Incblog for enterpreneurs
Covering entrepreneurship and business start up questions for non-residents and US citizens.
Covering entrepreneurship and business start up questions for non-residents and US citizens.
Jun 22 2017
by admin | 19:06 GMT
Full transcript below:
Goutham: Hello, everyone. We’re just going to be getting started shortly, we’re just waiting for everyone to join. Hi, and good morning everyone, and thank you for joining. I hope you’re all well wherever you’re listening from around the world. I’m your host Goutham Bhadri, a current client of USA Corporate Services. We are live from New York City, right next to the world famous Empire State Building. And it’s my pleasure to introduce your presenter for today, John Gordon.
John is the president of USA Corporate Services and he loves helping non-US based entrepreneurs overcome legal, tax, immigration, and cultural challenges to set up a US company. He also serves on the board of Columbia Business School Alumni Club of New York. He is a yoga-practicing, home beer brewing, company founder, board member, husband, father and someone who can go on for hours about history, politics, and other neat stuff.
Today’s presentation is on How to Set Up an Import Export Company in the U.S., so if you want a piece of the $4.9 trillion of trade the U.S. does each year, you’re in the right place. John is joined online today by YYichen Ma from our Marketing Team. Yichen will be handling the Q & A today, speaking of which we’ve had lots of questions already and we’ll answer as many as we can during this webinar. If you have any questions as we go, please click on the Q&A button on your screen. And before you ask, yes, a recording of the webinar will be made available afterwards. Right. I know you’re keen to learn the Ins and Outs, so over to you, John.
John: Thank you, Goutham. Hi, everyone. Thanks for attending today and well, thanks to Goutham for that wonderful introduction. Are you sure that’s me you’re talking about? Well, people have been drawn to the U.S. market for its huge size, open competition, and well the large food portions. In today’s webinar, we’ll be discussing How to Set Up an Import/Export Company in the U.S. If you have questions, please let us know through the little Q & A tabby thing that should be showing in the upper left or the lower left of your screen. And before we wrap up, we’re going to have a section for Q &A.
Now, to get started, the first thing we’re going to talk about is whether you do even need to set up a U.S. company at all? It may sound odd for someone from the company formation industry to suggest you might not need a company, but you know it’s better for you to think about this now than further down the road after you’ve invested a lot of time for that reason. And actually the key thing is, how big is your company going to be? Will it be big enough to justify all the overhead of maintaining a company as well as trying to support a business in another country? So will you be earning enough based on what you think you’ll be able to sell? If the amount is below, let’s say $50,000 per year, you may not have enough to make it worthwhile. In that case, you can work with a distributor, or work with consignment dealers, or there’s different arrangements so you could make so you don’t go through all the overhead.
So if, you once you set up a company in the U.S., there’s a lot of rules that you will be subject to, the most famous being taxes. Also that, you’ll be part of the U.S. liability system, so once you become an importer of record, if import is what you’re doing, then you become permanently liable for what those products have done during the time that they’re still in the market. So it’s something to really think about before going to the rest of the process.
So, assuming that the answer after getting through scary first part here, assuming that you still want to go, this is a summary of the requirements that you’ll have to go through to set up a business. First, you set up the company, but then you’ll have to set up the rest of the processes and procedures of generating business and getting going. So we’re going to go through the steps, of which the first one of course, is location.
The United States is a federal system. And the federal system is kind of like imagine a big condominium high rise where you have 50 units. But the condo association itself has its own rules and all the tenants have to follow them. But within your condo, you can make a lot of your own rules as long as they don’t go past, as long as they fit within the rules of the condo association. If the condo association says no open fires in your condo, then obviously, you can’t have one. But other than that, they tend to make their own rules.
Now this starts to make a difference because you see that next to location is the state of incorporation. These two things don’t have to be the same.
So let’s worry about where you’re going to physically locate your business, assuming that you’re going to be setting it up physically within United States. So you have the choice of 50 states. Two are missing from this map, but chances are if you’re importing, you’re going to be in the continental United States. So that’s going to be a lot of decisions to make. And at the end of day, a friend of mine is a location consultant and he likes to point out that, you know, we can provide a lot of data, but it’s really what the client wants that’s going to determine it. Some people like warm weather and want to be in Florida, some people like the culture that you will get in New York City. Some people like the laid back atmosphere of California. Some people like the Wild West, or going to Texas. So you never know.
So, when it comes to methods of choosing a location, where to put your business. There’s these three methods, one of which is either actually taping a map of United States to a dart board, start throwing darts. Okay, that works. It’s very fast and can be kind of fun. But your chances of success are just as random. At the other extreme is hiring a consultant. That’s a lot more expensive. You know people like my friend are not cheap. They will do a lot of work, but again underneath it all, they’re still going to be looking at you for what is it that you really want? How would you define success? So that’s where the self-directed method falls in between. You’re going to learn a lot, because you have no choice. So you get a lot of insights into the overall market and then you can make your choice from there.
