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5 March 2021 | Taxes in the USA for natural persons: Tax liability & taxation

4. March 2021 | Founding a company in the USA – you should know these rules as an investor! (this contribution)

February 2, 2021 | DBA USA

27. January 2021 | Taxation of corporations in the USA: dividends from subsidiaries

If a German entrepreneur wants to start a company in the USA, then he should consider a whole series of requirements and other aspects. On the one hand, this is only possible for some types of companies if the entrepreneur is and remains personally based in the USA. It is also important that you know the legal situation of the state in which you want to set up the company. After all, most of the details of a foundation are related to this. In addition, it is important in advance to have knowledge about the taxation of the company both in the USA and in Germany.

New US Tax Law: Only 11% Taxes for USA Corporation

We explain how corporations in the US tax the distribution of dividends from foreign subsidiaries.

Founding 1st company in the USA – Introduction

Starting a company in the USA is tempting for many German entrepreneurs because there is a much larger market than in Germany. But in order to participate in this enormous potential on the ground, you also have to know the rules of the game. For example, in the USA, unlike in Germany, the federal system is such that the Federal Government only defines the general guidelines when shaping the framework for company law. In fact, the federal states are actually the relevant legislators with regard to company law and thus also with regard to the conditions for setting up a company.

But the individual states in the USA also play an important role in the taxation of companies. Although there is a uniform income taxation in the USA, which corresponds to the German taxation. However, the states have also adopted their own taxation regulations.

Beyond the legal and tax aspects, which you should know before deciding to start a company in the USA, other points are also of great importance. After all, as a US entrepreneur, you are also active in the environment there with all its peculiarities. Therefore, in our article, we look at both the generally valid aspects that one has to consider when starting a company in the USA and the most important factors that can affect a US company after successful foundation.

2nd company founded in the USA: legal framework of corporate forms

As already described, there is basically only a rough legal framework in the USA to distinguish the different types of companies. On the one hand, there are partnerships, but on the other hand, there are also corporations that most states recognize uniformly on the basis of certain criteria. But the federal states themselves are fully autonomous in designing the legal framework, for example company law. But even if a federal state decides that a certain legal form should not find an equivalent within its own borders, it may still recognize it in the other federal states in the form applicable there.

In the past, it happened again and again that a federal state introduced its own legal form in order to offer entrepreneurs a location advantage. This was the case, for example, with the Limited Liability Company (LLC), which established Wyoming in 1977 as the first state. Since this legal form was very successful, other federal states followed this example, so that in the end the federal government came on the plan and codified essential features of this corporate form in a uniform manner.

No matter in which form of company you want to be economically active in the USA, there are some general features that you have to consider when starting a company in the USA.

3.1. When is an Immigrant Investor Visa Required?

First of all, you have to distinguish whether you want to start a partnership or a corporation as a company in the USA. Because in the case of the partnerships it is in principle necessary that one as an entrepreneur is also based in the USA. This is related both to the establishment of the company and later to taxation. Thus, the application for a so-called EB-5 visa, also known as the Immigrant Investor Visa, is unavoidable.

In this context, we would like to point out that there is an annual quota of 140,000 applicants in residence permits for entrepreneurs investing in the USA. The waiting lists are therefore correspondingly long. Investors from China in particular have a keen interest in this.

To obtain such an EB-5 visa for investing entrepreneurs, you have to submit a series of applications and provide the necessary documents. However, if the US authorities find errors or even deliberate misinformation in the rigorous examination, this can lead to the fact that, in addition to a refusal of the EB-5 visa, all future visas and thus all legal entries are excluded.

3.2 Creation of new jobs

Furthermore, the regulations stipulate that at least ten new, permanent jobs are created full-time (at least 35 hours per week). The respective entrepreneurs themselves and their family members as employees are excluded from this count. Of course, only employees who have a valid work permit in the USA can come to the approach.

However, if a company in the later course of its activity falls into difficulties, the authorities may allow temporary exemptions to the number of employees.

