements.
Employee Entitlements
| Information | Explanation |
|---|---|
| Statutory Working Hours ? | 40 hours |
| Specific Regulations about Overtime ? | Any hours exceeding 8 hours per workday are considered overtime. Overtime hours are paid at 1.5 times the normal pay rate. |
| Paid Public Holidays ? | For companies, paid public holidays are determined by the company policy. This is because employers are not required to pay employees for time that they have not worked according to the Fair Labor Standards Act (FLSA).
The following days are usually paid public holidays:
It is not uncommon for companies to offer the following paid public holidays:
Note: The above dates relate to the year 2019. |
| Public Holiday Pay Rate ? | By law, companies are not required to pay their employees overtime or holiday pay for working on a holiday, or to pay them at all. Companies may have policies that provide for holiday pay. |
| Disclosure and Confidentiality of Personal Information ? | Employees’ personal data is protected by data privacy laws. This includes data that may identify, or is linked to an identifiable living individual e.g. name or Social Security Number. Federal statutes which protect personal data include the Health Insurance Portability and Accountability Act, protecting health-related information, the Genetic Information Nondiscrimination Act, protecting genetic information, and the Fair and Accurate Credit Transactions Act, protecting consumer credit information. Most U.S. states have laws concerning data security and what to do in the case of a breach. Many of these laws impose an obligation to protect Social Security Numbers and other personal data against authorised use or disclosure. In Massachusetts, companies are required to adopt a written data security policy that meets certain standards to protect personal data collected from customers and employees. |
| Medical Leave ? | The Federal law for Sick Leave is the Family and Medical Leave Act (FMLA), and requires employers with 50 or more employees to provide up to 12 weeks of unpaid, job-protected leave for serious illness of the employee or a spouse, child or parent, to eligible employees. For example, in Delaware, XpertHR reports that In Delaware, private employers are not required to provide employees with sick or vacation leave, either paid or unpaid. However, while Delaware law does not currently require employers to provide a state family and medical leave, employers with 50 or more employees will likely be required to adhere to the federal FMLA |
| Annual Leave Accrual Entitlement ? | According to HR site, BLR, In Delaware, the law does not require private sector employers to provide employees with vacations, paid or unpaid, However, if employers “promise” vacation terms, they are legally bound to provide it as promised. Employers are free to devise their own system for vacation accrual. Most employers offer employees some form of vacation leave. The standard annual leave in the USA is two-weeks (10 work days), plus national holidays. Longer leave may be given to long-term employees or senior management. |
| Maternity Leave in United States ? | According to the US Department of Labor the Federal law stipulates that an employer may not discriminate against an employee over pregnancy-related conditions. The employer must treat her the same as any other temporarily disabled employee. An employer also may not have a rule that prohibits an employee from returning to work for a predetermined length of time after childbirth. Employers must hold open the employee’s position during any pregnancy-related absence for the same length of time they would hold jobs open for employees on sick or disability leave. If an employer provides any benefits to workers on leave, the employer must provide the same benefits to those on leave for pregnancy-related conditions. The Federal Family and Medical Leave Act (FMLA), requires employers with 50 or more employees to provide up to 12 weeks of unpaid, job-protected leave for the birth or adoption of a child. For example, in Delaware, XpertHR reports that Delaware law requires accommodations for pregnant employees, which may include time off to recover from childbirth |
Probation
| Information | Explanation |
|---|---|
| Probation Period ? | There is not a clear preference towards laws on probation in federal laws, and a probation period would only apply if written into the employment contract. In Delaware, there appears to be no specific rules on probation periods. |
GEO Solutions or DIY Employment in United States?
Companies entering USA must make a decision whether to use their own resources for a Do-It-Yourself (DIY) approach, or to use a Global Employment Organization to handle payroll and employment responsibilities. A GEO or USA Employer of Record solution makes it faster, easier and cheaper to deploy staff if they don’t have a USA entity established that can run payroll.
A DIY approach will typically be delayed until there is a properly incorporated entity ready to run payroll. Shield GEO can deploy foreign staff in 4-6 weeks and local staff in 48 hours. Additionally Shield GEO is responsible for all compliance issues related to the employment.