So this is our five-step method of choosing a location. Start from the end. What would a successful import or export business look like? What do you need in order to make it successful? This is step two. What are the steps? Do you need to be close to people? Do you need to be close to your market? Do you need to be close to resources? And also, are you worried about high taxes? Chances are if there’s a lot of people, highly educated people, the taxes in those areas tend to be higher than if you go into a more rural area, where there’s less services, less people, it’s also less taxes.
So as you start to think, what are the locations from step two that really meet those requirements, and you can start to put together a list of those places that start to meet it, which ones have the most positives? Which ones do you like the most but have the at least negatives to them? There’s no place that’s perfect, so what’s the least imperfect place? And then from that, pick a finalist so you can go on to the next step.
Next step is to cross into that second box from before. Do you want to be incorporated in the same state that you just picked or pick another state, which usually ends up being Delaware. Would that be better for you? It’s going to cost you more, no question about it, if you incorporate in a different state. The bigger your company, the less that the expense really matters but even a big company often started off as small and very concerned about his expenses, so there really should be a good reason to incorporate someplace besides where you’re located.
So at the end of day, over the years, these are the main reasons that people don’t incorporate in the same state where they are located. You know, if you’re looking to get venture capital then chances are the venture capitalists and a quite a few large angel investors, they want you to be in Delaware. We’re going to Delaware’s benefits shortly, but that’s just the way it is.
Say you’re operating across several states; we have a number of customers who will set up, say, in Georgia but then they want to be in, say, Florida, Texas, California, as they start expanding their services. In that case you might as well, since the extra expense is no longer all that much, incorporate in Delaware, get the lowest amount of administrative overhead. The corporate rules for governance are less intrusive than in most states, so Delaware makes sense there.
The next one is a situation that, that happens more often than you might think. You start off and you’re not sure where you want to end up. Your location search was difficult, you couldn’t find a good choice of balances and you just want to get started. But you realize that maybe you’re going to change your mind. There was somebody I met a while back who, she was a Columbia MBA. She and her husband wanted to start a business. And so we met at one of the network gatherings and so she found out what I did and of course, asked this kind of question. She’s in New York, but they’re going to be moving to Pennsylvania by the end of the year. But they’re thinking that, well, maybe to go on to the west coast afterwards, but they’re not sure. She says, “Where should we incorporate?”
With that kind of ambiguity, I said well, then, incorporate in Delaware, because that’s one of the easiest places to migrate from here to there without worrying about changing your state of location. If you start in Delaware but you’re physically in New York and you registered to the business in New York, then when you leave the state, you just file the cancellation of that registration and then that’s it, you’re done with New York. Then you just register to do business in Pennsylvania. If they move, fine, they can just move. If they don’t move, great, we’re all set. So it’s, this way they did, they never need to change their tax number, they can keep all the same bank accounts, they keep the same credit rating, and they keep the same contracts, everything is consistent.
The last reason, and this happens sometimes, is you just don’t like the disclosure laws of the state that you’re in. Some states ask a lot of questions. They seem to never be happy. Well, in that case, fine, you can go to another state like Delaware where they don’t really ask much. And then register to do business in the state where you’re located. I don’t know that that’s the best reason, but that’s what some people like.
And this is probably a good time to mention about what’s a foreign registration, because this one really confuses a lot of people. Each of the states likes to pretend that it’s an independent country, because they do make a lot of their own rules. And so, if something wasn’t created in that state, then it’s foreign. If a company was formed in a particular state then it’s domestic to that state. So for example, if you’re here in New York and your LLC was created in New York, that’s a domestic LLC. If the LLC was created in the state of New Jersey, or if it was created over in the island of Jersey, one of the Channel Islands, those are both equally foreign in the state of New York. So in either case, they would just be considered a foreign company. One of the reasons that they call it a foreign registration is that because of our constitution, each state has to recognize the equivalent of another states, well, stuff. So if you notarize something in New York, it’s valid in California. If you form a company in Utah, it’s valid in Vermont. So everything from license plates, and registrations, to other stuff, each state has to honor what was done in the other state.
So, if you’re a Delaware company doing business in Pennsylvania, then you have to do a foreign registration in Pennsylvania so your Delaware Company is legally doing business there. If you don’t, most states have some kind of penalty for you. At the least, you can’t use their court system. A lot of people think that’s not really a big deal until they had their first big contract for payment and no payment comes in, so of course, you want to sue for collection. Then they find out that they can’t, because they’re not registered to do business there. As far as the state is concerned, you don’t exist. So how can a non-existing company sue the existing company for the payment that wasn’t made? So this is one of the reasons that you really need to register where you do business.
