Aspiring Entrepreneurs setting up a business.
Expanding your business into the USA is a wonderful achievement for your business. It brings a whole new host of questions about your overseas tax liabilities, laws, regulations, insurances and compliance requirements. First, you must decide which business structure you wish to choose and register correctly with the Secretary of State and the IRS for tax. For now, let’s not cover the cross-border implications of having a business in the USA and being a resident of the UK, as that needs a deeper discussion. Here is a summary of the various structures and what they mean.
U.S. Business Structures.
There are several structures to choose from in the USA, and like in the UK, there are differing tax and compliance implications for your choice. There are four common business structures in the USA and possibly five depending on which State laws you decide to incorporate under.
This arrangement is very much like a sole trader in the UK. It is an unincorporated business structure, and there is no limited liability. An Employer ID number (EIN) is needed at the point you begin trading if you want to hire employees. Like a sole trader in the UK, you as the business owner are personally liable for the business’s liabilities. There may be no formal registration process, but the State you perform business within may require you to hold a license or register your trading name.
Another unincorporated business structure is a general partnership where two or more individuals agree to form a trade or business to make profits. There may be no formal registration process depending on the State you form your trade or business however, you may need to run a name check, register your ‘Doing Business As’ name and obtain a license to trade in that state. Like the sole proprietorship, the parters are not protected from teh liabilities of the partnership unless an element of limited liability exist as a Limited Partnership (LP) or a Limited Liability Partnerhsip (LLP).
Typically the most similar to a Limited Company in the UK, the C-Corp is a separate entitiuy to it’s shareholders. A C-Corp is incorporated with the Secretary of State and annual compliance filings are needed each year to maintain the corporation’s good standing. Complaince varies from State to State and some require a corporation to have an Agent acting on their behalf for all legal and compliance matters. An EINis needed to file annual tax returns with the IRS and State. Profits are taxed once at teh Corproation level and then again at the shareholder level as dividends. Non-US shareholders are subject to special withholding requirements.
This is usually quite a tax favourable arrangement in the US and an election to be treated as a pass through entity is made, by a deadline set forth by the IRS. By submitting this election it allows all income, deductions, losses and credits to be taxed once to the shareholders rather than twice. Be aware that an S-corp is not a recognised entity structure in the UK and it is more often than not unfavourable in terms of taxation for a UK resident.
Limited Liability Company (LLC)
An LLC is one of teh easiest company structure to incorporate and is very popular for small businesses or sole proprietors that wish to trade and obtain some degree of protection of personal liability. For tax purposes in many cases an LLC is treated as a pass through entity unless a request to be treated liek a corpraotion is submitted to the IRS. Onmce again however, the HMRC does not recognise an LLC as a business structure and this can create cross-border tax problems for UK tax residents operating via an LLC inciorpaoted in the USA.
Non-US Taxpayers additional reporting required
Despite being a non-resident of the USA you may have enhanced reporting requirements for you activities in the USA. The IRS and certain States are quite stringent on how non-US taxpayers must report their interest in US trades, business or holdings in US incorporated companies
For example, dividends paid from a US corporation to a non-US share holder could be subject to a 30% tax withholding on gross earnings.
In addition to withholding, a US company would be required to submit certain international information reporting forms to the IRS, disclosing their interest from non-US sources. Failure to file these information return can see 5-figure penalties imposed on the company and shareholders.
Not surprisingly you may have questions and of course it would be best to speak with someone who can support you in your expansion when it come to some of the more complex cross-border implication of your business structure. S.E. Tax Professionals are here to support you in your journey through business growth and expansion into the USA leaving you to work on your business while we take care of the compliance.