3.3 Investment capital

Probably the most important condition to consider if you want to start a company in the USA concerns the capital to invest. Two cases can be distinguished. On the one hand, the existing regulation since 21.11.2019 provides for an amount of USD 1.800,000 as an investment amount in the USA. This is the normal case. On the other hand, it is already possible to obtain a so-called immigrant investor visa from an amount of USD 900,000. For this it is necessary to invest as an entrepreneur in rural areas or those with a high unemployment rate.

By the way, the US authorities also check whether you are the legal owner of the planned investment amount. Again, an entrepreneur must submit appropriate proof before he can start his company in the USA.

It should be mentioned in passing that before the specified date the minimum amounts of capital to be invested were USD 1,000,000 and USD 500,000 respectively. They were raised to take account of inflation. Further adjustments to the inflation rate are also expected at intervals of five years. So the next adjustment is planned for 21.11.2024.

3.4. Naming rights of the new company

The name of the company you want to start in the USA can on the one hand be considered a company on a local to federal level. On the other hand, national trademark rights and other related factors can also be relevant in the establishment.

3.4.1 Entity Name

On the one hand, you can register your company locally, which protects it at least regionally by name. This formal name of the company is called Entity Name. Thus, in most states, no other company may use this name in the same state.

3.4.2. Trademark

In addition, other naming rights may be relevant. For example, the registration of a trademark is useful to secure the name of the company in the other US states, no matter what type of name a foreign company may be there. In particular, this is important when starting a company in the USA because you have to expect legal disputes and considerable legal consequences when using an already awarded trademark. The trademark includes either the company itself or the services it offers. Both are eligible for registration and can therefore enjoy legal protection.

3.4.2. Doing Business As-Name

Furthermore, there is the possibility that you provide the company you want to start in the USA with a so-called Doing Business As name. This also represents a kind of company, but can also be used as an unofficial name of the company for general use. This includes fantasy names. Also such a name abbreviated to DBA can be registered locally.

3.4.3. Other names implications

Apart from the trademarks, the actual provisions on naming rights vary from state to state. In some states, there are certain requirements for certain types of companies or industries. Furthermore, it may be necessary to register a specific company name in order to open a bank account to the company. Finally, in the case of certain types of undertaking, information on this must also be integrated in the chosen name of the undertaking. However, the individual states determine the regulations themselves. It may even be possible that alternative abbreviations for a form of enterprise may be allowed.

3.5. Further specific requirements

Of course, depending on the type of company, there are other regulations that you as a company may have to observe. For example, the recognition of a professional qualification for certain activities by the US authorities is a possible condition. In addition, licenses to operate certain enterprises may also be required. The location of the company also requires careful examination, because local authorities allow commercial activities only in certain areas. In particular, resident areas should be protected here.

So it is highly recommended that entrepreneurs who want to start their own company in the USA should also be well informed about this. However, it must also be ensured here that there may be different regulations in some states.

Starting a sole proprietorship in the USA is only possible if you are also based there as an entrepreneur. On the one hand, this means that a US citizen must actually have a residence in the USA. On the other hand, this has the consequence for interested foreign entrepreneurs that they have to apply for a residence permit.

Furthermore, in most cases you do not have to register the company name with the local authority. The business activity as an entrepreneur alone justifies what is called sole proprietorship in the USA – with all the associated consequences. Thus, it is quite easy to set up a sole proprietorship in the USA.

5th company founded in the USA – Partnerships

For partnerships (GP, LP, LLP), the regulations for establishing a company in the USA are similar to those that apply to individual companies. However, company law aspects also come into play here, for which there may well be separate framework conditions in the individual states.

In order to form a partnership, there is usually no need for a written social contract. An oral contract is already valid. Often a registration with the local authorities comes into question. According to the applicable federal company law in the case of limited liability partnerships, it may be necessary to submit a company contract for their registration (a so-called certificate of the respective corporate form). It must then contain at least certain information, for example for the purpose or name of the company and its partners. There is no formal requirement for this, such as certification or even notarisation.

In addition, federal law or other local laws of the county or city in which the company is founded may require a partnership to announce the commencement of its activity in a local newspaper. In this case, you have to submit this advertisement to the authorities in order to start operation.

