Ethan Stone
by Ethan Stone, Stone Business Law
QUESTION:
I am currently a citizen of India, and I live in in India. However, I’d like to incorporate my new startup in US. How do I go about this?
ANSWER:
First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site. The information below is general in nature and should not be understood as a substitute for personal legal advice.
Your question says that you want to “incorporate” in the U.S., but I’ll briefly discuss both corporations and limited liability companies (LLCs), on the assumption that you haven’t thought through which type of entity you want to use.
The Simple Answer
The quick and simple answer is that, your foreign citizenship and residency won’t affect the process of incorporating a startup in the U.S. You do it the same way you’d do it if you were a U.S. citizen and resident:
- Draw up the organizational papers. This is usually fairly simple unless you already have investors. For a corporation, the minimum is the certificate/articles of incorporation, bylaws and an action of the incorporator (naming the initial board and officers). For an LLC, the minimum is the certificate of formation and limited liability company agreement. It’s usually a good idea to add a few things to the basic documents, such as a form of confidentiality and invention assignment agreement (for officers, employees and contractors), and an option plan. If you have already developed some intellectual property (code, algorithms, business names and logos, url registrations etc.), the individuals involved should also sign an intellectual property assignment, to make sure everything is in the new entity from the beginning. If you’re forming a corporation, it’s also usually a good idea to enter into a shareholders’ agreement, dealing with voting rights, transfer of shares etc. (these matters should be addressed in the limited liability company agreement for an LLC).
- Make the necessary filings with the state in which you decide to form your company (usually Delaware)
- Pay some minor fees to the state of incorporation
- Hire a service company (CSC and CT Corp are the most common, but there are many others) to serve as the company’s “agent for service of process” in the state in which you decide to form it.
Depending on who is involved and whether anyone is investing, you might have some securities filings, too. None of this is incredibly complex, but there are lots of ways to mess up, some of which have very bad consequences. So it’s best not to do it as a DIY project. Find a lawyer and pay for a corporate filing service to handle the filings for you (again, CT Corp. and CSC are the best known but there are many others).
Complications
Although there’s no reason you can’t form a corporation in the U.S. as a foreign resident, doing so can raise additional complications. I’ll discuss two major ones: U.S. regulations that may apply to activity abroad if the entity is formed in the U.S. and taxation. These are complex areas of law. I’m going to give a general description of the issues involved, but you’ll definitely need to retain competent tax counsel involved to help you think through the tax implications of your specific situation and plans. If specific U.S. regulations seem like they might be an issue, you should also hire a lawyer who specializes in them to help you think things through.
U.S. Regulations
When you form a U.S. entity, you create a legal person in the U.S. That means that some activities abroad may come under U.S. regulations that wouldn’t apply if no U.S. person were involved. I’ll discuss a couple of areas where this is likely to raise issues – the Foreign Corrupt Practices Act and U.S. “export” regulations – but there are many more. So it’s probably worth having a U.S. lawyer (or an Indian lawyer familiar with U.S. laws) review your business plans, especially planned activities outside the U.S., to make sure you know what you’re getting into.
Foreign Corrupt Practices Act (FCPA)
The federal Foreign Corrupt Practices Act basically prohibits U.S. persons from bribing foreign officials, political parties and party officials to obtain or retain business, including bribes paid through intermediaries. It allows payments that merely “expedite” a routine official action (such as clearing a shipment through customs that is legally entitled to be cleared). If you form an entity in the U.S., both the entity and its directors, officers and employees, when acting on its behalf, are subject to the FCPA, even if all operations and personnel are located outside the U.S. So if you form a Delaware corporation and then bribe a local official to “overlook” some building code violations in your Gurgaon office, you’ve violated the FCPA. By contrast, if you formed your company in India and did the same thing, U.S. law would not apply. The FCPA is a criminal statute, so the consequences of violating it are potentially very serious. The federal government has enforced the FCPA very aggressively in recent years.
“Export” Regulations
The United States has a very complicated set of laws and regulations governing the “export” of certain technologies from the U.S., as well as other commercial dealings between U.S. persons and certain countries (especially Cuba, Iran and North Korea). These laws normally don’t apply to foreign nationals resident outside the United States, except to the extent they actually conduct business in the U.S. If you incorporate a company in the U.S., however, you’ve created a U.S. person that is subject to them.
