International / Foreign founders
U.S. tax exposure for foreign founders.
Incorporating in the United States takes a day and costs very little, which is exactly why so many founders do it before asking what it commits them to. The entity choice determines who files what, whether profits are taxed once or twice, what gets withheld on the way out, and whether you personally become a U.S. filer. It is much cheaper to decide than to unwind.
The decision
C corporation or LLC
A C corporation contains the U.S. tax inside the company
The corporation pays federal tax on its own profits at 21 percent and files its own return. Its foreign shareholders do not become U.S. filers merely by owning shares, which is the single biggest practical advantage for a founder who does not want a personal U.S. filing obligation. The cost is that distributions out are dividends, subject to withholding at 30 percent unless a treaty reduces it, so profits paid out are taxed twice.
An LLC pushes the tax out to its owners
A U.S. LLC is a pass-through by default, which means its income is the owners’ income. For a foreign owner that generally creates a personal U.S. filing obligation on Form 1040-NR, an ITIN requirement, and, in a multi-member LLC, mandatory withholding by the partnership on effectively connected income allocated to foreign partners. Single owner or multiple owners changes the mechanics but not the direction.
Investors usually decide this for you
U.S. venture investors overwhelmingly expect a Delaware C corporation, partly by convention and partly because qualified small business stock treatment under section 1202, which can exempt a large share of gain for U.S. holders, is only available for C corporation stock. If outside U.S. investment is plausible, the C corporation is usually the answer regardless of what is optimal today.
A U.S. entity is not what creates U.S. tax
U.S. tax attaches to income effectively connected with a U.S. trade or business, or to U.S.-source income. Where a treaty applies, the threshold is often a permanent establishment: a fixed place of business or a dependent agent with authority to conclude contracts. A foreign company can have U.S. customers without U.S. tax; a foreign company with a U.S. office or U.S. staff usually cannot.
Employees and contractors are a bigger trigger than customers
Hiring in the United States creates payroll registration, withholding, and state obligations quickly, and a U.S.-based employee is frequently what converts a foreign business into a taxable U.S. presence. Contractors abroad are a different analysis, documented with the W-8 series rather than Forms W-9 and 1099.
How we work it
Facts first, then the structure.
- Map the factsOwners, residences, treaty coverage, where work and customers sit.
- Model the choicesCompare C corporation and LLC on tax, filings, and exit.
- Set up complianceEIN, elections, accounting, payroll, and state registrations.
- Run the calendarFederal and state returns, information filings, and withholding.
What follows formation
The filings and obligations that attach
Form 5472 attaches to almost every foreign-owned structure
A U.S. corporation that is 25 percent foreign-owned, and a U.S. single-member LLC owned by a foreign person, must report transactions with related parties on Form 5472. The penalty is $25,000 per form per year and does not depend on income. See foreign-owned LLCs and Form 5472.
Related-party pricing has to be defensible
If the U.S. entity buys services, licenses, or goods from a company you also own abroad, the price between them has to be arm’s length under section 482, supported by written intercompany agreements and documentation. Adjustments and penalties in this area are substantial, and the documentation is much easier to produce contemporaneously than in an examination three years later.
Branch profits tax catches the foreign corporation route
A foreign corporation operating in the United States directly, rather than through a U.S. subsidiary, faces regular tax on effectively connected income plus a branch profits tax on the amount treated as repatriated. It is designed to match the double taxation a subsidiary would face, and treaties may reduce but rarely eliminate it.
Delaware is a formation state, not an operating one
Forming in Delaware does not avoid obligations where you actually operate. Expect Delaware franchise tax and registered agent costs, plus foreign qualification, income tax, and payroll registration in each state where you have people or property. Sales tax nexus is separate again, and is triggered by economic thresholds in most states rather than by physical presence.
Getting an EIN without a U.S. identification number
A company with a foreign responsible party cannot use the online EIN application and must apply by fax or mail on Form SS-4. This routinely takes weeks and is the step that holds up bank accounts, payroll, and payment processing, so it belongs at the front of the sequence.
This page is general information about how the rules work, not tax or legal advice for a specific situation. Facts change outcomes. Talk with the firm before acting on anything here.
Keep reading
Related pages
- Foreign-owned LLCs and Form 5472The filing that follows most structures
- Nonresident filing and treaty positionsWhen the founder personally becomes a filer
- S corporation versus LLCWhy the S election is off the table for foreign owners
- Services for businessesAccounting, payroll, and advisory once you are running
Questions
Common questions
Can a foreign person own an S corporation?
No. S corporation shareholders must be U.S. citizens or residents, or certain trusts and estates. A nonresident alien shareholder makes the S election invalid, which is why the real choice for a foreign founder is between a C corporation and an LLC.
Do I owe U.S. tax if my company has U.S. customers but no U.S. presence?
Often not. Selling to U.S. customers from abroad does not by itself create effectively connected income, and where a treaty applies the test is usually whether you have a permanent establishment. Once you have U.S. staff, an office, or a dependent agent closing deals, the analysis changes.
Which is cheaper to run, a C corporation or an LLC?
The C corporation is usually simpler for a foreign founder, because the filings stay at the entity and the owner does not personally enter the U.S. system. The LLC is often cheaper on paper and more expensive in practice, once personal returns, ITINs, and partnership withholding are counted.
How long does it take to be operational?
Formation is fast. The gating item is the EIN, which for a foreign responsible party is applied for by fax or mail and can take weeks. Banking, payroll registration, and payment processing all wait on it, so start there rather than treating it as paperwork to catch up on later.
I already formed an LLC and now want a corporation. Is that fixable?
Usually yes. An LLC can elect to be taxed as a corporation, or be converted or restructured into one, and both routes are common. Doing it before there is meaningful value or outside investment is materially simpler, so it is worth addressing early rather than at the point a term sheet arrives.
Decide before you file the formation documents.
Tell us who the owners are, where they live, where the work happens, and who you expect to raise from. The structure follows from those four answers.