If there is own taxation of such forms of company in the respective state of incorporation of the partnership, then the presentation of a tax registration with the Internal Revenue Service (IRS), i.e. the federal US tax authority, is often another requirement that must also be met.

6th company founded in the USA – Corporations

In contrast to the mostly very extensive requirements for establishing a corporation in Germany, this is relatively easy in the USA. The foundation takes place in two acts.

6.1. First act: adoption of the articles of association establishing a capital company

The founding contract of a corporation is called Articles of Incorporation in the USA. The shareholders of the corporation to be established determine the framework conditions for the corporation. Among other things, the name and seat of the company as well as the name and address of its founders are of course important. The purpose of the company shall also be indicated. Also relevant are information on the type, number and value of participations in the corporation. As a rule, this refers to shares that the company issues to shareholders or issues on the stock exchange.

In order to establish a corporation in the United States, its founders submit the Articles of Incorporation to the Secretary of State (equivalent to the Department of Interior) of the state where the establishment is to take place. The approval for the establishment is then made by issuing the Certificate of Incorporation.

6.2 Second Act: Holding of the Constituent Founding Assembly

A founding meeting of the shareholders is required to elect a board of directors for the corporation and to determine the statutes (bylaws) of the company.

6.2.1. Establishment of a Board of Directors

The organization of the management of a US corporation is different than that of a German corporation. So you can not accept any actual organs in the US corporation. Rather, this is structured into directors and executive officers, who do not need to know a strict separation in their areas of responsibility. In fact, the design of the board of directors and executives is also possible depending on the size of the company. So with a small corporation it is quite possible to conduct business only with one director. Fixed rules are therefore missing as well as prerequisites that board members would have to meet.

6.2.2. Definition of the Statutes

Bylaws mean regulations that should apply within the company and to which employees are also bound. For example, these can also be general ethical principles with which US corporations like to advertise to the outside world.

Of course, these provisions are purely formal aspects for corporations that have only one founder. At least with regard to the resolutions of the shareholders' meeting, no further explanation is necessary.

6.3 Further requirements for establishing a corporation in the USA

6.3.1. No minimum capital when starting a US corporation

Even when establishing a corporation in the USA, the respective laws of the states apply. Some time ago there was a requirement for the minimum capital in some states, but in many cases it was only USD 1,000. In the meantime, however, this requirement has generally disappeared. However, foreign entrepreneurs who want to both start and live in the USA are obliged to comply with the already mentioned requirements for the investment volume when establishing a corporation.

6.3.2. Registration of the company in other states

In addition, in the USA, it must be noted that, in addition to registration at the establishment of the corporation, registration may also be required in other states. This is the case in particular if a corporation has a permanent establishment there or another special operational or economic link exists there. For example, this is required in California if you want to sell goods or provide services there from another state.

6.3.3. Provisions for the involvement of local authorised representatives

In order to make such additional registration, the corporation must appoint an official registered agent in the respective state. These state-approved service providers are then also helpful in the registration on site. It is important here that the authorised representative is also listed with name and address in the articles of incorporation to be submitted to the Secretary of State.

6.3.4. Rules for the submission of further documents after establishment

Finally, in some states, after a period of 30 to 120 days has elapsed, it may be necessary to submit further documentation to the tax office to start the business. For example, Alaska expects a so-called initial report within 6 months. There, among other things, information on the business address and the members, for example, of an LLC founded there. However, if the company does not receive an initial report within the set deadline, it loses its livelihood; Its existence therefore ends.

15 years no tax pay – design after return

7th company founded in the USA – Limited Liability Company (LLC)

When establishing an LLC, some special features are involved. Thus, the social contract is to be understood only as a founding contract (articles of organization). This document must also contain some information in order to successfully submit it to the Secretary of State of the respective state. Thus, the name, address and information for the purpose of the company as well as those relating to the founding members of the LLC must also be provided here. If an authorised representative is to be involved, his name and address should also be mentioned.

You may also need to submit an LLC operating agreement to determine the rights and obligations of members of the LLC. In addition, this document also regulates the management principles that should form the basis for decisions.

Even with an LLC, many states expect to receive an initial report within a certain period of time. For example, this is planned in the state of Washington within a period of 120 days.