There are two major ways this can cause trouble:
First, the “export” regulations can bite you, even if you aren’t exporting anything from the U.S. (or doing anything else in the U.S.). To put it simply, if your U.S. company does types of business the U.S. doesn’t like with people or countries the U.S. doesn’t like, you might be violating U.S. law. As with the FCPA, these rules would not apply to you if you formed your company in India and did business from outside the U.S. Some of the prohibitions are intuitive (if you’re thinking about it), but a significant number are almost random. So it’s best to have an expert review what you’re doing to determine if there are any compliance issues.
Another thing to bear in mind is that if your company develops technology in the U.S. that is covered by export regulations, you may automatically have “export” issues. “Export” covers more than you might expect. If you are developing covered technology in the U.S., any disclosure to a nonresident foreign national (whether s/he happens to be in the U.S. or abroad at the time and whether or not s/he is an officer or employee of the company) will generally constitute an “export” of the technology. Depending on the technology and the country (yes, India is restricted), compliance may require nothing, reporting to the government or obtaining a license. Some of the categories of covered technology are obvious: If you’re dealing in weapons systems, missiles or nuclear technology, you’re probably restricted and need to pay a lot of attention. Other technology is not intuitive (e.g. some kinds of high-speed computers, “dual use” software and encryption algorithms). The regulations are so haphazard and complicated that it makes sense to find an expert to check if you’re covered. You won’t be able to figure it out yourself. By the way, the “export” part of these regulations will apply even if you form your company in India, so long as the technology is developed in the U.S.
The consequences of violating U.S. export regulations are potentially dire (including criminal penalties), so it’s best not to mess around. Normally, a quick review will determine that there are no issues, but it’s worth undertaking the quick review.
Tax
The two entities you would be most likely to use to “incorporate” a business in the U.S. are the corporation and the LLC. The equity holders in a corporation are called shareholders or stockholders and the equity holders in an LLC are called members. From a non-tax perspective, the LLC is generally preferable because it is more flexible. For example, an LLC can have a board of directors and officers if that makes sense, but it can also be managed directly by its members.
The normal income tax treatment of corporations and LLCs is very different. Corporations are normally considered to be a separate taxpayer. That means that the corporation pays income tax on its income. When it pays dividends to its stockholders, they are taxed again on receiving the dividends. By contrast, LLCs are normally not taxed separately. Rather, they “pass through” all of their tax attributes (income, deductions, credits etc.) to their members, who then pay tax individually. A corporation can make an election to be taxed on a pass-through basis. This is called an “s” election and corporations that make it are referred to as “s” corporations. Nonresident foreigners are not allowed to hold stock in an “s” corporation, however, so it’s not an option for you. For a more detailed discussion of various kinds of U.S. business entities and tax elections, look here.
As a rule, venture backed startups (and startups that hope to be venture backed) form as taxable “c” corporations, rather than as pass-through LLCs. There are several reasons for this:
- Venture capital firms do not like “pass through” taxation because it can complicate life for them, particularly if they have pension funds or university endowments as investors (most of them do).
- Companies whose shares are publicly traded are almost always taxable corporations (there’s few advantages and some disadvantages to being anything else).
- People forming tech startups usually plan to profit from the endeavor by selling their equity in the business, either in a sale of the company or in a public market after an IPO. Since they never plan for the company to pay dividends, it doesn’t bother them that they would get taxed twice (the corporation pays tax on its income and then the shareholder pays tax on receiving the dividend) if it did.
Now that we’ve reviewed the available entities, let’s review how the U.S. taxes nonresident foreign nationals. First, it taxes income that is “effectively connected” with a U.S. business roughly the same way it would tax a U.S. citizen or resident. If that income results from an interest in an LLC that “passes through” its tax items to its members, the LLC is required to make a “withholding” payment to the federal government to cover the member’s liability. Second, certain categories of “U.S. source” passive income (such as dividends, royalties and interest) are subject to a flat 30% tax. This tax is, again, enforced by a requirement that the U.S. payor withhold it at the source. On the other hand, capital gains (e.g. from the sale of stock) are generally not taxed.