Everybody likes to ask us this question: which one is better? So I like to think of being back in high school. I had a teacher named Mrs. Walsh. She was a math teacher. She was a dragon. Everything had to be perfect, assignments on time. You better show up for class on time. Everything had to be done just right, exactly the way she wanted it. Each step in a calculation had to be exactly the way that she told you it was going to be. Everything was rigid, it’s all set out properly. Mrs. Walsh would like corporations. I had another teacher named Mrs. Smith. She was very, we would call it, Lucy Goosey. Chinese would say,” suibian,” meaning “following convenience.” LLCs are great for lazy people, because like Mrs. Smith’s technique, first you learn your stuff and you get it done by the end of the semester, yeah, you get your grade and you’re done. So, there’s no big deal and there’s no tight regulations. Things are however it is you want to work it out, so as it all gets done properly.
Now, if you’re dealing with tax law, if you’re dealing with immigration, as a nonresident, then you wish you were in Mrs. Walsh’s class, with the corporation, with everything being very rigidly set out. Everything from how money is distributed? If you wanted to distribute profits from the company, it can only go to shareholders through dividends, which the board authorizes. In LLC, well if you’re the sole member of the LLC, you can take out your money pretty much any time, as far as the taxes are concerned, it’s all the same pocket so there’s no real regulation. It’s all kind of, again Lucy Goosey.
But a corporation, if you’re an officer, say the president, or treasurer, or CEO, or bottle washer, your compensation is probably going to be set by the board. And if you take anything more than that, well, that’s stealing. So you have corporations, where everything is very carefully documented. But with LLCs, things might end up being all over the place. You might have a nonresident tax return with some of your information. You might have some local tax returns that you could provide as evidence. It’s really just not very well organized as opposed to with the corporation, where it’s going to be very well organized. You don’t have much choice.
Another thing for the difference between corporations and LLCs is that, sometimes an LLC can give you a lower tax rate than a corporation can, because of the way that LLCs can avoid double taxation. They [LLCs] can take advantage of tax laws that corporations cannot. Again, Mrs. Walsh will not let you change your tax status. Mrs. Smith says, yeah, that’s okay, as long as it all gets paid by the end. So you may have to leave Mrs. Smith’s class because if you’re trying to get visas, in particular, where you have a business plan, you have to show contribution, you have to show value that you’ve done something, well, the stricter rules is going to work better for you.
Okay, so now you’ve picked a location, you’ve decided where you want to be set up, and you’ve also decided which type of entity. Now you’re ready to set up a company.
So when we do the incorporating process, first you’re going to register your documents with the government where you’re going to be incorporated, and in other states if needed. You know, that’s a foreign registration part. Part of registering new company is coming up with a name. That also might be a bit more complicated than you might think. We often ask, can we use the name of the foreign company, parent company, for a subsidiary? The answer is yes, as long as it’s available and nobody and else has taken it. Some people have asked us whether taking a name in one state stops people from taking in other states, and the answer is no. States only care about what goes on within their own borders. So once you’ve incorporated in one state, it doesn’t stop anybody, including a competitor from using the same name in the next state over. It’s just the way to rules are.
So once you’ve registered the company, you’ve done all your documentation, gotten everything else set up, then in order to do almost anything in the United States, your company will have to get a federal employer identification number, which is also known as the federal tax ID or the federal tax number. If you’re a non-resident, without a Social Security number, yes, it can be done, but it takes a while. Lately it’s been taking a couple of weeks to get a response. The IRS seems to be slowing that process down more and more.
Then as you get you’re confirmation, you’re now a real company. Then you set up your organizational documents. This will confirm who owns the company, which are the shareholders or the members, if it’s an LLC, and it sets out who’s going to operate the company. The management, which would be directors and officers of a corporation or the managers of an LLC, and then they adopt the operating agreement or the bylaws, depending on which type of company it is. This is also very important, because when you go to set up a bank account, they want to see who owns the company and who is managing the company, who is authorized to do stuff. So by time you get to the bank, you’re going to need a tax number and you’re going to need to show who is authorized to do what.
Going to open a bank account is the one part which definitely requires a visit to the United States. If you don’t come to the United States, then whatever bank you’re using is in violation of the Patriot Act, which requires banks to know who their customers are, and they must have either met the customer at the branch, or at their place of business. This is something that’s only getting more and more strict. The requirements are getting harder and harder every year. So now this has become, by far, the most difficult part of this whole process.
So, now you have a bank account. You’ve got your company set up. Now you’re ready to start leasing office space and just generally, conduct business.
So, now you have a company and you want to start doing your import or export or both. Actually, an expert once told me that if you think that you have an import company and you’re not an exporter, what do you do with returns and vice versa? I would say that the first thing you need to do, absolutely need to do, is find a good customs broker.
If the crazy quilt of corporate laws around United States, you can see each state is all different, if you think that’s complicated, customs are set up by the federal government but their regulations are just as all over the place. It’s really, really difficult to make sure that your goods will come in when and where you want them to. The customs broker can ask you the right questions so that when they get asked questions by the customs people, that they can answer them and then expedite getting it onto you or to your customers. If you’ve not been doing that, if you don’t use a customs broker, your odds of getting stuff through consistently is very, very low.
