

Ask HN: What's the best way for foreigners to incorporate in the States? - tpinto

We're a design and development team with a company registered in Europe (Portugal). We have a product we've been selling worldwide (mainly to the US) for quite a while. We've had our problems with being non-US in the past, the main one being not having a merchant account and thus being impossible to signup for Authorize.net (or a similar service).<p>For the last couple of weeks we've been thinking about incorporating for different reasons: taxes and paperwork. We've been hearing about taxes and incorporating on Delaware, Texas, Nevada and the likes but we'd love to know what you guys on HN would suggest.<p>Where are your startups based? If in the US, what State? Where would you suggest us to register the company and where should I look into? We're looking for low taxes and almost no red tape, paperwork, invoice requirements, etc... We're developers and designers, we like to build awesome products ;)<p>We'd love to hear about not only taxing but also about monthly/quarterly/yearly paperwork one needs to fill in and submit on each example you guys know about.<p>Thanks for sharing. Feel free to link to any resources you know about.
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adamgries
Hey Guys,

In practical terms, unless you become microsoft it probably doesn't matter
which state you incorporate in tax-wise. We received advice saying that
Delaware is favorable to business in a variety of legal precedents. Also,
Delaware runs incorporation as a business, which makes it easy to take care of
things online etc..

Somebody mentioned Wyoming as having less paperwork but I have to say I've
never felt there was much paperwork with Delaware.

Without anybody physically present in the US you may need to furnish a bunch
of docs - not sure how that would work since we always had one permanent US
resident in the company.

In our situation we looked at mixed ownership (US and non US) of a business
that had worldwide income (mainly from the US).

Here are the implications of the different US incorporation strategies we came
up with. Remember LLCs are flow through (i.e. the LLC does not pay taxes, but
it's owners) vs. C-corps that are not flow through (the company itself has tax
obligations). Foreign residents cannot own an S-corp (a corporation with flow
through treatment).

Incorporation scenarios

1\. Clean US C-Corp

Pro: easy to sell company or assets transparent stock exit is good and clean
ability to issue stock options

Contra: Gain on asset sale allocable to U.S. taxed at 35% U.S. federal rate
double taxation for asset sales, for U.S. owner (no such problem for foreign
owners although there may be tax in your own country) If no asset sale but
stock sale instead, purchaser will likely want to reduce purchase price (due
to loss of tax benefits) some double taxation for operating profits (some
profits from operating income can be offset by bonuses and licensing
payments). Double taxation meaning that there is a federal tax on the company
and then a tax on any dividends. U.S. corp subject to tax on worldwide income.

How to handle regular operations: Use bonuses and pay for services to zero out
operating profits. Compensation paid to non-U.S. persons for work performed
outside the U.S. is not subject to U.S. tax. Any dividends paid to non-U.S.
shareholders would be subject to U.S. withholding tax - 30% (or less if an
applicable treaty applies).

2\. US LLC with Individual Owners

Pro: easy to sell company or assets transparent on asset sale, U.S. owners and
Foreign entitled to U.S. 15% capital gains rate for most gain. One level of
tax only. for US owners, profits flow to owners as income and charged regular
income tax (+ social security and medicare :( ). One level of income tax.
"Profits" interests can be issued tax-free, which can share in future
distributions and appreciation. Can be referred to as LLC units - equivalent
to shares.

Contra: inability to issue stock options (but can issue profits interests as
above) If there are operating profits going to Foreign owners, those owners
will be treated as US residents for tax purposes and will be liable to pay
full income tax on the profits allocable to the U.S. Also, before any profits
are distributed to Foreign owners, the LLC will need to pay to the IRS a 35%
withholding tax. However, the Foreign owners can file U.S. tax returns and
receive a refund to the extent they are entitled to it. On a sale of assets or
LLC units, Foreign owners would be required to pay tax on gain (most at low
federal 15% rate)

How we would handle regular operations: Use bonuses and pay for services to
sink zero out operating profits.

3\. US LLC with Foreign C-Corp owners (i.e. your Portugese C-corp would own
the US LLC)

Pro: Same as in 2.