Payroll
| Payroll | United States |
|---|---|
| Management Fee for Employer of Record Services / Monthly Payroll Costs | Please contact us for a quote. |
| Notes | Shield GEO pays the employee on a monthly basis, typically on the last working day of the month, although we can adapt to your preferred schedule. Income tax and social security (where applicable) are deducted at source and paid to the local tax authorities. Payroll in the United States is most frequently bi-weekly (26 payments per year) although twice monthly (usually 15th and last day) is not uncommon. Monthly is rare. |
| Currency ? | The United States Dollar (USD) |
| Payment Frequency ? | Payroll is generally run half-monthly – on the 15th and last day of the month. |
| Statutory Requirements for Employee Payslips ? | Payslips are emailed to employees. |
| Documents Supplied to Employee at the End of Tax Year ? |
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| Income Tax Deductions ? | Citizens and residents may be entitled to the following deductions on assessable income:
*Qualified residence interest is interest incurred from buying, building or improving a qualified residence, up to $1 million of home acquisition debt and $100,000 of home equity debt. Interest may be deducted from up to 2 qualified residences – a primary home and one other vacation home or similar property. |
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| Tax Returns Supplied | The company is required to provide Form W-2 (a summary of the employee’s annual earnings) to both the employee and the IRS by January 31 of the following year. The employee is usually required to prepare their own income tax return or to seek a professional tax service provider. When an employee is on expat assignment and thus subject to tax in two or more countries, it is common for the employer to pay for an accounting firm to prepare the returns. |
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| Corporate Tax Requirements | The corporate income tax rate in the US is 21%. Corporate taxpayers are required to file an annual tax return (generally Form 1120) by the 15th day of the fourth month following the end of the tax year. Companies may select a tax year that is different to the calendar year. Companies are generally required to make tax payments in 4 equal instalments throughout the year on a quarterly basis, and fully paid by the tax return due date. While extensions may be granted for filing taxes, they are generally not granted for tax payments. |
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| Employers Social Security and statutory contributions |
The Federal Insurance Contributions Act (FICA) imposes old-age, survivors, and disability insurance taxes, also known as social security taxes and Medicare taxes. The social security tax for employers is 6.2% on the first USD132,900 of wages paid. The Medicare rate is 1.45% for employers. Employers are also responsible for withholding an Additional Medicare Tax of 0.9% on an employee’s wages in excess of $200,000 in a calendar year. |
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| Employees Social Security and statutory contributions |
The social security tax (old-age, survivors, and disability) for employees is 6.2% on the first USD132,900 of wages paid. The Medicare rate is 1.45% for employees. Employees also face an Additional Medicare Tax of 0.9% on their wages in excess of $200,000 in a calendar year. It is the employer’s responsibility to withhold this tax. |
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| Employer Social Security Limits ? | Social security tax has a wage base limit of $132,900. There is no wage base limit for Medicare tax. |
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| Employee Social Security Limits ? | Social security tax has a wage base limit of $132,900. There is no wage base limit for Medicare tax. |
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| Is employee social security deducted ? | Yes, social security and Medicare taxes are withheld. |
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| Special Requirements for Expense Reimbursements to Employee ? | Expenses must be approved and supported by an itemised expense report and scanned copies of receipts, and provided 5 business days before the payroll date. |
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| Public Pension/Retirement Allowances ? | There is no public pension scheme. The employee has the option to enrol in a 401(k). A 401(k) is a retirement savings plan, sponsored by the employer, which allows employees to save and invest a portion of their pay-check before taxes are withheld. When the employee chooses to make 401(k) contributions, the employer must match that contribution, dollar for dollar, up to the lesser of 4% of salary of USD18,500 per year. |
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| Are employees required to have private pension/retirement ? | Employees are not required to have private pension. They have the option to enrol in a 401(k) plan. A 401(k) plan allows the employee to defer a portion of their income to an individual 401(k) account under the plan. The amount deferred and contributed to the 401(k) account is usually not taxable to the employee until it is withdrawn or distributed. If permitted by the plan, the employee may make 401(k) contributions on an after-tax basis (known as Roth 401(k)s), which are tax-free when withdrawn. Many employers choose to match their employees’ contributions up to a certain percentage under a 401(k) plan. For example, a 401(k) plan might provide that the employer will contribute 50 cents for every dollar that participating employees choose to defer under the plan. For 2019, the maximum amount that an employee can defer to a 401(k) plan is $19,000. The maximum allowable employer and employee joint contribution limit is $56,000 for 2019, and $62,000 for those aged 50 and older. |
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| Insurance requirements | All U.S. taxpayers are required to carry health insurance or pay a penalty. It is customary for the employer to offer a variety of medical insurance plans to cover a portion of the cost. The employee’s portion of the premiums is customarily included in payroll deductions. No other insurance is required by law but it is customary for employers to offer Short-Term Disability Insurance, Long-Term Disability Insurance, and Life Insurance. Premiums for these are customarily included in payroll deductions. Medical insurance is included in statutory payroll deductions and Shield GEO can arrange private medical insurance at additional fees. |
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| Private Medical Insurance ? | All U.S. taxpayers are required to either:
Most taxpayers have minimum health coverage. This includes most coverage provided by an employer, health insurance purchased through a Health Insurance Marketplace, and government-sponsored programs e.g. Medicare, among others. Under the Affordable Care Act, certain employers (called ‘applicable large employers’ or ALEs) must either offer minimum essential coverage to their full-time employers and their dependents, or make an ’employer shared responsibility payment’ to the IRS. |
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General Employer of Record Service Terms
| General Employer of Record Service Terms | |
|---|---|
| Payment Currency ? | US Dollars (USD) |
| Onboarding Documents and Information Required ? | The following documents and information relating to the employee are required for onboarding:
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Work Permits
| Work Permits | |
|---|---|
| Can Sponsor Work Permit |
Shield currently does not sponsor work permits for employees in the U.S. |
| Work Permit cost | Please contact us for a personalised quote. |
| Work Permit Documents ? | The documents required depend on the type of work visa that the employee is applying for. These may include:
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| Work Permit processing time | The H1B visa processing time is generally six months, L1B and J1 visas can take as little as one month (after all documents have been made available). |
| Work Permit process |
There are 3 Visa types that are commonly used: H1B. This is the most common visa, the application process starts on March 1 and needs to be filed by April 1. People who are granted an H1B can start October 1 in the USA. L1 This is a visa especially for management or technical experts from within the group, who are seconded to the USA (within the same group of companies). Employees need to be either management or experts, and have worked for the group company for at least one year prior to being seconded to the USA. Processing time is one month if extra fees (USD 1,235) are paid. J1 This visa is for trainee exchange programs. Some nationals (non-EU) can only stay for 18 months |
| Can Work Permit be processed in country | Yes, but not recommended. |
| Switch Business Visa to Work Permit? | No, not really as a business visa is for a person, an H1B, L1B or J1 are applied and granted to the company. |
Payroll and Tax in United States
There are specific rules for payroll and taxation in the USA, depending upon the state of incorporation and / or business operation. The primary concerns for a foreign company that needs to comply with tax laws in the USA are: federal and state individual income tax for employees, Social Security and Medicare costs, payroll tax, sales tax, withholding tax, corporate tax and permanent establishment concerns. There is also potential state and federal unemployment insurance that is paid by the employer, as well as workers’ compensation funds.
