The Internal Revenue Service classifies taxpayers as U.S. citizens, resident aliens, or non-resident aliens. Resident aliens are non-citizens who pass certain IRS tests, such as the “green card test” or “substantial presence test” and thus are subject to U.S. worldwide information and income reporting. An alien who does not pass either of these tests is generally classified as a non-resident alien. However, some taxpayers are classified as “dual status” aliens. As the IRS explains, a dual status alien is an individual who “can be both a non-resident alien and a resident alien during the same tax year.” If you are a dual status or non-resident alien, there are certain factors you must keep in mind when starting a company or doing business in the United States, such as how different business entities compare, what types of entities you may legally own as a non-resident, and what types of tax documents you may need to file.
Can a Non-Resident Alien (foreigner) Own a Business in the United States?
When forming a business entity in the United States, non-residents (foreigners) must choose between forming a corporation, limited liability company, partnership or a sole proprietorship. However, there are federal laws that prohibit non-residents from owning certain types of businesses and entities.
Non-Citizens and Corporations
There are two types of corporations in the United States: S corporations, which are “pass-through entities,” taxed at the individual level only and C corporations that are taxed first at the entity level and subsequently at the shareholder level when dividends are paid. Non-residents may own and operate C corporations but are prohibited from owning S corporations.
Non-Citizens and LLCs
Though a non-resident cannot be the owner, or shareholder, of an S corporation, he or she can still avoid double-taxation by forming a limited liability company instead of a C corporation, as there are no citizenship requirements to form an LLC in the United States. An LLC can elect for federal purposes to be taxed as a partnership or as an S or C Corporation. However, a single member LLC taxed as a partnership is a disregarded entity for federal purposes and thus taxed as a sole proprietorship and nonresident aliens are prohibited from electing to have an LLC taxed as an S Corporation. This effectively leaves, LLC’s taxed as C Corporations and LLC’s taxed as a partnership where two or more owners, available to nonresident aliens.
What Are the Basics of Forming an LLC or Corporation in the U.S. for Non-Residents?
Below, our business tax lawyers have compiled some important issues for non-residents to be aware of when forming a business in the United States.
- No U.S. address is necessary. You do not need a U.S. street address to incorporate your business in the United States.
- Owning a company that does business in the U.S. does not automatically grant you the legal right to work in the United States. Becoming the member or shareholder of an LLC or corporation does not automatically grant you the right to work in the United States. To work in the U.S. legally, you will need to either obtain the appropriate visa, such as an O-1 Visa (which is meant for aliens with “extraordinary ability in the sciences, arts, education, business, or athletics”), or obtain a green card. (Note, however, that most green card holders are resident aliens, rather than non-residents.)
- Some entities offer stronger protection from personal liability than others. Corporations and LLCs are often favored over partnerships or sole proprietorships because they provide the owners a greater degree of financial protection from personal liability for debts incurred by the business. That being said, there are situations where it is possible for creditors to “pierce the corporate veil” and hold shareholders personally liable for business debts.
- There are no limits on the number of members or shareholders. There is no restriction on the maximum number of “members” (owners) in an LLC, which offers flexibility and allows room for growth. An LLC can have hundreds of members, a small group, or just one. There is also no restriction on the number of shareholders in a C corporation. At minimum, however, a C corporation requires at least one shareholder, in addition to a board of directors, which meets annually (or more frequently) and guides overall business strategy.
- You will need an ITIN from the IRS. An ITIN, or Individual Taxpayer Identification Number, will enable you to file and pay U.S. taxes with the IRS – even without a Social Security Number (SSN). You must file Form W-7 (Application for IRS Individual Taxpayer Identification Number) to request an ITIN. Though essential, this step can slow down the incorporation process for non-resident business owners, as it can take the IRS up to 10 weeks to issue an ITIN.
International Tax Attorneys for Foreign Companies Doing Business in the U.S.
At the Tax Law Office of David W. Klasing, our international business & tax attorneys and CPAs have decades of experience providing tax planning services for foreign companies and non-residents. Working with entities all over the world, we use our in-depth knowledge of international tax regulations to help make doing business in the United States simpler and more cost-efficient.
From entity selection and formation, to corporate tax compliance, to strategies for minimizing tax liabilities and IRS penalties, our international tax lawyers and CPAs are here to guide your business. Contact us online to schedule a reduced-rate consultation or call the Tax Law Office of David W. Klasing at (800) 681-1295 today.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
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