Another thing you’re going to have to know about is, the various state and federal regulations about your product, before you set up your company. We have friends who are setting up an import company to bring tea in from Taiwan. It’s been taking a bit longer than they expected because there’s just so many regulations. And even though the product is very simple, there’s a lot of rules, as things get more complicated. Like if you are trying to smuggle in weapons or actually, if you’re trying to import pharmaceuticals of different types, there’s a lot of regulations, but, this being America, prior the hardest regulation is trying to import wines and other alcohol. That stuff gets very complicated. It’s cheaper, all around, if you find out the regulations before you even try to set up your company.
Then once you become familiar with those federal and state regulations, now you can confirm. So what licenses and permits will you need? In the past, we’ve dealt with all sorts of companies, so one thing that we do know is it’s too complicated in the one hour of webinar to try to explain what any of these things would be, there’s just all sorts of stuff. And again, it’s at two different levels, federal and state.
Step four is the one that’s often the most forgotten, what insurances will you need to carry? And then, what do you have to do to get them? Just because you can go out and buy a policy, insurance companies are notorious for finding out how they can get out of paying you. So if you have, one thing you will definitely have to get is product liability insurance, because once you become importer of record, well you’re going to be attached with that. Product liability is a huge thing in the United States, so you’re going to have to carry that one. They’ll also have different types of insurances depending on if you hire people, there’s going to be a need for workers compensation and disability insurance…and of course, you may want to think about getting health insurance, as you may have heard about the United States and the health care system, or lack of it. So these are all things that are needed. This step four is probably the most forgotten step of setting up a U.S. company. And if you’re importing products or exporting, and you’re not sure what can go wrong, then I suggest you find a very good broker and have a long discussion. Insurance is not a very exciting topic, but it can also kill your business if you don’t have it.
And step five, now go out and get them. So, if you’ve been finding out, once you’ve formed the company, then now it’s time for you to go out and get all these licenses, permits, insurance, and whatnot.
Everybody asks about taxes. The one that you’re going to expect is that yes, there will be a lot of taxes. This is something people often want us to predict before they set up the company. It’s not going to happen. No one, not even a CPA with a doctorate is going to be able to explain to you what your taxes will be before you’ve submitted all the documentation to prepare a return, because you have federal income taxes, state income taxes, state sales taxes, there are local taxes, which could be anything from city taxes, for example, New York City has a city income tax as well as if you live here. So you get to pay a city income tax, a state income tax, a federal income tax, there’s also property taxes, it just goes on and on and on.
So in general, there are taxes on your business and then there’s taxes on you. So as you see here, there’s commerce taxes and consumer taxes. These categories are a little bit misleading, because a business becomes a consumer when they buy a product. If you’re buying, you go down to the store and you buy copy paper or pens that you’re going to use at your office, you’re a consumer. It doesn’t matter if you are a business. As an employer, you’re going to pay taxes. As a property owner, you’re going to pay taxes. And in a lot of places as a renter, you may end up helping the landlord to pay his property taxes. And there is investment taxes, so this is just part of the complication of doing business in the United States.
Next year. So, the second year, you’ve definite got to prepare tax returns, as we said from the previous slide. And then depending on what state you’re in, or how many states are in, you can be preparing annual reports and paying annual fees for your company to the secretary of state or whichever agency that state collects. If you have visas, then you’re going to have to make sure you can prepare the documentation for renewals on those. And then it’s just wise to do a review of progress or make your adjustments to your business model matches.
Now, going back a little bit on taxes, this is a good time to mention that federal taxes apply equally throughout the United States. There are states, to me Nevada comes to mind mostly, but some people think that Delaware has this as well. That it’s some kind of domestic tax haven, that’s not subject to taxes. No, federal taxes apply to all U.S. persons. And your company would, when you set up a U.S. company, it’s a U.S. person. It’s going to pay federal taxes, no matter what. Just because you incorporated, let’s say in Nevada, which often markets itself as tax-free Nevada, that’s true. They have no state income tax. If you set up at Nevada company and you register to do business in California, well you’ve got to pay California taxes no matter what, because you’re in California. You’ll pay federal taxes, because you’re a U.S. entity in the United States. You will pay Nevada taxes because Nevada doesn’t have company income tax, but they do have quite a few fees you’ll be start paying.
So the other thing is that Nevada won’t tax your income, Delaware says the same thing. If you earn money outside of Delaware, you won’t pay Delaware tax or you wouldn’t pay Nevada tax. This is all true, but it’s also true that if you incorporate in California and you are earn all your income in Utah, you won’t pay anything more than the minimum California tax, because you’re not in California and they can’t tax you. So this doesn’t make California a good offshore location, but it does mean that it’s misleading to say that Nevada was tax-free. If you’re not there, of course, there is no tax. They wouldn’t be able to tax you no matter where you came from, because you’re not there.