Both of these taxes are modified by a tax treaty between the U.S. and India. In particular, the rate of the flat tax on passive income is reduced to 15 or 25% (depending on corporate structure) for dividends, 10 or 15% (again, depending on corporate structure) for interest, and 15% for royalties. One unusual twist in the U.S. India tax treaty is that it gives particularly favorable treatment to income from consulting or technical services that are ancillary to the use of licensed technology. So it might be beneficial to develop the technology in India, license it to the U.S. entity, and then provide consulting/technical services (such as software maintenance and updates) for a fee. But it is worth reemphasizing that the U.S. doesn’t tax capital gains earned by nonresident foreign nationals. So if you’re not planning to move to U.S. at any point during the development of the business and your ultimate goal is a capital “exit” (i.e. a sale of the company or a sale of your stock in an IPO or a private secondary market), the best strategy might be to use a taxable corporation.
By the way, if you form your company in India and conduct business in the U.S., the U.S. might tax those activities under separate “branch profits” tax rules. Those rules are very complicated (and modified in important ways by the U.S.-India tax treaty). So if you decide to form in India but still plan to conduct business in the U.S., you’ll need to hire a tax lawyer familiar with those rules.
The discussion above should give you some general ideas, but bear in mind that it only covers U.S. treatment. I’m just not competent to discuss how the taxes will play out in India. It should also be apparent that the right structuring decision is going to depend on multiple factors (your personal situation, your investors’ situations, your business plans etc.) and will often involve difficult tradeoffs based on guesses as to uncertain future events. So you really need to get expert advice from someone familiar with U.S. and Indian taxes before you make any structuring decisions. That’s not just a boilerplate caveat. If you don’t get someone to review your particular situation and help you think through your best strategy, you could easily get things wrong in ways that will be difficult or impossible to fix later and could cost you astounding amounts of money, especially if things turn out really well for the business.
I hope this helps situate you. Good luck on the new venture!
I also found this one for Indian entrepreneurs who want to open U.S. company: https://www.myusacorporation.com/articles/incorporate-in-usa-from-india
Get a legal advice to register a company at https://consultlane.com/private-limited-company
Hi,
I am an India citizen. I have registered a Pvt. Ltd. company in India. The business model I choose is consulting. I want to establish my company in US too. I am holding a Business Visa and can travel to establish the business relationship. I have my customers who are ready to give business to me. Please help me how I can register my company and what could be the total expense I should incur to start with a basic business center and all the operation I wanted to conduct from India. Your help is highly appreciated.
Thanks,
Srinivas
@ Tanuj
Hi, Harsh here , I am Chartered Accountant and based at Mumbai. We can help you in forming a Subsidiary company in india and its related work.
My official id: [email protected]
id:
Great advice. I have a slightly different but related question:
I am a US Citizen and working on a software product startup. I have already formed a Delaware C-Corp using http://www.incorporate.com. I also have a private limited company in India. This was created earlier. Now I wish to make the Indian company a 100% subsidiary of the Delaware C-Corp. What is the process of doing that?
Another related question:
The Indian company does all the product development work. The product is SaaS based and therefore will always be purchased online. It will be sold through the US C-Corp. Does it make sense to make the Indian company a 100% sub of the c-corp? Or is it better to leave the Indian company as a separate entity that bills the US company at an arms length? I want the IP to be owned by the US company, VCs will invest in the US company and the indian and US employees will get stock options from the US company.
Thanks in advance for your advice.
Get a legal advice to register a company at http://www.dobizindia.com/
Hi, i tormented to begin a grocery buildup issue or else objective to obtain already era-privileged growth in usa. Im from india. Kindly appearance me all the detailes harshly speaking the above taking into consideration investment amount limit, visas, real issues etc. http://www.techdroop.com
I am non resident director of UK company. I am not drawing any
salary but plan for dividend payout from the profits made by the
company. But from 3 years there are no business orders.
Please clarify as a director i can do the above duties and continue
and take dividend payouts which may take 6-7 years.
scope of a director’s duties is
operates Startup venture
• started a business, involved in planning, made financial
decisions and completed a series of legal activities like Structure
of the Business.