A US company must register for payroll tax in its state of formation. In order to comply with federal tax requirements, the company will need to obtain an Employer Identification Number (EIN). As with most other things, payroll tax is state-based, so the exact procedure will depend upon the state, and most states have income tax withholding requirements as well. For many companies using a local specialist payroll provider will simplify this process and ensure full compliance with local laws.
| Information | Explanation |
|---|---|
| Remote Payroll ? | A remote payroll in the USA is where a foreign company, i.e. a non-resident company, payrolls a resident employee in the USA. This applies to both local and foreign employees. One option for a non-resident company to payroll its employees (local and foreign) in the USA is to use a fully outsourced service like a GEO or PEO which will employ and payroll the staff on their behalf. |
| Local Payroll Administration ? | In some cases, a company will register their business in USA under one of the forms available, but prefer to have another company administer its payroll. This can be accomplished through a payroll provider. It is important to note that the company, as the Employer of Record, is still fully responsible for compliance with employment, immigration, tax and payroll regulations. But the payroll calculations, payments and filings can all be outsourced to the payroll provider. |
| Internal Payroll ? | Larger companies with a commitment to the USA may wish to run their own local payroll for all employees, foreign and local. In order to accomplish this, they will have to complete incorporation, register the business and then hire the necessary staff. There will be a need for in country human resources personnel who have the background needed to manage a USA payroll, and can fulfill all tax, withholding, and payroll requirements. This approach carries significant cost and requires some knowledge of local employment and payroll regulations. The company will need a local accounting firm and potentially legal counsel to ensure full compliance with USA employment laws. |
| Fully Outsourced Payroll & Employment ? | Companies can outsource the employment and payroll of their staff in USA to a GEO, like Shield GEO. This is possible for both foreign workers and US nationals. This is the easiest, fastest and safest way to payroll staff in USA. Shield GEO manages all aspects of payroll for workers in USA, including taxes, withholding, social security payments and other statutory requirements. Shield GEO becomes the Employer of Record and employs the staff on behalf of the client. Staff are paid monthly with tax and social security deducted at source and paid to local authorities. Shield GEO will invoice the client monthly in advance of the payroll date. The invoice consists of the Total Cost of Employment (Base salary + Employers Statutory Contributions + Additional statutory contributions) and a Management Fee. Shield GEO provides the employees with payslips. Read more about outsourced payroll and employment through Shield GEO. |
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Setting up payroll in United States
| Information | Explanation |
|---|---|
| Currency ? | The United States dollar (USD) |
Tax Figures
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| Corporate Income Tax ? | There is a flat tax of 35% that applies to the taxable income of corporations that have annual taxable income equal to or greater than USD 18,333,333. Progressive tax rates, starting at 15%, apply to income of corporations with total taxable income of less than USD 18,333,333. |
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| Income Tax Rate ? |
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| Payroll Tax ? | Employers must withhold federal income tax from employee wages and must forward the tax to the government. They also must pay federal and state unemployment tax and social security taxes. The federal unemployment insurance rate = 6% (imposed on the first USD 7,000 of each employee’s wages). State unemployment insurance is mandatory in all 50 states and the District of Columbia and varies by state. Employers receive a credit, up to a maximum of 5.4%, against the federal tax for amounts paid to state unemployment insurance funds. |
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| Sales Tax ? | Sales tax is collected in 45 states with rates differing based on specific state. The lowest average combined rates are in Maine (5.50%),Wyoming (5.47%), Wisconsin (5.43%), Hawaii (4.35%) Alaska (1.76%). The highest average combined state sales tax rates are in Tennessee (9.45%), Arkansas (9.26%), Alabama (8.91%), Louisiana (8.91%), and Washington (8.89%). The differences in the tax rates result in consumers shopping across borders or buying products online. |
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| Withholding Tax ? | Gross amount of dividends, interest and royalties are subject to a 30% withholding tax. Any other income, profit or a gain characterised as “fixed or determinable, annual or periodic” (FDAP) is also subject to this tax (the rate can be reduced under a tax treaty or if the income is ECI it is not taxable). A non-final tax is also withheld on proceeds from the disposal of US real property interests (10%) and by partnerships on their ECI that is being allocated to foreign corporate partners (35%). |
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| Other Tax ? | There is a variety of excise taxes. Apart from this, local governments, the 50 states and the District of Columbia impose various income, franchise, license, stamp, estate, property and other taxes. The U.S. also have unified estate and gift tax for citizens and residents, which is generally based on the net assets of the donor/deceased in excess of USD 5,430,000 (2015), and there is generally no tax imposed on donees/heirs on the appreciation of the assets in the hands of the decedent. Non-resident non-citizens, are taxed only on property situated in the United States and in excess of USD 60,000 (subject to increase by various treaties). A gift tax is imposed on gifts made during a person’s life, which is unified with the estate tax. The maximum rate for estate and gift taxes is 40%. Individuals, estates and certain trusts must pay a 3.8% tax on net investment income over a certain threshold (USD 250,000 for married individuals filing jointly, USD 125,000 for married filing separately and USD 200,000 in other cases;USD 12,300 for estates and certain trusts). Individuals also must pay a .9% tax on wages, compensation or self-employment income that exceeds a threshold amount (USD 250,000 for married individuals that file jointly,USD 125,000 for individuals married and filing separately, USD 200,000 for single individuals). |
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| Time to prepare and Pay Taxes ? | 175 Hours |
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| Time required to start a Business ? | 5.6 Days |
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Immigration and Work Permits in United States
Foreign workers are required to have the proper visas and work permits in the USA, as established by immigration laws. Work permits must be secured for employees, and sponsored by a locally licensed and incorporated entity, which can be a problem for companies just entering the US market. If you have yet to complete the incorporation process you can use an outsourced management company or GEO Employer of Record to sponsor the employee for the necessary permits.