Now, expertise that you will need. Well, one thing that I can tell you from the experience of customers is, you will need an accountant, because virtually any American business uses an accountant. You can’t do it on your own. But if you’re a nonresident, you will need an accountant with international tax experience. Don’t rely on the help of an inexperienced but cheap accountant who only has domestic experience. You can be like one of our clients who found out that the cheap accountant that they went to after ignoring our advice, well, they save money up front, but guess what, this accountant didn’t realize they have to file this thing called form 4571. And that’s for any company, LLC or corporation that has more than 25% ownership that’s not U.S. resident. So failure to file this form is a $10,000 penalty. So they may have saved maybe $1,000 by getting a cheap accountant, they also had to pay a $10,000 penalty because this cheap accountant didn’t realize. And they also ignored the 30-day notice the IRS gave them as a warning that, you know by the way, you didn’t file this form on time but we’ll give you 30 days to catch up. The accountants ignored it. Then they got the real notice that said no more time out pay. Then the accountants realized that they are on the hook. It’s really…because if they try to force the client to pay it, well, the client can turn around and sue the accountant. So the accountants begged the IRS for a little extra time and apparently it worked it all out. But this was a lot of needless stress, because they just didn’t have the proper experience. We know of companies that have tried to take this cheap route and within a year, they found out that that’s not a good idea.
The customs broker, we already talked about. That’s something that it’s just not going to work well. It has no happy ending if you try to get stuff into United States past to customs people who look for irregularities and they can re-categorize stuff as this or that. It’s just not worth it. Just hire the customs broker, pay them and get it done right. You’ll need a registered agent for your company. I hope you choose us. One of the things that a registered agent can do on top of just acting as somebody who accepts service of process, is that they can also tell you when things are, or do what certain things actually mean. Yeah, it’s just…well, it depends on the skills of the registered agent, I guess.
Lawyers, and the reason that lawyers are down here on the second role is that, well they tend to specialize because the laws United States are very, very complex. So an immigration lawyer probably is not good at intellectual property. As a matter of fact, if they’re good at intellectual property, don’t go through them for immigration. The intellectual property guy can help make sure that your trademarks can be registered properly, which is good if you want to preserve your own brand. They can file patents to protect you against copycats. They know a lot about the timing, or for that matter, and this is something that plays back with the customs broker, you might be importing goods and then it turns out that you’re infringing in somebody’s trademark and the customs people are getting all upset. You may need the lawyers as well as the customs broker to sort that one out.
And the corporate one, if you’re setting up a pretty basic, either a subsidiary or this is entrepreneurial venture for a very basic company work, you may not need a lawyer. If you’re starting to get investment, talking about serious money, then yes, we would definitely recommend when you need legal work get it done. Get it done properly. And find somebody who knows what they’re doing. Now, if you’re hiring staff, you will definitely need a payroll service. If you think you’re going to figure out the different rules of 50 states about hired staff, most U.S. companies now use a payroll service because what some of the local governments will do or sometimes the IRS, they can come back to you several years later and say, oh, we reviewed your form 941 and we found irregularities and you owe us X amount of dollars. The payroll service they can argue, but when he is, probably then you can. And they should have all the records all in the right place and they just push back and say no, you don’t, or they can tell you, oh, yes you do. Sorry, it was our mistake. Or, sorry it was your mistake, you didn’t report something.
So these are the different experts, at the minimum, that you’re going to need in order to successfully get your business off the ground and out of trouble. So, that’s enough talking for me for a moment. So before we wrap this up, we’ll open up the floor to new questions.
Okay, Mario Lopez has an interesting question. Your business is projected to make $15,000 a year or more, is it worth it to continue with the idea? Actually is saying, five zero thousand, $50,000. I was really thinking gross, but then again it depends on your markup. It depends on how big you want your company to become.
Kunam asks the question of how are Florida state laws for incorporating a company as compared to Delaware. Well, I would say that at the end of day, most states have very similar provisions and over time they tend to converge. So if you’re comparing Delaware, or Wisconsin, or Florida, or Texas, as a small business, small to medium, you probably won’t see a whole lot of difference. At the end of the day, if you want something that’s not where you are located, then again, we always fall back and just go to Delaware. Chances are Delaware could…one third of Delaware state budget, how they pay their bills every year, comes from incorporating business. So they try to make sure that every year they review the law so that if someone has come up with a good idea, next year it’s going to be in Delaware’s law. The other states, well, they may experiment or they may just ignore it for several years or it could be like New York and things go dysfunctional for a few years and then they wake up and they correct everything and then they go back to sleep. So that’s where Delaware has a benefit. But if you’re thinking to set up in Florida, then probably you can just set up, incorporate in Florida.