• Own company software products
• wrote Business plan how to start and run the business
successfully.
• involved in the Mission Statement, Company Incorporation,
information on our Products/Services, market highlights
• contacted venture capitalists and research grants to get
started.
• Registered for Taxes and got a Tax Identification Number
• Payee registration
• Obtain Business Licenses and Permits
• did thorough market analysis for information needed or gap
in the market, and how particular solutions can fill it. try to
Convince potential investors how to succeed in the target markets
in industrial sectors automotive & aerospace, automotive, gas
turbine, railways,agribusiness.
• illustrated industry and market knowledge in research
findings
• setting up sales objectives for the company
• forecasted market growth
• studied indirect or secondary competitors who may impact
business success
• defining roles & responsibilities of employees responsible
for preparation and implementation of organizational standard
software process DO178B
• did presales activity by creating databases for USA,UK
countries for the possible Business development prospects and
identifying potential domains,potential customers
• responsible for selling software services and products in
the market
• preparation of company’s organizational structure, details
of profiles of management team, detailed description of each
division or department and its function
• Increased revenue by 5 percent in the first six months,
• Outlined R&D activities & wrote white papers, marketing and
sales management strategy for the business
• outlined funding requirements
• analyzed the market and set clear organizational objectives
• Filing company’s annual returns, prepare balance sheets,
cash flow statements and capital expenditure budgets, monthly or
quarterly projections
• prepared work instruction for employees to understand the
roles and responsibilities associated with
• Responsible for preparing estimations & Business proposals
contact Email ID [email protected]
I (Indian citizen) have set up a US company as a US non resident and director. Business include agri business and software creation. with a valid US business visa, I created a software
product, & part of training.
I wanted to open a company branch in other countries. I am director of the US company and till date sell these software products
through amazon websites. Can I claim these experience in resume?
US company as a US non resident:
state of formation is ARKANSAS
contact Email ID [email protected]
@ SS,
I am in similar situation. We moved to US last Nov 2014 on L1/L2 Visa and i have got my EAD & Social Security Number.
I have a pvt. ltd company in India doing business for past 4 years and now need to set up a company in US. However, not sure whether LLC is the good option or not ? I also need to avoid “double tax” as I want US company to raise invoices here and pay my Indian company for project execution/services.
How can i also avoid liability issues if in US company i have got myself and my indian company as partners ?
Best/Raj
Hi, i want to start a grocery store business or else want to purchase already established store in usa. Im from india. Kindly inform me all the detailes regarding the above like investment amount limit, visas, legal issues etc….
Hi, I can help with US India entity setups and annual tax and corporate compliances. Visit http://www.MYTAXFILER.com or http://www.MyStartupCFO.com.
Hello, I am US citizen and have over 15 years of experience in providing services to business entrepreneurs. Send an email to me at [email protected] with your business profile to open a business partnership in USA. Thanks
DEAR SIR,
WE ARE A PVT LTD COMPANY REGISTERED INDIA AND IN TO THE BUSINESS OF TECHNICAL SUPPORT FOR OUR CUSTOMERS IN USA AND CANADA. WILL IT BE POSSIBLE TO REGISTER A LLC OR BUSINESS IN INDIVISUAL NAME.
AT PRESENT I AM IN USA FOR ANOTHER 20 DAYS.
I WANT HAVE A PAYMENT GATEWAY FOR RECEIVING PAYMENTS IN INDIA FROM OUR CUSTOMERS IN USA AND CANADA. WE ALREADY HAVE A PAYMENT GATEWAY CALLED UPCLICK.COM FROM CANADA.
Ethan,
Thank you.
Your answer has been most helpful.It raises questions I had not fully thought through before.
I will contact you after a couple of weeks when I have more answers.
My best regards
Hi
One stop for your queries for incorporation in US or India. Contact http://www.vakilsearch.com or write a mail to [email protected]
What is the total expected cost in USD or INR for all of the processes mentioned above in this article? (P.S. article was good and extremely inforamtive)
Can we have a detailed list of documents required for Indians to form a LLC in USA?
I have a similar questions as we are incorporated in India, however, would prefer to have a company in US for ease of operations. We run through http://www.editnpublish.com. Can you suggest something on whether RBI allows forming a company in US for Indian citizens and if yes, what about the required capital etc. Myself and my accountant seem to have no clue on this.