Have your own Company?
According to U.S. Citizenship and Immigration service , employers must make sure that people they plan to employ or continue to employ in the USA is authorised to accept employment in the country.
There are two general categories of US visa permits:
- “Non Immigrant” Visa, which is typically obtained by those, who plan to work in the U.S. temporarily and usually have a specific purpose (H1B Work Visa, E-1, E-3 and L1-B visa)
- “Immigrant” Visa, which is for those who are migrating to the USA to live and work there permanently (Green Card – Lawful Permanent Residents, typically EB-3 or EB-2 visa)
Sponsoring employees for “Non Immigrant” (or temporary) class visas is usually a quicker and less complicated process compared to “Immigrant” (or permanent) visas. However, there are still many technicalities and steps that are far from intuitive increasing the possibility of failure.
The H1-B type visa is typically the most common way for employers to sponsor professional workers in the U.S.
H1-B
Employees
To qualify for this sponsorship, the employee must hold a position that requires them to have at least a bachelor’s degree or equivalent experience in the field of future employment.
Employers
For employers H-1B eligibility is a much more complex issue. They must file the petition for the visa on behalf of the employee, who is not allowed to self-petition. Every company, regardless of size, must petition for one of the 65,000 H-1B visas that are made available by U.S. Citizenship and Immigration Services. Based on trade agreements, 6,800 of those visas are allocated for immigrants from Singapore and Chile first. Another 20,000 of them are made available for workers that have advanced degrees (master’s degree or above). Usually, more applications are filed than visas are available lowering chances of employees to get H1B visa.
Process
1. Sponsoring Company files a petition on your behalf.
An employer can be an individual, partnership or corporation. Applications has to be “job specific.” A new H1B visa petition has to be filed if employee’s situation changes (for example, you lose your job or change locations), your new employer must file . The visa is only valid for work with the employer that filed the original petition. The USCIS requires employment letters which provide:
» Specific information addressing the positions held
» The exact duties of the position
» The exact dates of employment
» Information regarding the supervisors and co-workers of the beneficiary.
2. The ‘Prevailing Wage’ and actual wage have to be determined. The sponsoring company is then required to pay the higher of the two.
To determine the prevailing wage the company has to complete and lodge a special form with the State Employment Security Agency. In this form employer outlines the responsibilities, skills and experience needed for the job. The actual wage is determined by comparing other workers’ wages in the same positions and with the same level of experience.
3. The Labor Certification Application (LCA) has to be filed.
This form contains information about the sponsoring company. By completing and signing it, the company is agreeing to pay the higher of the two wages mentioned above. It also agrees that this employment will not adversely affect the conditions of other workers and that there is no ongoing strike for their occupation at the workplace. The sponsoring company has to attest that it will offer the H1B sponsored employee the same benefits (health, life, medical, retirement, stock options and bonuses) as their other workers.
4. When the LCA is approved, the Department of Labor will return a certified copy to the sponsoring company.
5. The sponsor company must then post notices at the work site that it filed for LCA (for 10 days). Alternatively, the H1B sponsoring company can provide notice of this filing to the collective bargaining representative for its employees.
6. H1B petition (including fees, form I-129, required forms, documents and information) filed with appropriate USCIS Service office.
7. H1B petition is being processed.
Processing times can vary based service centre and the visa (typically it is a few months wait). If the sponsoring employer can demonstrate a substantial need for the employee, USCIS might approve the petition sooner. Employment cannot begin until USCIS has issued the visa.
8. Receipt issued by USCIS
The sponsoring company is sent a receipt by the USCIS Service Centre which bears a 9 digit reference number allocated to that particular case, as well as visa processing times and general information about the employer and foreign worker that is being sponsored. At this stage, the H1B application is already in a queue.
9. Petition Approval
Generally it will be approved within the designated time frame outlined in the USCIS receipt. An approval notice (Form I-797) is issued to the petitioner (sponsoring company).
Documents required from employer
- Job title of the position being sponsored
- Salary offered to the employee
- Detailed description of the job
- The minimum requirements for this job
- Name and job title of person who will sign the forms on behalf of the company
- Name and address of company.
- Informational brochures about the company. If the company is new it is advisable to provide as much information as possible
- Employer Federal Tax I.D. Number
- Telephone number and fax number for company
- Client site letter on the client site’s letterhead.
- All the US Immigration Bureaus visa filing forms and fees
Documents required from employee
- Job Offer from a sponsoring US employer
- Copy of the current CV
- Copies of passport, degree certificates and transcripts
- Employment reference letters from previous employers (if applicable)
- Professional License (if applicable)
- Copies of any professional development course certificates (if applicable)
- Copy of the education evaluation (if one has already been completed and is applicable)
It should be noted that there are certain difficulties that start-ups and small companies currently face.
