7 Common Mistakes in Setting up an LLC in the USA as a Non-Resident

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If you’re a non-resident looking to tap into the vast and lucrative US market, company formation in the USA may be the right choice for your business. Establishing an LLC in the USA as a non-resident can provide numerous benefits, including the ability to do business in the US market from a customs and tax perspective, access to venture capitalists and other investors, the ability to enhance your business reputation, the possibility of obtaining a US work visa, and the potential to reduce taxes on income.

However, it is important to be aware of the common mistakes that non-residents may make when setting up an LLC in the USA. In this article, we will explore the 7 most common mistakes in company formation in the USA for non-residents and provide tips on how to avoid them.

Choosing the Wrong Business 

The most common mistake many non-residents make while establishing a business in the US is not choosing the right business entity. You can set up a sole proprietorship, a partnership firm, a business corporation, or a Limited Liability Company (LLC).

Establishing an LLC only makes sense if you wish to protect your assets from future business liabilities. Then there are differences in terms of:

  • Tax Treaties – which were originally designed for corporations. If you set up an LLC, the distribution process to foreign owners is quite hazy.

  • Tax Choices – are flexible in the case of LLCs but also more complex.

Many non-residents take cues reserved for US-based applicants and do not consider the steps involved, given their unique circumstances. Start by evaluating your needs thoroughly, including those regarding ownership, funding, paperwork, transfer of ownership, and exit options, and choose a business entity that fits well into your situation.

Choosing the Wrong State 

Most non-resident business owners choose to set up a business in the US without proper research on the different states. The market is full of “confusing” information regarding the preferred states like Nevada and Delaware.

Some of the main proposed reasons include low filing fees and exemption from state, corporate, and personal taxes in these states. Take all such information with a pinch of salt. If you’re looking to establish an entity with the help of outside investment from venture capital companies, angel investors, and private equity, Nevada or Delaware may be great states.

Since many investors only begin with Delaware C firms, setting up an entity in this state will spare you accounting and legal hassles in the future. Even so, it is better to set up business in the state in which you’re based.

Otherwise, you might encounter numerous challenges associated with opening a business account, paying a fee for operating as an “alien entity,” and appointing a registered agent. Besides these, the biggest challenge is to apply for a Certificate of Good Standing, also known as the Certified Copy of the Articles of Incorporation.

The total fees for documentation and processing may make the “home” state substantially less expensive. Finally, foreign nationals wishing to establish a business in the US have further considerations to keep in mind, such as international taxation, location choices, etc. So, do your due diligence before choosing a state of incorporation.

Not Seeking Advice from a US-Based Attorney 

Many non-residents try to walk the legal route all alone. You do not compulsorily need to hire a US-based lawyer or attorney to form an LLC. Online business formation services will help you represent yourself as an entity. But do remember that these services do not have the authority to give you accounting or legal advice.

Consider the scenario, four business partners establish a business in the US as non-residents. They apply through an online service, procure operating agreements and incorporation documents, and start their business.

Fast-forward a few years, and the business is growing—sales are skyrocketing—and the partners are looking to raise capital through venture capitalists. During a routine due diligence of the documents by the investors, it was discovered that the company’s secretary is the owner and not the founder!

What would this situation be? An expensive mistake for which US-based attorneys need to be hired. Not to mention, the company will end up losing an investor. If your company is mainly a complex partnership, seek the legal and accounting advice of the experts.

The best thing to do would be to work with services that have experienced legal advisors at hand. The skilled team will smooth out each process—import-export, immigration, real estate, supply chain, and more.

Not Understanding State and Federal Tax Laws 

The corporate tax scenario in the US is different from most countries worldwide. This tax is charged at the federal, state, and local levels. The Federal tax rate on taxable income may range between 15% and 35%.

As for the state taxes, they are levied based on the specific state’s jurisdiction. Businesses also need to pay a federal alternative minimum tax. Like individuals, corporations also have to file tax returns annually and keep a quarterly record of tax payments, payrolls, and estimated income.

Some businesses (based on the nature of their operations) may need to collect sales tax from their customers at the point of purchase. This sales tax is typically a percentage of the overall price—again, something that varies among states.

The sales tax must be paid every quarter and is one tax for which government officials will chase you first in case of default. Then there are double-taxation agreements between the US and your home country to consider. Such contracts impact profits derived overseas. A poor understanding of how corporate taxation in the US works can get you into some serious trouble.

Paying for “Low-Cost”

You can incorporate your LLC in the US by paying for advisory or execution-only services.

The execution-only services are cheaper, but there are hidden costs involved. For such services, you will need to do most of the heavy lifting, including having a clear idea of the company you wish to form. These services receive orders and seldom interact in a meaningful way.

If you are thoroughly sure of your needs and wish to avoid taking an expert’s opinion, you can opt for execution-only services. However, most (hesitant) business owners fall for the low-cost trap and get entangled in the process.

Choosing a team of experts heavily involved in non-resident business formations, payment services, etc., will give you the guidance you need every step of the way. What’s more, is that the advice will be tailored to your unique business needs. So, choose advisory services where the experts take the time to know your business and unique circumstances and then recommend strategies and solutions for incorporation.

Failing with Compliance 

Your business must stay compliant long after the initial application is filed. If a plaintiff in the future can prove that your business has not adhered to the letter of the law, your assets may be at risk.

To avoid hassles with immigration, taxation, etc., it is vital to maintain compliance. What comes under LLC compliance?

  • Keeping business and personal expenses separate
  • Adhering to the tax rules, both at the international and domestic levels
  • Submitting the Annual Statement on time, as needed by your state of incorporation
  • Among other things, purchasing relevant business insurance, such as inland marine policy and workers’ compensation insurance
  • Ensuring the business is never engaged in any fraud
  • Submitting the Article of Amendment in case of any business changes.

Besides completing and sending in all documents on time, you must keep copies for future reference. Seek expert help to maintain compliance (especially if you’re unsure) because the Internal Revenue Service (IRS) does not spare ignorance.

Hiring Themselves 

Many non-resident business owners start with no intention of relocating to the US. They complete the incorporation process with the help of reliable advisory services and start business operations.

However, they decide to move to the US to work. The biggest mistake is not applying for a work visa. This creates a situation where the business owner has no legal right to work for his company.

If they are found out, the state may decide to deport the owner without the right to return, and the company will be fined for hiring an illegal foreigner. Thankfully, this can be easily avoided by applying for relevant non-resident work visas, the most common being the E-2 Treaty Investor Visa, the E1 Treaty Trader Visa, and the L1-Intercompany Transfer Visa.

Grab a Helping Hand! 

Setting up an LLC in the US as a non-resident can be challenging and daunting. It can take hours to research and read through the various processes involved. After all, thousands of business owners fall for one of the abovementioned mistakes and delay the process at best or jeopardize it together!

However, seeking help from experts specializing in offering business formation help beyond borders will pave the way for a hassle-free incorporation journey. Your plan to set up a business in the US as a non-resident is an admirable one.

So, why wait? Get in touch with the experts and start right away!

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