Contra: inability to issue stock options (but can issue profits interests as
above) any tax issues would shift to these C-corps. Each c-corp would owe
regular U.S. corporate income tax at a 35% rate on any income allocated to it
by the LLC (unless offset by expenses). C corp would also owe a second-level
of tax, called the U.S. "branch" profits tax (could be 5% or 15% if C Corp is
organized in Cyprus; 30% in BVI or any other country with no tax treaty with
U.S. - combined 54.5% rate). But on an exit event and liquidating distribution
by the LLC no branch profits tax would have to be paid (this is in comparison
with dividends). LLC still has to withhold profits allocated to Foreign C
corps at 35% rate.

How we would handle regular operations: Same as in 2.

4\. US C-Corp that licenses an Offshore company's Technologies

Pro: U.S. profits offset by royalty payments to offshore entity (this may be
hard to do, since profits might fluctuate wildly, and having accompanying
fluctuations in royalty payments would be suspect - could base royalty on U.S.
revenues). IRS requires that any royalty be based on fair market value rates.
To be protected, an outside appraisal would be obtained. A royalty rate of 10%
of gross revenues may be in the ballpark, but would have to be confirmed by an
appraiser/industry expert. Maybe your business could justify higher rates. But
IRS audits this area closely. Profits of Foreign corp not taxed in U.S. (so
long as no services for it are performed in the U.S.) and distributions to
non-U.S. owners not taxed in U.S.

Contra: more legal and credibility problems when exiting Difficult to sell
assets U.S. has withholding tax on royalties - 30% unless reduced by a tax
treaty. Withholding rate for qualifying Cyprus entity - 0%. (For all purposes
of qualifying for U.S. treaties, the entities must qualify. For example, if
the owners of the Cyprus entity are not Cyprus residents or the entity does
not conduct an active business in Cyprus, the Cyprus entity likely would not
qualify. In that case, 30% withholding would be required to be paid by the
U.S. licensee (if it does not, IRS can impose penalties). (Same for BVI, which
does not have a treaty with the U.S.). Bad tax result for U.S. seller of
original technology. Under IRS tax rules, a permanent royalty would be
imputed. Each year, the U.S. seller would report income based on the
performance of the technology (generally, sales revenues) If Foreign corp
develops and owns the technology, and licenses it to U.S. company in exchange
for royalty, U.S. owner should not hold 50% or more of the stock of the
Foreign corp. If it does, 50% of the royalty would pass through to the US
owner (called subpart F income). If U.S. owner owns 10% or more of the Foreign
corp, and the Foreign corp is not in an active business, then distributions to
the U.S. owner will carry a painful interest charge (called PFIC income). If
profits are distributed each year, this aspect would not be too harmful (so
the profits could not stay in the company to avoid taxation beyond the end of
the tax year since the U.S. owner would be liable for them). If an active
business and U.S. owner owns less than 50%, these passive income rules do not
apply. Key is to determine whether Foreign corp would be treated as having
passive income. Both U.S. and Offshore companies have to employ people. The
money flowing to the Offshore company is profits only, and will likely not be
sufficient to cover significant employee salaries and other expenses;
therefore it should be kept to a minimum. However, the Offshore company must
employ one or more people to show that it is actually developing that
technology for which it is receiving these massive royalties.

How we'd do it: BVI entity holds IP, U.S. entity operates C Corp pays
royalties to reduce US profits

Hope this helps. Hit me up if you want to discuss further.

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philiphodgen
The legal part of this is trivial. Form a corporation somewhere. Delaware.
Meh. (It is actually slightly more complex than that, but not MUCH more
complex).

The tax side of this is nontrivial.

You sound like you are doing this because you have problems extracting money
from your customers. In other words, you have a business process problem. If
at all possible I would suggest finding a business process solution to your
business process problem.

Here's why. You are solving a business process problem with a legal solution.
You are pounding nails with a screwdriver. It is going to create a tax problem
for you.

A U.S. corporation (formed in Delaware or anywhere else) is a taxpayer. The
Federal government will be looking for a tax return from this corporation.
(Form 1120, if you want to look at it). Your money collected from your
customers will be flowing into that corporation. That looks like taxable
income to the U.S. government.

Now you have replaced your business process problem with a U.S. government tax
problem. That's an order of magnitude worse. You can solve tax problems, but
it takes time and money to do so. That means lawyers and accountants and
paperwork.

So now you have replaced your business process problem with a tax problem, and
you have solved your tax problem with an "accountants and lawyers and
paperwork and overhead and brain damage" solution.