Costs
The total cost of application will be vary from about US$1,000 to US$4,000 depending on specific circumstances.
Use the Shield GEO Employer of Record Solution?
Once you get in touch with us, one of our consultants will take all the work off your hands, coordinate with our local partners to get all the required permits organised, provide the processing time, costs, document-checklist and keep you informed through the process. Contact us to know more.
Types of visas in United States
| Category | Description of Visa |
|---|---|
| H1B Visa - Specialty Occupations (Professionals, Graduates) | The H1B visa is the main method for employers to recruit international professionals and international students to work in the USA. Duration: up to 3 years (can then be extended one time for up to a 6 years) |
| H2B - Short Term 'Seasonal Jobs' Work Visa | It is the visa to travel to America and work in jobs such as hospitality, theme parks, on a cruise ship, in a restaurant, or, for example as a ski instructor. Generally, USCIS may grant H-2B visa for up to the period of time authorised on the temporary labor certification (may be extended for qualifying employment in increments of up to 1 year each). The maximum period of stay is 3 years. |
| E3 - Certain Specialty Occupation Professionals from Australia | Applies to Australian professionals coming to the United States solely to perform services in a specialty occupation. The specialty occupation requires theoretical and practical knowledge in specific professional fields and at least a bachelor’s degree, or its equivalent. Initial period of stay = 2 years (with up to 2 years per extension; no maximum number of extensions, with some exceptions). There is no government mandated application costs for this visa, it only requires a free filing to the US Department of Labor. |
| TN NAFTA Professionals | The TN nonimmigrant classification allows qualified Canadian and Mexican citizens to temporarily entry the United States to work or do business. Initial period of stay = up to 3 years. |
| L-1B Intracompany Transferee Specialized Knowledge | The L-1B visa allows a U.S. employer transfer a professional employee with specialised knowledge relating to the organisation’s interests from one of its affiliated foreign offices to one of its offices in the United States. This classification also enables a foreign company which does not yet have an affiliated U.S. office to send a specialised knowledge employee to the United States to help establish one. The employer must file Form I-129, Petition for a Nonimmigrant Worker with fee, on behalf of the employee. Maximum initial stay for qualified employees entering the United States to establish a new office is one year. For all other qualified employees a maximum initial stay is three years. Extension of stay may be granted in increments of up to an additional two years (until the the maximum limit of five years is reached). |
| L-1A Intracompany Transferee Executive or Manager | This visa is similar to the previous one, but it applies to senior managers or executives. The other difference is that for all L-1A employees, requests for extension of stay may be granted in increments of up to an additional two years (until the the maximum limit of seven years is reached). |
| E-1 Treaty Traders | The E-2 visa allows a national of a treaty country to be admitted to the United States when they invest a substantial amount of capital in a U.S. business. Certain employees of such a person or of a qualifying organisation may also be eligible for this type of visa. Maximum initial stay = 2 years (with extension of stay in increments of up to two years each). |
| H-2A Temporary Agricultural Workers | The H-2A program allows U.S. employers or U.S. agents who meet specific regulatory requirements to bring foreign workers to the United States to fill temporary agricultural jobs. |
| Employment-Based Immigration: First Preference EB-1 (Permanent) | Issued to individuals who have an extraordinary ability, are an outstanding professor or researcher, or are a multinational company executive or manager. |
| Employment-Based Immigration: Second Preference EB-2 (Permanent) | This visa is issued to professionals with advanced degrees or to persons with exceptional ability (in the sciences, arts, or business) plus to members of professions holding advanced degrees or the equivalent. Official fee totals to about $1490 (without considering various contingent fees associated with the cost of possible appeals, ancillary forms and fees that different circumstances might require, and medical examination and mailing costs). |
| Employment-Based Immigration: Third Preference EB-3 (Permanent) | This visa is issued to professionals with a baccalaureate degree, skilled workers (requiring at least 2 years of training or experience) for which qualified workers are not available in the United States, individuals capable of performing unskilled labour for which qualified workers are not available in the United States. Official fee totals to about $1490 (without considering various contingent fees associated with the cost of possible appeals, ancillary forms and fees that different circumstances might require, and medical examination and mailing costs). |
| EB-5 Immigrant Investor Program | Under this program, entrepreneurs are eligible to apply for permanent residence if they make the necessary investment in a commercial enterprise in the United States and plan to create or preserve 10 permanent full-time jobs for qualified U.S. workers. |
| E-2 Treaty Investors | The E-2 visa allows a national of a treaty country to be admitted to the United States when they invest a substantial amount of capital in a U.S. business. Certain employees of such a person or of a qualifying organisation may also be eligible for this type of visa. Maximum initial stay = 2 years (with extension of stay in increments of up to two years each). |
Setting up a company in United States
When setting up a company you may want to consider these factors:
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Business factors
- The industry and type of business
- Nationality of the headquarters/individual(s) and
- Presence of existing trade agreements or relationships
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License and Product Approval
You will need to ensure your products can be lawfully imported into the US, that all legal requirements of US customs and import laws are met, that you have all required licenses and permits to import and sell the products, and that your export and import documentation complies with US law. Also, there is US legislation relating to particular types of products, what they can and cannot contain, labeling, etc. Failure to comply can, in some instances, subject the manufacturer, seller and possibly others to fines and penalties. It can also be ammunition for product liability lawsuits for persons harmed by the products.
