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C-Corporation For Non-Residents
C-corporation is pretty popular among US non-residents
Especially for high-growth startups with plans of raising venture capital.
C-corp is slightly more complicated than an LLC, though. It comes with its own formalities.
In this guide, we’ll take a look at how a non-resident can create and operate a C-corp.
Let’s start with understanding residents.
US Residency
Who is a US-resident?
US citizenship and US residency are completely different things.
If you are not a US citizen, you are not a resident unless you meet these 2 conditions:
- You have a green card
- You pass substantial presence test i.e, you are physically present in the US for 31 days of current calendar year and 183 days during the last 3 years(including current year)
Definition
What is a C-Corporation?
C-Corporation or C-Corp is an independent legal entity that is separate from its owners and has a perpetual existence.
Ok, there are 2 things here: “separate from its owners” and “perpetual existence”.
C-corp is a completely separate legal and tax entity from the people who own it. So, from the legal and IRS’ points of view, C-corp is an independent entity.
This separation gives the owners (aka shareholders) protection from personal liability. Meaning, the shareholders are not “personally” liable for the corporation’s debts and obligations.
Now, what about perpetual existence?
This is kinda derived from the previous point. Since a corporation is an independent entity, it continues to exist even if owners expire/leave. All the assets, debts and obligations belong to the corporation itself. Not its shareholders.
This makes it more comfortable for creditors and lendors to work with a C-corp.
Ownership
Can anyone own a C-corp?
Any foreign individual or company can own a C-corp in the US. It is not exclusively for US residents.
Ownership in a C-corp is given out by offering company’s stock.
Ones who own this stock are the called the shareholders of the corporation.
They have the economic and management rights over the corporation.
And unless it’s specifically mentioned in the articles of incorporation, these shares can be easily transferred. Anybody can buy and sell these shares freely.
That’s one of the reasons why investors love C-corp.
Advantages
What are the advantages of a C-corp?
Raise capital
Because of the ability to issue various types of shares, you can raise external capital from angel investors, venture capitalists and other investors. This is not possible for LLCs, sole proprietorship and partnership. C-corp can also issue unlimited shares to unlimited number of people, making it the best entity for IPOs.
Limited liability
Shareholders are not personally liable for the corporation’s debts and obligations. Personal assets are separate from corporate assets. Shareholders only stand to lose a maximum of how much they have invested. Nothing more.
Perpetual existence
Even if shareholders and the management exit the corporation, the corporation still exists. This makes it easier to work with financial institutions and brings more credibility to a C-corp.
Lower corporate tax
If your C-corp has a US-sourced income like royalties, then the corporate tax of 21% is lower than the typical tax withholding of 30% done in a foreign owned LLC. So, if you have a mobile app that earns royalties from Play store or App store, C-corp may end up having lower taxes than an LLC.
Plenty of deductions
IRS allows various types of expenses and deductions for a C-Corp. These help in saving tax and getting some cool benefits. If you have employees in the US, it’s even better. You have employee fringe benefits, health insurance premiums, dental/eye care, salaries and bonuses, rents. Non-resident founders can also be hired as employees in a corporation.
Better legal support
C-Corp is one of the oldest business entities. So, they have a lot of precedents and case laws, making it easier in the courts.
Disadvantages
What are the disadvantages of a C-corp?
Income tax for non-US source income
C-corp always pays income tax no matter what the income source is. Even if you have no significant presence in the US (no US office, no US employees) and you operate your business completely from abroad, still the income generated by the C-corp will be taxed in the US. So, if you have a business that has a non-US source income(consulting, for example), you may want to go for an LLC.
Dividend payments are expensive
If the corporation pays dividends to non-resident shareholders, 30% of the amount is withheld as tax unless there is a tax treaty signed by the non-resident’s home country and USA. They also have to pay taxes on their income at their home country. That’s double taxation. That’s quite a lot of money.
More paperwork
Compared to an LLC, C-corp has more paperwork and regulations at the federal, state and local levels. This includes drafting corporate bylaws, issuing annual reports, electing board of directors, conducting annual meetings, etc.
Roles in a corporation
Who runs a corporation?
Since the structure of a corporation is slightly complex, there are people with different roles.
These roles exist not just for the big corporations, but for every single C-corp. Some of the roles include board of directors, president and officers.
Here’s what the roles mean:
Shareholders
Shareholders are the actual owners of a C-corp. They provide the initial and ongoing capital. Each of them owns a portion of the ownership known as a share of stock. Depending on the type of stock they hold, they have different rights and have different priorities when it comes to liquidation.
You can have unlimited numbers of shareholders.
Directors
Directors are elected by the shareholders to be their representatives and to protect their interests. A corporation is governed by its board of directors. They have a fiduciary duty to act in the best interests of the corporation.