GF asked the question, do I need to register my company in all states where I keep my inventory in general? Yes, unless it’s a very small amount or it’s only for a short period of time. The more involved you are with the state, the more it is that you’re likely to have to register. And while I hate to be vague about that, most state laws don’t come out and say, if you do this, then yes you have to register. States prefer the opposite method, which infuriates everyone and makes us all say, it depends. Because they’ll say well, if you’re incorporated, if you open a bank account in a state and that’s your only activity, then you’re not doing business here, okay? But then they have rules like that, things that you probably wouldn’t really where notice too much. So use it as a bright lines though, is that if you’ve hired somebody to work for you in that state, then you get to register. If you keep inventory in that state, you probably have to register. Definitely, if you have an office, if you own real property, you are doing business in that state. You’ll never get away with saying that, oh, I didn’t know. So if you have substantial inventory, then yes. Especially if you’re keeping it there in a long term basis.
Etham is asking, for import and export company to expand business need to have more property, do I need to change the type of company? No, you shouldn’t have to change the type of company that you have, even if you grow larger. Either type of company can grow as large as you need it to. There are some very large LLCs, there’s a lot of very small corporations. It’s not the entity, it’s how strict do you want to be. And with an LLC, sure, you can do business inside United States. But if you are doing business outside United States before and then you start to do business inside the United States, then you’re going to have to start filing nonresident tax returns. Or if you become a resident, then of course, you have to file a resident tax return. So that will be your main difference, the accounting for the time outside the U.S. Generally it would just, in your tax number application you would just say, date started business. It would be much later than the date of formation. The question, how to find good import/export opportunities? There’s actually a number of websites. Unfortunately, I don’t have them with me right now but, yes, there are. I wish I could remember. If you want to ask me later, I can send it to you or we can put it into a follow up.
Taran, as an Indian citizen, I want to set up a software company with a low tax rate. Which company will be good? Well, we would usually recommend just going with Delaware. Because if your business is outside the U.S. or… one of the ways that they determine where you’re doing business is where is the economic activity taking place? So if you have an LLC but the business is all being done outside the U.S., then you may not be considered to be doing tax. But I would suggest that you get a very good accountant to speak to first, because this is the kind of ambiguity that the tax authorities love.
Okay, Francisco has asked a great question, if the source income is non-U.S., it is not subject to federal taxes as I understand? That depends. If you have a U.S. corporation there is no, with one big exception, it’s definitely subject to federal tax. Corporations are U.S. person, they’re subject to income tax on all their income worldwide. So it doesn’t matter if it’s non-US sourced. There was a proposed tax change or border adjustment that would have made us very happy for our business because if all our non-U.S source income….if we’re considered to be exporting companies, then all of the revenue that we earned would be considered nontaxable but we still maintain all the deductions for paying the state filing fees, we would’ve been very happy. But that’s not the law. So we continue to pay taxes on our worldwide income. Now for an LLC, this is often true. If you’re a nonresident using a U.S. LLC and you have both U.S. and non-U.S .income, my understanding is you can exclude the non-U.S. income, which makes it a benefit. And if we register in Delaware, does it matter where our location address is? Yes. So if you register in Delaware but you’re doing business in Pennsylvania, even though they’re right next to each other, then you’re doing business in Pennsylvania and you have to register to do business there. If you’re earning income in Pennsylvania, then you’re subject to federal and Pennsylvania tax. Yes, we can recommend customs brokers. We can send that out as a follow up.
Great question, is it mandatory to have an employee? No, it’s not. That’s a great question because it’s a very easy, yes no. I’d have to say it depends. Well, unless you’re trying to get a E2 or some type of investor visa, or if your company would be applying for L1s for the management, then yes, you would have to have employees. E2 and other investment type visas is the creation of jobs that justifies a visa according to Congress. So yes, you would have to hire employees. But in general, if you’re just setting up U.S. business and then, you know just getting it started, then no, you don’t have to have any employees. Quite a few companies do not. As a matter of fact in America, it’s very common on real property buildings and land, through using an LLC, which would have no employees. It just owns a piece of property or owns an asset. Yes, actually we have resources on our website that you can go to, at usa-corporate.com. We have resources which has the international tax accountants, lawyers, and customs brokers.
As a Canadian citizen, Canada is in a very unique situation because being so close United States, it’s very easy to see all their literature about how easy LLCs are compared to corporations. If you’re from Canada, well, don’t use an LLC unless you enjoy double taxation. It’s actually worse than a corporation on the U.S. side. Corporation would get a tax credit against any US corporate taxes and withholding taxes. An LLC does not. It’s not the American fault, it’s the way that the Canadian law works.
But if you come to run a company in the United States, there’s different visas that you could use. But yes, in order to work for your company within the United States, then you would have to have some type of visa. Unless Mr. Trump gets rid of NAFTA, you can use the TN9 visa to come in, and that’s where you would present your documentation at the border when you cross. The only risk in the TN is that if the, I don’t know, the border guard is going through a divorce or is otherwise very upset, can look at your documentation, refuse to let you in. There’s no appeal. You have to go home. So that’s about the only downside to the TN that I know of. Otherwise, it lets you work within the United States. The other thing you can do is just officially work, if your U.S. Company pays you to work outside the United States, then there’s no visas required. Except for, of course, to come in through visa waiver.