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Business names, brands and Trademarks
If you intend to sell goods or services to the USA under a particular trademark, brand name, promotional slogan etc., have your USA lawyer search before you start business, whether the use of the mark, name, slogan, etc. might infringe any existing, third party trademark. If it does not, consider applying for USA trademark protection covering that mark, name, slogan, etc. The same points apply to other types of intellectual property you may have and should protect (e.g., patents, copyrights and designs), though the search and application procedures for each type, and the nature of the rights conferred are different. A company name is not the same thing as a trademark. According to a guide from the UK Government, A registered US federal trademark will provide protection throughout the entire US for the particular goods or services for which it is registered. The name of your US Corporation will give you (weak) protection within the state in which the corporation is formed, and in those other states in which the corporation is registered to do business. The protection offered by a corporate name is different, and much weaker, than the protection accorded by a US federal trademark.
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Copyright
In some countries copyright protection is automatic and doesn’t need to be filed, or indeed isn’t possible to register. However, a guide from the UK Government reports that in the US, if you own items that are or may be protected by copyright, you need to protect them in the US. That is done principally by filing an application for registration with the US Copyright Office. Doing this in a proper and timely way is a must; failure to do so can result in serious problems for the copyright owner.
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No single ‘Corporation’ type
There is no such thing as a “US corporation” per se, although the essential set up steps are consistent among the states. Each of the 50 states has its own laws governing the creation of legal entities, corporations included. The limited liability company (LLC), while offering the limited liability feature, is, for legal, tax, and cost reasons, usually not the appropriate vehicle for UK parties, according to the guide from the UK Government.
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Which State to Incorporate In
A. Which State
Which state’s laws shall to form a corporation under will vary depending on the particular company’s needs. In most cases, the choice, will come down to: (1) A Delaware corporation; or (2) A corporation formed under the laws of the US state in which the corporation will have its centre of operations (e.g., main office).
B. Foreign entities
Because the laws are state-based, a US firm formed in one state can be considered a ‘foreign company’ to another US state, such as in Texas. Sometimes foreign entities are also called “out-of-state entities” to clarify that entities formed in other U.S. states are foreign entities, as well as entities formed outside of the United States.
C. Multi-state Registration
If you form a corporation in one US state, doing business in other states means you have to register the corporation to do business in those other states. For example, if you incorporated your business in Delaware for the tax benefits but actually live and work in California, then you will need to register the business in California too. Certain other activities that your corporation performs in US states other than the one in which it is formed may also require its registration to do business there.
That registration process is generally not difficult, time consuming or expensive. Registering in other states is also much easier than incorporating in each, as you only need one set of bylaws, board of directors, officers, etc. and only need one annual meeting each year and one set of meeting minutes.
However, what counts as ‘doing business’ in another state? Generally, however, the mere act of selling goods from one American state to a customer in another American state does not normally require the corporation to register to do business in the customer’s state.
An article on Entrepreneuer.com does provide a useful list of broad guidelines:
- Does your LLC or corporation have a physical presence in the state (i.e. office, restaurant, or retail store)?
- Do you hold property in the state?
- Do you have any W2 employees in the state?
- Does your company have a bank account in the state?
- Are you required to hold any special licensing in the state?
- Will you be shipping products from within the state? (i.e. do you have a warehouse in the state)
- Did you incorporate your business in a state other than where you live/are physically located?
Of course, this still depends on the state and can vary. In some states it is based on whether the business has a ‘nexus’ in that state, however what constitutes a nexus is not explicitly defined at law.
A further challenge is then when registering in multiple states, many businesses are confused about what obligations it brings and factors such as whether sales tax applies in cross-state sales. Some states will require that you have a certificate of good standing from your home state. In most, once you register for interstate business with them, you will be required to file annual reports, fees, and taxes for the state of qualification (in addition to your state of incorporation). This can lead to a lot of administrative overhead, complexity and uncertainty – which means business and legal risks for businesses. Proper tax, legal and business advice is essential.
Which state you choose will depend on why you are forming the company. Some US states are more “business-friendly” or “international-friendly” than others, especially Delaware, Nevada and Wyoming. For detailed information on these states and picking a state, please visit “Which State to Incorporate or Form an LLC“.
Mynewcompany.com provides some scenarios:
- If you simply want to form a US company because you need to open a US bank account and/or merchant account (to accept credit cards) and will not be opening a US branch or have a physical presence, then you might choose Wyoming which has lower annual state fees (Corporation/LLC:$50) than Delaware (Corporation:$125; LLC:$250), or Nevada (Corporation/LLC:$325). Also Delaware, Nevada and Wyoming banks are more familiar with dealing with international clients without a local office than are many other states. This can make opening a bank account much easier.
- If you will be opening a US branch with a physical office (or home-based employee), you may want to choose the state where you will be opening the office. Note that if your office will be operating in, for example, Florida, then you may still choose to form the company in another state like Delaware, however, the state where you are opening the office will want you to “re-register” that Delaware company in Florida. This process is called “foreign qualification” which means you are qualifying the Delaware entity to open a physical business in Florida.
- If you want to form a company for the purpose of obtaining US investment or venture capital, you may consider a Delaware Corporation as this is the entity that is required by the vast majority of US investors and venture capitalists. Related Article attorney that specializes in startups recommends setting up a Delaware Corporation.
