Get your business up and running in the US in a matter of days.
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 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:
And this goes without saying: if you have never been to the US, you are a non-resident.
Ok, let's move on to understanding C-corps.
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.
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.
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:
In a small business, all these roles can be performed by a single person.
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.
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.
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.
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.
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.
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.
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:
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.
State-specific taxes vary depending on several factors. To give you an idea, take a look at Delaware and Wyoming.
There are couple of ways for founders to get paid in a C-corp.
Think about your unique situation before considering these options.
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.
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.
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.
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.
These is an overview of the costs:
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.
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:
Hiring comes with a few responsibilities, though.
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.
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.
Here are the general steps to incorporate your C-corporation:
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