When the corporation is small, directors may be involved in daily operations. But as it grows, directors may only oversee the corporate affairs. They delegate management work to corporate officers.
Officers
Directors are elected by the shareholders to be their representatives and to protect their interests. A corporation is governed by its board of directors. They have a fiduciary duty to act in the best interests of the corporation.
When the corporation is small, directors may be involved in daily operations. But as it grows, directors may only oversee the corporate affairs. They delegate management work to corporate officers.
In a small business, all these roles can be performed by a single person.
Taxes
What are my tax obligations?
C-Corp usually pays 3 types of taxes: Income tax, payroll tax and franchise tax.
Tax treatments can vary depending on the state of incorporation, total assets, issued shares and how members are paid.The 3 most common taxes are:
Income tax
Corporate income tax is paid at Federal and State levels separately. This is paid by the corporation, not by the shareholders.
Federal corporate tax is paid by all corporations at a corporate annual rate of 21 – 28%.
State corporate tax is paid only in certain states. It depends on where you are incorporated and where you are operational. For example, in order to attract businesses, states like Wyoming have zero state corporate tax.
Payroll tax
Social Security tax, medicare taxes and unemployment insurance are commonly referred to as ‘payroll taxes’. Corporations have to pay this when they have employees.
Half of this tax amount(except for Federal Unemployment Tax Act(FUTA) tax) is collected from the employee’s paycheck. And the other half is contributed by the corporation.
Form 941, Employer’s Quarterly Federal Tax Return is filed to report income taxes, Social Security tax, or Medicare tax withheld from employee’s paychecks.
Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return is filed as well.
Franchise & Excise taxe
Most states charge an annual fee, often called as “franchise taxes”, “renewal fees” or “annual registration fees”. This could be fixed, or variable depending on the authorized shares and assets. States have different methods of calculating franchise taxes.
In addition to this franchise tax, almost all states have a small annual report fee to be paid while filing a mandatory Annual Report.
Also, excise taxes are typically imposed on manufacturers and retailers of goods and services. Not very common, however still important to many types of businesses.
Note
Take the time to understand how each state calculates their franchise taxes. If you don’t understand how your chosen state calculates it, you could end up with a tax amount of thousands of dollars.
In addition to these taxes, if corporation pays dividends to non-resident shareholders, then 30% tax has to be withheld and paid to the IRS.
When to pay taxes?
Taxes are paid as 4 quarterly instalments, instead of a one-time payment at the end of the year.
For all types of taxes, whether it is income tax, payroll tax or franchise tax, it is paid in this manner.
Only in certain cases, you don’t have to split the tax into 4 instalments. For example, if your federal income tax is estimated to be less than $1000, you don’t have to split it into 4.
Also, depending on the state you are incorporated in, franchise taxes have a minimum limit. If you fall below the limit, you don’t have to split the total amount.
IRS and state agencies are pretty serious about quarterly payments.
They charge a penalty if you fail to pay an instalment or pay it late.
So, keep this in mind.
Forms to file
There are some additional forms to be filed when you have non-residents as shareholders.
Depending on how the shareholders are paid, you may not have to file some of these:
C-Corporation
- Form 1120, US Corporation Income Tax Return
- Form 5472 (If 25% ownership is foreign)
- Form 1040NR by the individual(if there is a US-source income)
- Collect Form W8-BEN from each partner (if royalties are withheld)
- Form 941, Employer’s Quarterly Federal Tax Return
- Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
Tax rates
These are some of the most common tax rates applicable to a C-Corp.
Of course, some of these numbers will vary depending on your situation.
Take this only as an approximate figure.
21 – 28%
Federal corporate income tax rate
0-13.3%
State corporate income tax
6.2%
Employer portion for social security tax
1.45%
Employer portion for Medicare tax
30%
Individual income tax on shareholder’s dividends
6%
Total FUTA tax, including state credit
State-specific obligations vary a lot. To give you an idea, take a look at Delaware and Wyoming.
Delaware
- If you conduct business in Delaware, you:
- pay state corporate income tax
- pay franchise tax
- pay annual report filing fees
- file Delaware Corporate Income Tax Return
- file Annual Report
- If you don’t conduct business in Delaware, you:
- pay franchise tax
- pay annual report filing fees
- file Annual Report
- State corporate income tax rate: 8.7% of federal taxable income
- Franchise tax: A minimum of $175 and a maximum of $250,000
- Franchise tax can be calculated using 2 methods: Authorized share method & Assumed par value method. The second method often results in lower franchise tax (refer). But, this depends on the amount of the assets, number of authorized shares and other technical stuff. Take time to read about this.
- Annual Report filing fees: $50
Wyoming
- Whether you conduct business in Wyoming or not, you:
- pay annual report license tax.
- file an annual report.
- There is no state corporate income tax.
- Annual Report License tax: Greater of $50 or $0.002 on every dollar of company’s assets located in Wyoming.