Is it cost-effective? Maybe.

Then the next thing to consider is State income tax. The U.S. has a peculiar
set-up for income tax. The Federal government imposes an income tax. Most of
the States impose an income tax. Some cities also impose an income tax (stay
the F away from Philadelphia and New York, for instance).

Your Delaware corporation must be doing business SOMEWHERE. "Must be
somewhere, can't be nowhere." So you need a physical presence somewhere for
your corporation, even if it is only a glorified Post Office Box. You put that
in a tax-free location. More money.

In summary: sub-optimal.

OK. If you absolutely have to solve a business process problem with a legal
solution, look at this as a possible solution:

1\. Check with your tax advisor in Portugal. What type of entity is your
company? You want it to be taxed as a corporation as defined in U.S. law. THIS
IS ABSOLUTELY ESSENTIAL. (It doesn't matter how your company is taxed in
Portugal. We're doing U.S. tax engineering here).

2\. Form a Delaware limited liability company. If necessary, file Form 8832 to
have the LLC treated as a disregarded entity.

3\. Get your authorize.net or whatever account in the name of the Delaware
LLC.

4\. <the moment of magic> I don't know if this will work or not but if it
does, then you win. You want the Delaware LLC to NOT be a "permanent
establishment" of your Portuguese corporation as that phrase is defined in the
income tax treaty between Portugal and the United States. See Article 5 of the
Treaty if you want to be confused. :-)

5\. The impact of NOT having a permanent establishment in the USA? Only
Portugal can tax your profits. The USA cannot tax your profits even though
they are earned in the USA.

6\. The objective you are aiming for is this:

\- you have a Portuguese corporation deriving profit from U.S. sources.

\- The money pipelines through a Delaware LLC which is disregarded for tax
purposes, so it is as if the Portuguese corporation is doing business directly
in the USA for tax purposes.

7\. You file Form 1120-F for the Portuguese corporation, and attach Form 8833
claiming the benefits of the treaty.

\- By doing this you are saying to the U.S. tax authorities: "Yes, I have
U.S.-source profits but the U.S. can only tax those profits if they are
derived from a permanent establishment in the USA and my Portuguese
corporation does not have a permanent establishment in the USA. So go bite
tires."

That's what I would do.

(I do this in real life but I am not your lawyer, this is not legal advice,
you'd be a damn fool to rely on random postings on a website to make critical
financial and business decisions, etc. etc.)

Phil.

~~~
tpinto
Thanks a lot, Phil. That's a good piece of advice.

The Authorize.net was just an example where we felt like we couldn't relate to
everyone else in the industry when searching for a solution for that problem.
Now, we've solved that and "replaced" Authorize.net for one of the european
companies that do pretty much the same.

So, my post wasn't focused on that specific problem, but on incorporating in
the US, mostly because that's where our clients are and if doing it on
Delaware would allow us to save a lot on taxes: great ;)

So, the company we have in Portugal could even not relate to the one we would
create in the US, by now it is just the common umbrella under which we're been
doing business (both client work and that specific product I've mentioned).

~~~
sebi
what European company is that?

~~~
tpinto
It's <http://www.paylane.com/> \- I've also heard good things about
<http://www.adyen.com/>

------
WildUtah
If paperwork is a concern and you don't really want a substantial USA presence
but just a legal toehold and an official bank account, just google
"incorporate in #{state}".

The one office you really need is a registered agent, the official place
government and courts can get in touch with your corporation and you can pay
an attorney to do that and forward you mail for a few hundred dollars a year.

For big businesses, the best state to incorporate in is Delaware because
Delaware can handle masses of corporate acts and paperwork and claims and
lawsuits efficiently.

For really small operations, the least cost and paperwork will be in Wyoming.
You may well never file any paperwork there beyond annual renewal fees.

------
cmer
Delaware C Corp. Hands down.

I'm a Canadian and I have done it through DelawareIntercorp.com. They were
great. I later sold that company to a publicly-traded company also
incorporated in Delaware and everything went very smoothly. Make sure you talk
to a lawyer and tax specialist before you do anything though. It could cost
you a lot of money if things aren't done right.

