Starting a business in the USA can be confusing for many foreign companies.
Type of entities, laws, and regulations, how to manage payroll for employees, are some of the doubts that trouble foreign SMEs that want to operate in the USA.
In the article, we will guide you to understand more about these aspects and how to effectively start a business in the USA.
Introduction to the USA economy and business culture
Economy
The United States is the world’s largest importer and the second-largest exporter that has free trade agreements with nations including Canada, Australia, South Korea, etc., and with a mixed economy supported by abundant natural resources, renowned companies, and global talents who were attracted from all over the world.
Business culture
American business culture is largely individualistic with freedom. Americans tend to communicate and address disputes directly and privately and speak in contexts. However, there are a lot of legal controls and regulations underpinning doing business in the USA. Therefore it can be difficult for foreign companies to penetrate the American market because of the scale of such a large country and the scale of its economy.
Business opportunities
Also, how businesses handle employees are influenced by diverse culture in American society. Meanwhile, with such a large-scale economy and diverse business culture, the American economy is full of business opportunities as well.
Challenges of doing business in the USA
However, the business landscape often changes in the USA by new technologies, trends, and policies. Examples of business opportunities presented by industry research include E-Commerce, AI technology, cybersecurity, and virtual consulting, etc.
Aligning with business opportunities are challenges facing businesses entering into the USA such as complexities in the taxing system, local regulations, high competition from multinational corporations, and multicultural environment.
Therefore, businesses entering into the USA market from time to time find themselves in need of professional help in setting up businesses and hiring employees in the States.
Types of entities in the USA
If you are interested in starting a business in the USA, it is crucial to have a strong understanding of the different types of legal entities available.
The business opportunities in the world’s largest economy are endless, and the country is one of the most attractive markets for entrepreneurship. The election of the right corporate structure is essential for the company’s future well-being and legal status.
The following structures are available for companies that want to start a business in the USA:
- Corporations (S, C, and Joint Ventures types)
- Limited Liability Company (LLC)
- Sole proprietorship
- Partnerships (Limited and Unlimited)
Corporations
A corporation is a common legal entity for larger companies registering a business in the USA requiring a more robust vehicle.
In the United States, there are both domestic and foreign corporations. Domestic corporations have been incorporated under the laws of the USA, while foreign corporations are incorporated under the laws of another country or state, and if they register with a certain state in the USA, they are authorized to conduct business operations in that state.
Taken from a functional point of view, there are two types of corporations that companies use to start a business in the USA – a business corporation and a not-for-profit corporation.
Types of corporations to start a business in the USA
Within the corporation type of entities, investors have different options to register a company or business in the United States. Depending on the entity’s intended activity they can be classified into business corporations and non-profit corporations.
- Business corporations: Formed for conducting business in a broad sense of the word, transactions are used to turn a profit. Under a business corporation, there are the C and S types of corporations
- Non-profit entities: self-explanatory
C-Corporations
This classification refers to any corporation in the United States that is taxed separately from the owners.
C Corps does not have any limits on the number of shareholders, both foreign and domestic. Anytime the profits or earnings of a C Corp are distributed to the shareholders, they are considered by U.S. income tax purposes as a dividend.
There are exceptions that exist for certain distributions that are made in exchange for stock instead simply as cash dividends. These exceptions include distributions for a shareholder’s complete termination of interest and distributions for the liquidation of the corporation at the end of its legal life.
S-Corporations
In order to be classified as an S Corp, three requirements must be met.
- It must be an eligible entity (LLC which has elected to be taxed like a corporation or a domestic corporation);
- Cannot have more than 100 shareholders;
- There must be only one class of stock;
Simply put, this model passes corporate deductions, credit, losses, and income through shareholders for federal tax purposes.
Generally, an S Corp is a corporation that operates under the laws of the state where the entity is organized. Income is taxed at the shareholder level, meaning that the money distributed to the shareholders was not previously taxed.
Certain corporate penalty taxes (e.g., personal holding company tax, accumulated earnings tax) do not apply to an S corporation.
Non-profit Corporation
This model is oriented towards companies incorporating a non-profit making organization attaining benevolent, educati