Pay Yourself
How does a non-resident get paid from a C-corp?
There are couple of ways for founders to get paid in a C-corp.
Think about your unique situation before considering these options.
Taking a salary
As a non-resident of the US, you can be an employee of a US C-corp. IRS is okay with it. Labour Department is okay with it. However, you may not get the perks of a US-employee, but the upside is that you may not have to pay US income taxes if your services are performed from outside US.
According to the IRS, non-residents employed by a US-corporation don’t have to pay any income taxes if they perform services from outside US(like design, development, consultations, etc) They don’t have to file W-2 or 1099 IRS forms either.
Earning dividends
Another method is to pay yourself dividends from the corporation. However this can get a bit pricey if your home country doesn’t have a tax treaty with US.
A standard 30% tax is withheld for dividends paid to foreign shareholders in the absence of a tax treaty.
A company in home country as a contractor
If you have a company registered in your home country, you can assign this company as a service provider for the US corporation.
That way, the corporation can consider payments to the service provider as a business expense.
This won’t be considered a US source income for your home country’s company and therefore may not be liable to pay 30% tax withholding.
Costs
How much does a corporation cost?
Corporations are considered more expensive to incorporate and to maintain as compared to an LLC.
It’s not a deal-breaker for most founders, though.
Of course, the costs vary according to how you structure it and the type of business.
This is an overview of the costs:
One time
Incorporation fee for the State
~$100
Reserve business name
$75
Annually
Registered agent costs
$100 – $300
State annual report fees
$50 – $75
Non-resident’s tax withheld by the corporation
30%
Quarterly
Federal Income tax
21 – 28%
State Income tax
0 – 13.3%
Payroll tax – employer contribution
7 – 10%
State franchise tax
$175 – $250,000
Service charges
Lawyer
$100 – $500/hour
CPA
$100– $500/hour
Biden Administration proposed an increase in capital gains tax to 39.6% for individuals with incomes over $1 million. They also proposed an increase in corporate tax rate to 28% and elimination of several deductions.
Hiring
Can I hire employees in a corporation?
You can easily hire employees in a corporation.
IRS even incentivises you to hire US employees by allowing several expenses and deductions.
Some of them are:
- Health insurance premiums
- Dental and eye care
- Compensation of officers
- Salaries and bonuses
- Pension
- Rents
- Charity donations
Hiring comes with a few responsibilities, though.
- Corporation has to withhold tax from the employee’s wages for Social Security, Medicare and unemployment insurance, deposit it with the IRS and state agencies.
- Corporation has to file Form W-2 for each employee with the IRS.
- Depending on the state you’re in, state and local authorities have to be notified about new hires.
If you wish to have people working for you in the US but you don’t wanna pay payroll taxes, you can hire independent contractors or freelancers.
According to the law, you are bound to pay payroll taxes when you have ‘dependent agent’ in the US. How to establish ‘dependence’ is a slightly complicated area.
An employee is considered a dependent agent. A contractor is typically not considered a dependent agent.
State of Formation
Which state should I form my C-corp in?
Choosing a state to incorporate depends on the type of operations you have.
If your business doesn’t have operations in the US, then you can incorporate in Delaware or Wyoming as they are both business-friendly states.
If you happen to open an office or hire an employee in the US, you may incorporate in that particular state.
However, if you have operations outside the state where you have incorporated, then you will have to register your corporation in that new state as well. This is known as foreign qualification.
For tech startups that are looking to expand the business across the nation, it is better to incorporate in a state that has low state taxes even if your operations are in another state. In this case, the savings you get from a low-tax state far outweigh the costs of foreign qualification.
It’s also important to know that investors love Delaware corporations. They often require startups to incorporate in Delaware. It is because Delaware has pretty strong business laws.
Also, the Court of Chancery in Delaware is very efficient. Cases are decided by judges experienced in this law, not juries.
How to Incorporate?
What If I Want To Convert To Another Entity?
Here are the steps to incorporate your business:
- Choose a state of incorporation
- Pick a name and reserve it with your state (optional)
- Nominate a registered agentt.
- Draft and file articles of incorporation
- Appoint directors of the corporation
- Issue stock certificates to initial stakeholders
- File SS-4 or online to get EIN
- Draft corporate bylaws
- Conduct the first board of directors meeting
FAQ
Frequently Asked Questions About Forming An C-Corp for Non-residents
Here are the most commonly asked questions about forming a C-Corp business:
Yes, almost every country. Only certain countries that have US sanctions, like Iran and North Korea are not allowed.
C-Corp needs to hold at least one annual shareholder’s meeting. This does not have to be in a luxury resort. It can be as simple as an online meeting. However, you’ll have to ensure meeting minutes are maintained and that every shareholder is issued a notice. Board of Directors meetings can be called when there are important business to discuss that affects the entire corporation.