Location consulting is several thousand dollars, at least. But how expensive it would be depends on what you’re doing. If you’re thinking to set up some kind of stylized Irish pub that’s going to be somewhere in the East Coast, that I don’t know if it’s all that expensive. You know, it could be several thousand, but compared to say, setting up a new auto parts manufacturing factory, that’s going to be a lot more expensive. Immigration lawyer, yes, we work with a couple. And they’re also listed on our website at usa-corporate.com.
If the parent company is in the UAE, which is tax-free, and you open branches, then you will be subject to U.S. tax and branch profits tax in the United States. The tax-free part, if it’s tax-free outside the United States, that’s irrelevant within the United States.
L1 visa times, as far as I know, they can still be expedited unlike H1B. So expedited is, well, most visa processing goes from either, from a few weeks to several weeks to a few months. Congress and the new administration keep cutting back on staffing at these places, at the CIS that handles visas. So it’s not fun to get a visa right now.
Okay, here’s a question about regulations to import food to United States. I would start with Customs and Border Patrol. I would speak with a customs broker. And you can be sure that the Food and Drug Administration will also have some something to say about it, there may well be local regulations as well. So I think the best way to start though is, just talk about a customs broker because they’re the ones who are going to have to try to help you get it through. Third-party warehouse storage. Quick answer is, yes. If you still hold title to your products, that’s your inventory, even if it’s someone else’s warehouse. So the fact that you have product being stored in a state, usually that would be considered a reason to require an application for authority.
How do you choose a customs broker correctly? Very good question. That’s something that, in a way it’s the same way you would use any kind of help. Talk to them. See if they really, you can even test them out a bit, see if they have references they can give or stories they can tell about how things have gone right, how things have gone wrong, what did they learn about? Because if once you’ve discussed with them to find out if they have…you might also want to find out if they had experience in bringing in what I’m bringing. If somebody has been bringing lumber into the United States or oil, but you want to import tea, I don’t know if that experience crosses over. But if somebody’s been bringing in food, say food and beverages, and you want to import tea, and then they probably have some pretty good ideas about what’s required.
Okay, GF, you have a very good question. Can I set up a corporation that operates two businesses, like an import export business and a consulting business? The short answer is, yes. And the answer that…If you want to think like an American who’s been experienced in business, you would set up two companies. And the reason is if you have two companies which are in different fields and they have different levels of risks, they have different customer base, you’d want to split those two companies apart. You want to split them into two separate operations, that way you can see, is your import export company, is it making money? Is it losing money? If you mix it with the consulting business and consulting is doing really well and import is losing money, you may not see it. Because all you see is that oh, we’re making money. Also, import export is going to have one level of risk, including being for example, importer of record, you don’t want something that blows up on you there to affect your consulting business, which should be in a whole different risk category. And the thing with consulting is that the risk there is usually errors and omissions, or somebody just doesn’t like your work. So why would you risk your import export company against an angry consulting client?
So generally speaking, it makes more sense to split these into two companies, but legally, sure, you can either operate different businesses from under the same LLC or corporation or you can, yeah, you can mix and match as you like. Or you can even do different businesses, sequentially, if that’s your thing. You can be doing import export for the next two years and then decide you’re bored, you want to do consulting because there’s more money in it, stop import export and just start consulting. Same company, doesn’t matter. That’s perfectly legal. It’s the opposite of some country is where you, when you set up your company, you have to set out the scope of what you’re going to do, and that’s all you can do. Here it’s the opposite. There’s things that you cannot do, because you need a license, or like if you’re an import export you can’t offer medical services, unless you’re a doctor, and that’s going to be a different type of company. So, as long as it’s not a restricted thing, you can do as many different types of businesses as your imagination lets you, or that customers will pay you.
Tracy McLaren is asking if her UK Company can export U.S. goods to Africa or other places. Are you better off incorporating a company in the U.S. or getting a customs broker to handle this? You could go either way. You probably wouldn’t have much U.S. income tax if you do just purchasing through UK company, you can probably just use the customs broker and try to avoid U.S. tax altogether. The U.S. Company would probably end up earning, if you use an LLC, you might also be able to avoid the non-U.S. source income because the purchasing would not be considered taxable activity since you’re spending money, not earning it. So in your case, if it was me, I think one, I would get tax advice from somebody who knows what they’re talking about, and then two, assuming that it is what I think it is, then I would just use an LLC, again, as a nonresident. As a U.S. resident, I’d probably use an LLC anyway, because it’s easier.