When setting up a company in the US, you have the following options:
- Corporation (C)
- Limited Liability Company
- Branch Office
This article provides a general guideline for foreign businesses on entering the United States for business purposes. In particular it looks at common pathways to establishing a business presence in the United States, generally through a corporation, limited liability company or branch office. In addition various economic, tax and regulatory facts are provided throughout as a source of useful information to assist those who will enter the American economy. The guide also looks at some immigration requirements such as obtaining the appropriate visa status.
Data is based on the time of writing this article, June 2015, or closest available dates.
The United States of America is a federal republic comprised of 50 states, plus the federal district of Washington D.C.
Population: 320,000,000
Capital: Washington D.C
National language: English
Time zone: (UTC−5 to −10) – Summer (DST) (UTC−4 to −10)
Calling code: +1
Currency: US dollar (USD)
Nominal GDP: $17 trillion ($54,596 per capita)
Domain: .us; .com
Due to its British colonial roots, it has a common law influence, although the hundreds of years of independence have led to an evolution away from English law. Most distinctly, while it is a federal republic, the 50 states maintain a high degree of individual law making power, which means the rules and regulations for things such as incorporation, tax rates, employment law and the like can vary state to state. This compounds the complexity of doing business in the US by the fact that a company formed in one state will be technically viewed as “foreign” in another state. Operating in more than one state can require multiple registrations and procedures, and simply offering and accepting orders to customers in other states will count as operating in that state. Nonetheless, setting up a business in the US is not generally difficult, although additional fees such as lawyers, accountants and insurance agents may increase costs significantly.
Example State: Delaware
Many businesses choose Delaware as their domestic state in order to take advantage of its strong corporate law structure—more than 50% of publicly-traded companies in the U.S. and 64% of Fortune 500 companies have incorporated in the state of Delaware.
We have selected Delaware as the ‘case study’ state and for each step where relevant, an example of the procedure in Delaware is cited.
Corporation (C-Corporation)
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.
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)
Limited Liability Company (LLC)
A limited liability company (LLC) shares many features with corporations but it is rather considered an “unincorporated business entity”, with a flexible management structure. Like a corporation, a limited liability company subsidiary is a separate legal business entity that generates its own revenue and debt, and can be wholly owned by a foreign parent company. In the US, a LLC has become a popular business form, in particular for smaller businesses and partnerships for both US and foreign operations, due to less administrative requirements and more flexible management and tax options.
Requirements/restrictions
By default LLCs have a flexible management structure, aiming to combine the benefits of sole proprietorships and partnerships. It is free to establish any organizational structure agreed upon by company owners in its articles of organization. If a corporate-like structure is desired for the LLC, an LLC operating agreement with special provisions to make the LLC operate like a corporation must be drafted.
In addition, if the subsidiary is to be owned by a foreign parent, the website US Branch Office says the LLC should file a an election to be taxed as a corporation in the U.S. Failure to do so eliminates the tax benefits of having a U.S. subsidiary and means the subsidiary would legally be treated as a branch office.
There is no requirement to have a local director. However many states require directors to be natural persons rather than legal entities (e.g. other companies). For example, in Delaware (General Corporation Law Section 141(b)).
Advantages/disadvantages
LLCs face fewer state-imposed annual requirements and ongoing formalities than S corporations and C corporations, and have a flexible management structure, free to establish any organizational structure agreed upon by the company owners.
An entry on Diffen points out that LLCs limited liability protection is often superior to that of corporations because it is harder to “pierce the corporate veil”.
In addition, an LLC has many advantages as a form of business entity:
- members (and parent company) are protected from liability for acts and debts of the LLC
- an LLC has the option to be taxed as a sole proprietor, partnership, S-corp or corporation, providing flexibility
- if electing to be taxed as a sole proprietor, for example, taxes are calculated and charged at the member level to avoid double-taxation (“Pass-through taxation”)
- less administrative paperwork and recordkeeping than other company forms.
- Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest (e.g., see Virginia and Delaware LLC Acts).
Some good examples of the drawbacks to selecting an LLC over another entity are listed on this BizFilings article:
- If not electing to tax as a corporation, earnings of most members of an LLC are subject to self-employment tax. This is not as good an S-corporation, whereby after paying a “reasonable salary” to shareholders working in the business, the remainder can be passed through as distributions of profits and are not subject to self-employment taxes. Unfortunately as mentioned earlier, S-Corporations can only be formed by US citizens.
- If not taxing as a corporation, an LLC is considered a partnership for Federal income tax purposes, which means if 50% or more of the capital and profit interests are sold or exchanged within a 12-month period, the LLC will terminate for federal tax purposes.
- Ownership in an LLC is often harder to transfer than with a corporation. With corporations, shares of stock can be sold to increase ownership. Typically with LLCs, all owners must approve adding new owners or altering the ownership percentages of existing owners.
Registration steps
1. 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. 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)
2. File incorporation papers
After drafting and preparing the appropriate incorporation papers, you can file your LLC papers with your applicable state department that handles the registration of new businesses. You may have to pay a fee ranging up to $1,000, depending on your particular state’s fee structure.
In the US, there are many websites that provide online incorporation services, such as http://www.incorporate.com and http://www.legalzoom.com
Time: 1-14 days (estimation)
Cost: : Depends on the state, but in Delaware, it is $89
3. 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 Organisation
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)
4. 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”, proof of a physical address, etc. 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)
5. 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.
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
6. 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’ in covers registration with the Office of Workers Compensation.