I am B1 VISA HOLDER HAVING REGISTERED LLC CO. IN DELAWARE.
AS PER VISA RULES I CANT DIRECTLY DO BUSINESS, SHALL I RECRUIT PERSONAL TO MANAGE BUSINESS.
2. SHALL I START A RESTAURANT OR GENERAL STORE BUSINESS, FOR THIS ANY US CITIZEN PARTNER IS MANDATORY.
Can an IT Staffing company that has absolutely no Directors in US could be started from India? We do not know anyone in US, and heard that a GC or a Citizen is required to open up a company and Bank Accounts etc.
Without which the company cannot be incorporated. Please help.
Dear Sir,
My question is different I would like to know
the sort of works outsource by US Technology Companies to small IT entrepreneurs in India & what are the formalities one have to fulfill for getting the work from US IT companies?
Regards,
Sanjay
Great advice. I have a slightly different but related question:
I am a US Citizen and working on a software product startup. I have already formed a Delaware C-Corp using http://www.incorporate.com. I also have a private limited company in India. This was created earlier. Now I wish to make the Indian company a 100% subsidiary of the Delaware C-Corp. What is the process of doing that?
Another related question:
The Indian company does all the product development work. The product is SaaS based and therefore will always be purchased online. It will be sold through the US C-Corp. Does it make sense to make the Indian company a 100% sub of the c-corp? Or is it better to leave the Indian company as a separate entity that bills the US company at an arms length? I want the IP to be owned by the US company, VCs will invest in the US company and the indian and US employees will get stock options from the US company.
Thanks in advance for your advice.
Dear Sir, Since India is not a Treaty Country with USA, can Indians Start their Small Businesses or buy Franchisees In USA?
The E-1/E-2 treaty trader visa allows nationals of an E-1/E-2 treaty nations to enter the U.S. and carry out substantial trade?
Please clear my Doubt. Thank you.
http://business-law.freeadvice.com/business-law/starting_a_business/small-business-immigration-2.htm
Contact the company Corporation Delware to form the company or Mr Jim Trider who working with a group who been doing this in Ireland
The discussion above should give you some general ideas, but bear in mind that it only covers U.S. treatment. I’m just not competent to discuss how the taxes will play out in India. It should also be apparent that the right structuring decision is going to depend on multiple factors (your personal situation, your investors’ situations, your business plans etc.) and will often involve difficult tradeoffs based on guesses as to uncertain future events. So you really need to get expert advice from someone familiar with U.S. and Indian taxes before you make any structuring decisions. That’s not just a boilerplate caveat. If you don’t get someone to review your particular situation and help you think through your best strategy, you could easily get things wrong in ways that will be difficult or impossible to fix later and could cost you astounding amounts of money, especially if things turn out really well for the business.
I hope this helps situate you. Good luck on the new venture!
The information is very helpful – I was about to form a company thru CTCorp but decided to look at the info provided by you! Hence decided to invetigate futherlocally before going ahead & doing so.
Can you advise if having US citizens (of Indian origin)as members will be helpful?
Thanks, V.Sood
very complicated issue… will i face any problem if i form a currency exchange company in US…
Hi,
Thanks for the great answer. I’m in a quite similar situation but without anyone I know being in the states to open the bank account.
There are two co-founders, all foreigners.
I’m thinking of using a services such as BizFilings and then open a bank account in Wells Fargo (which, as I’ve understood, is possible remotely as well).
Does this sound feasible to you?
Thanks & Best regards,
Antti
Ethan:
Thanks for the detailed response and I appreciate that you have covered the US legal issues. However, the poster of the question needs to consider the Indian legal issues.
The Reserve Bank of India limits residents of India from purchasing shares in an overseas (ie, US company) company. Although there is a US$200k RBI allowance for overseas investments, this is not meant to be for setting up one’s own company.
There are separate Indian regulations regarding the establishment of overseas wholly owned subsidiaries in the event the poster already has an existing Indian entity.
While the US has a fairly open regime for inward foreign direct investment, it is important to consider the outbound Indian foreign direct investment regulations.
Shantanu Surpure