Elton has the perfect question I was going to mention earlier, if I sell internet services like email accounts in a different state, do I need to pay taxes on that state? Thank you, Elton. You reminded me of a point I was going to make earlier. It doesn’t matter where your customers are, for tax purposes or for registering to do business. It only matters where you are. If you’re, let’s say you’re in the beautiful state of Vermont, up in the mountains, and all your customers are in California, you’re going to pay income tax at the state level in Vermont. Again, your federal taxes are going to be the same, it doesn’t matter. But you don’t pay California income tax, because the company didn’t earn anything in California. You’re in Vermont. And even though all your customers are over there, it doesn’t matter. They send the money to Vermont, you do what you do, they get the goods or so whatever it is. So you have no, in that sense, you have no connection to the state of California. You pay taxes in that state where you’re actually doing business. It also works with purchasing just because you buy all your goods from California then you sell them in Vermont and you’re located in Vermont. Again, you haven’t done anything in California, there’s no tax due there.
Skating a little bit on to thin ice with the L-1 visa question, says…as per L-1, do I have to employ or I have to hire an employee which would be someone from my place to look after the business. Does it have any minimum wages/salary for the manager? Yes, if you have an employee, then you get…this goes back to the big condominium of the United States. The federal law sets minimum wages. Actually, you cannot discriminate and you have to pay, at least, minimum wage for the hours worked. States can make it even tougher. So they can have states or like the city of New York has an even higher minimum wage. So yes, you would have minimum wages to pay and you had to be careful about which state you’re dealing with to know what that minimum wage would be.
Okay, another good question from Dixon Lowe, should we get a visa before incorporation or should it be the other way around? You can’t get a visa before incorporation, at least for the business visas that would be relevant to this discussion. Because it’s the business that’s applying for the visa on behalf of, if it’s L1 then it’s going to be for management people. Or if it’s E2 for investment, you have to have a fully functioning company with investment already made in order to apply for E2. So set up comes first. The U.S. government makes you take all the risks first before they take the risks in giving out a visa.
Do Dutch nationals have any special privileges or benefits to set up an import export company? No. U.S. law doesn’t really have a preference system. They just know that you’re not an American and you need a visa to come in. Maybe the reviewer likes or dislikes Dutch, but just because the city right where I am now used to be Dutch territory doesn’t make it any friendlier to the Dutch.
Okay, one last question. So Martada Harad [SP] says, is opening a branch is better or forming a new company? Here’s a reason that opening a branch is probably not a good idea. First, not surprisingly, a branch office would be subject to the branch profits tax, which is technically, a tax but it really just makes a foreign company pay the same amount of taxes as a U.S. company would, or a U.S. business would. So it evens out, but the expense, the inconvenience and the reason it’s not nice is that it’s an accounting headache and so your accountants will charge extra for it. If they don’t charge extra for it, then you better watch out and get a new accountant because you’re going to get hit with a lot of penalties from the IRS. The bigger reason is that if you use a branch, then your parent company has a toehold to United States or maybe more, which leaves it open to US litigation being able to seize assets from overseas. If you use a subsidiary, it’s the subsidiary that becomes a target within the United States, and you can pretty much adjust the size of that target. If it’s a branch, then you’re wide open to the U.S. litigation system, and I don’t think that that’s a good thing.
And with that, we’re out of time to do questions. So, let me wrap up by saying, now that you know what you need to do, to a large extent, and this recording will be available soon. So you’ll be able to review for example, the whole chart from the very beginning, then you know that we like to thank start from the end and work back. That way you can avoid the most serious business killing mistakes. If you want to be a successful business, you don’t want to be worried about compliance anymore than you have to. But then again, that’s one reason that we recommend for many people from outside the country and you’re setting up U.S. Company then go into Mrs. Walsh’s class. She’s very strict. Yes, she’ll hit you on the wrist or on the back of your hand with a ruler, it hurts a lot. So you follow the rules, that way every time somebody has a question, whether its litigation, justified or not, visa applications, tax returns, if you’ve been doing everything very strictly and by the book, then you don’t have to worry about compliance. You’ve already done it. And it just becomes a habit. Hopefully, you can grow to the point where you have somebody else who understands local rules and then take care of it for you and then you don’t have to worry about it.
So, think from the end in order to get to the success that you’re looking for, and then start from the beginning by setting up with those things in mind. And with that, I’d like to turn over everything and thank you all for coming over. I’ll turn over the mic to Goutham for his final remarks. And thank you very much for attending and for all your questions.
Goutham: Thank you, John. Okay, I hope you’ve all enjoyed today’s live webinar. Thank you all, for listening and participating. And thanks also to John, for presenting the webinar today and to Yichen for the online Q & A help. And I can hear her frantically typing as she answers all of the questions that kept coming in.
Watch your email for a recording and to hear about future webinars. As you can see, setting up a company can be complicated so please do leave it to the experts. I can talk from firsthand experience how beneficial it was when U.S. state corporate helped set up my company. And as John mentioned, if you’re considering creating a company in the U.S., please contact the team at [email protected] and they’ll be happy to help. Until then, good bye.