Time: Instant (online)
Cost: No charges
7. 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 Labour, 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
8. 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
9. 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 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
10. 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 (Delaware: $245)
Cost: varies, (estimate: 1-2 weeks
Branch Office
A foreign parent corporation operating in the U.S. without incorporating a subsidiary can operate as a branch office. This makes it possible for an overseas company to do business through an intermediary such as a sales representative or distributor.
Requirements/restrictions
The UK Trade and Investment trade services report states that registration requirements of a branch office varies per the laws of the particular US state. The level of activity required to register can vary from establishing a sales office in that state, to having an employee there or simply having a stock of goods there, and others
Even within the US, companies formed in one US state must still register to do business in another US state. In other words, as explained on the Texas Department of State, a branch office of a company formed outside of the United States can be viewed the same as a branch office of a US company formed in another US state. Both are foreign entities.
Advantages/Disadvantages
A branch office is not a separate legal entity of the parent corporation, thus, the foreign parent is responsible for any debts and liabilities of the branch. As reported on PLC legal guide, this can expose the overseas parent company to lawsuits and claims in the US against its assets, liability for US taxes, or possible full audit by the US Internal Revenue Service.
Registration Steps
1. Register to Do Business in Selected State
Registering to do business in other states is known under various terms, depending on the state, 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 (including overseas) 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 (Delaware: $245)
Cost: varies, (estimate: 1-2 weeks)
2. 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 Organisation
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)
3. 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”, proof of a physical address, etc. 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”, reports DelawareInc.com. 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 (estimate)
Cost: Generally no charge (may require minimum deposit)
4. 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.
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
5. 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’ in covers registration with the Office of Workers Compensation.
Time: Instant (online)
Cost: No charges
6. 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 Labour, 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
7. 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
8. 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
9. 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 (Delaware: $245)
Cost: varies, (estimate: 1-2 weeks)
Outsourcing Employment Through a GEO Employer of Record Service
Whether to incorporate in the USA, and what sort of entity to setup are just two of the many choices companies must make when expanding into a new market.
If the company intends to have staff in the USA they must also decide whether they will administer that employment internally or use a Global Employment Organization to handle payroll and Employer of Record responsibilities. A GEO Employer of Record solution is an attractive alternative where
- the company is looking to setup an office quickly
- the company wants to work within a defined budget
- the company wants to limit its initial commitment in the USA
- the company needs help with tax, employment, immigration and payroll compliance in the USA
The complexity of employment regulations in USA makes the use of a GEO advisable coupled with local legal counsel to ensure full compliance with employment laws, for example the drafting of local contracts for workers.
Shield GEO provides a comprehensive service in the USA allowing companies to deploy their staff quickly with reasonable, clearly stated costs and timeframes. The company contracts directly with Shield to employ and payroll their staff on their behalf in the USA.
Shield GEO then becomes the Employer of Record. Shield GEO assumes the legal responsibility for these employees, sponsoring them on work permits, complying with local employment law and running their monthly payroll. Using Shield GEO is the fastest and most cost effective way to deploy local and foreign workers into the USA. Read more about outsourced employment through Shield GEO.
Summary of Set Up Steps
| C-Corp | LLC | Branch | Time | Cost (USD) | |
| Registered Office or Agent | Yes | – | – | 0-14 days | 0-300 |
| Check and Reserve Name | Optional | Optional | – | Instant | 0-75 |
| File Incorporation Papers | Yes | Yes | – | 2-3 days | 89 |
| Tax/Employer ID number (EIN) | Yes | Yes | Yes | 1 week | 0 |
| Open Commercial Bank Account | Yes | Yes | Yes | 1-14 days | 0 |
| Register for Payroll Tax | Yes | Yes | Yes | 1-3 days | 0 |
| Register for Workers Compensation Insurance | Yes | Yes | Yes | instant | 0 |
| Register for Unemployment Insurance | Yes | Yes | Yes | instant | 0 |
| Publish Notice in Local Papers | Yes | Yes | Yes | 1-14 days | Varies |
| Register Trading Names | Optional | Optional | Yes | 1-7 days | 0 |
| Register Business in Other States | Optional | Optional | Yes | 1-2 weeks | 245 |
| TOTALS:*applications and processing times, not including internal document preparation, lawyer fees, etc. |
C-Corp.20-76 days- $89-709 |
LLC20-62 days- $89-409 |
Branch18-59 days- $245
|
Add an additional 2-4 months if registering trademarks. However, the business can register and commence without waiting for the trade marks.
Conclusion
Both a corporation and an LLC seem to be largely popular forms of doing business in the US. A comment from an attorney on free legal advice site Avvo notes the U.S. legal system is well-known for a “high incidence of litigation”. This certainly enhances the option of subsidiary, so that foreign companies can have a “legal firewall” between their U.S. operations and the foreign parent company.
Of course, the exact requirements and thus preference can depend upon the state. If most of the business activities of the U.S. entity will be cantered in one state, it is often desirable to just establish the U.S. business entity in that state.
However, it should also be confirmed that selling or advertising or receiving orders from any state counts as ‘operating’ in that state.
If the company will operate in many states, it is worth mentioning that Delaware is a popular state of formation. The website US Branch Office notes that Delaware offers favourable tax treatment (there is a privilege tax — known as a franchise tax — assessed each year based on a notion known as par value; these taxes are quite manageable and for small subsidiaries with insubstantial assets is usually $100- $200 per year), and its corporate income tax is based solely on taxable income derived from business activities in the state of Delaware, thus, most corporations do not attract Delaware state income tax because few to none of their operations will involve Delaware-based activities.
- USA Employer of Record Overview
United States
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