~~~
patrickaljord
How about the corporate bank account? There are many sites that help you
create a company but almost none allows you to create a corporate bank account
for your company, which is needed. For that I think it is still needed to go
to the US and do all the paper work yourself. Am I right?

~~~
cmer
This has been very tricky for me. I know a few banks will do it but a) I
forgot whom, b) the ones who did were all very inconvenient for me (ie: far).
If I remember correctly, Wachovia was one of them.

I decided to try a few banks in upstate New York since it's not too far from
here. I've been turned down by a few, namely Key Bank and Citizens Bank.

I ended up opening an account with RBC Bank in Virginia Beach, VA while I was
on vacation. FYI, they have branches in Florida too. This is a great way to
write off your vacation :) It was extremely easy, probably because they're
mainly a Canadian bank and I'm Canadian.

You should call them and see if they'll do it for you. If not, look for an
international bank such as HSBC.

On another note, I hired a lawyer to write a proper certificate of
incorporation. The default one isn't usually suited for Internet startups that
might require external funding, have an option pool, etc. You can see it here:
<http://bit.ly/9POOZe> . Feel free to reuse it.

Everything was fine with it during the acquisition so I assume it is pretty
darn good.

Hope it helps!

EDIT: The Certificate of Incorporation file also includes a note/warning from
my attorney. I thought I'd include it because it is very important.

~~~
patrickaljord
Thanks a lot. Does it matter if the company is in Delaware and its corporate
bank account is in Florida or in another state? Do I have to pay taxes in
Florida if my company is in Delaware?

~~~
cmer
It doesnt matter if your bank account is not in Delaware. About taxes, I think
it'll be different from state to state so I can't tell you.

FYI, I bought 100,000 shares of my own company for $200 when I started. Forgot
to mention this in my previous comment.

------
poet
Messing up incorporation is something that is very annoying and time consuming
to undo. Talk to a lawyer. I guarantee you the extra money you spend isn't
going to make or break your business.

------
nkassis
I've heard and I hope someone more knowledgeable can confirm that the easiest
is to incorporate in Delaware for foreigners. To maintain the Delaware corp
you have to pay a franchise tax on the amount of stocks you have issues (for
C-corps at least). I'd have to look it up again but up to 5000 shares it's 75$
a year. If the company is not in Delaware then you won't have to pay income
taxes.

~~~
lrm242
Delaware franchise tax is done two different ways. You pick the method you
want to use. The first method is based on the par value of outstanding stock
and the second is based on net assets of your company. Delaware will send you
a bill using the method that maximizes the franchise tax. You should use the
method that minimizes the franchise tax. You can have 10,000,000 shares
outstanding at a par value of .0001 and still pay, essentially 0 in franchise
tax (or the necessary minimum) if your assets are low.

------
swombat
You don't need a US-based merchant account to get a credit card processor.
There are lots of UK-based ones, like SecureTrading... surely there must be
some Portugese ones?

------
8ren
If it's just for accepting US currency, you could try <http://worldpay.com>.
It's expensive to setup, and they charge about 4.5% of the transaction, and
you have to wait a month after the transaction to get your money... but US
customers can and do make purchases via it for us (in Australia).

But most will also happily wire the money. We're selling to enterprise
customers mainly (banks etc), so it may be a different situation to you.
Actually, I suspect the main reason some of our customers prefer credit card
is to circumvent internal purchasing procedures.

Have customers told you precisely what their problem is? (or, can you identify
them and ask them?) There may be a simpler solution that incorporating in the
States (though I've heard that's helpful to being acquired, that doesn't sound
like a concern in the present instance).

------
radu_floricica
I know it's not your question, but to the same problem I found
<http://www.2checkout.com/> to be the answer. It's roughly comparable to the
US based ones... more choice would have been awesome, but it works. Also
PayPal.

------
MicahWedemeyer
Talk to a laywer and/or accountant, your questions are very common, and any
competent professional could answer them.

If you need a referral to a lawyer or accountant, ask friends and colleagues
who have a business presence in the US.

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shibataism
I think the only option is to set up a C-Corp in Delaware, if you want to be a
fast-growing venture business (rather than privately-held small business).

Paperwork is not a big issues because you can find attorneys easily.

------
trizk
You can probably use a website such as <http://bizfilings.com> to incorporate
Delaware C-Corp. No affiliation.

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ashleyreddy
I've used legalzoom to setup a Nevada LLC. Easy and cheap.

