Ask HN: What's the best way for foreigners to incorporate in the States?

The one office you really need is a registered agent, the official place government and courts can get in touch with your corporation and you can pay an attorney to do that and forward you mail for a few hundred dollars a year.

For big businesses, the best state to incorporate in is Delaware because Delaware can handle masses of corporate acts and paperwork and claims and lawsuits efficiently.

For really small operations, the least cost and paperwork will be in Wyoming. You may well never file any paperwork there beyond annual renewal fees.

I'm a Canadian and I have done it through DelawareIntercorp.com. They were great. I later sold that company to a publicly-traded company also incorporated in Delaware and everything went very smoothly. Make sure you talk to a lawyer and tax specialist before you do anything though. It could cost you a lot of money if things aren't done right.

If you need a referral to a lawyer or accountant, ask friends and colleagues who have a business presence in the US.

In practical terms, unless you become microsoft it probably doesn't matter which state you incorporate in tax-wise. We received advice saying that Delaware is favorable to business in a variety of legal precedents. Also, Delaware runs incorporation as a business, which makes it easy to take care of things online etc..

Somebody mentioned Wyoming as having less paperwork but I have to say I've never felt there was much paperwork with Delaware.

Without anybody physically present in the US you may need to furnish a bunch of docs - not sure how that would work since we always had one permanent US resident in the company.

In our situation we looked at mixed ownership (US and non US) of a business that had worldwide income (mainly from the US).

Here are the implications of the different US incorporation strategies we came up with. Remember LLCs are flow through (i.e. the LLC does not pay taxes, but it's owners) vs. C-corps that are not flow through (the company itself has tax obligations). Foreign residents cannot own an S-corp (a corporation with flow through treatment).

Incorporation scenarios

1. Clean US C-Corp

Pro: easy to sell company or assets transparent stock exit is good and clean ability to issue stock options

Contra: Gain on asset sale allocable to U.S. taxed at 35% U.S. federal rate double taxation for asset sales, for U.S. owner (no such problem for foreign owners although there may be tax in your own country) If no asset sale but stock sale instead, purchaser will likely want to reduce purchase price (due to loss of tax benefits) some double taxation for operating profits (some profits from operating income can be offset by bonuses and licensing payments). Double taxation meaning that there is a federal tax on the company and then a tax on any dividends. U.S. corp subject to tax on worldwide income.

How to handle regular operations: Use bonuses and pay for services to zero out operating profits. Compensation paid to non-U.S. persons for work performed outside the U.S. is not subject to U.S. tax. Any dividends paid to non-U.S. shareholders would be subject to U.S. withholding tax - 30% (or less if an applicable treaty applies).

2. US LLC with Individual Owners

Pro: easy to sell company or assets transparent on asset sale, U.S. owners and Foreign entitled to U.S. 15% capital gains rate for most gain. One level of tax only. for US owners, profits flow to owners as income and charged regular income tax (+ social security and medicare :( ). One level of income tax. "Profits" interests can be issued tax-free, which can share in future distributions and appreciation. Can be referred to as LLC units - equivalent to shares.

Contra: inability to issue stock options (but can issue profits interests as above) If there are operating profits going to Foreign owners, those owners will be treated as US residents for tax purposes and will be liable to pay full income tax on the profits allocable to the U.S. Also, before any profits are distributed to Foreign owners, the LLC will need to pay to the IRS a 35% withholding tax. However, the Foreign owners can file U.S. tax returns and receive a refund to the extent they are entitled to it. On a sale of assets or LLC units, Foreign owners would be required to pay tax on gain (most at low federal 15% rate)

How we would handle regular operations: Use bonuses and pay for services to sink zero out operating profits.

3. US LLC with Foreign C-Corp owners (i.e. your Portugese C-corp would own the US LLC)

Pro: Same as in 2.

Contra: inability to issue stock options (but can issue profits interests as above) any tax issues would shift to these C-corps. Each c-corp would owe regular U.S. corporate income tax at a 35% rate on any income allocated to it by the LLC (unless offset by expenses). C corp would also owe a second-level of tax, called the U.S. "branch" profits tax (could be 5% or 15% if C Corp is organized in Cyprus; 30% in BVI or any other country with no tax treaty with U.S. - combined 54.5% rate). But on an exit event and liquidati...

The tax side of this is nontrivial.

You sound like you are doing this because you have problems extracting money from your customers. In other words, you have a business process problem. If at all possible I would suggest finding a business process solution to your business process problem.

Here's why. You are solving a business process problem with a legal solution. You are pounding nails with a screwdriver. It is going to create a tax problem for you.

A U.S. corporation (formed in Delaware or anywhere else) is a taxpayer. The Federal government will be looking for a tax return from this corporation. (Form 1120, if you want to look at it). Your money collected from your customers will be flowing into that corporation. That looks like taxable income to the U.S. government.

Now you have replaced your business process problem with a U.S. government tax problem. That's an order of magnitude worse. You can solve tax problems, but it takes time and money to do so. That means lawyers and accountants and paperwork.

So now you have replaced your business process problem with a tax problem, and you have solved your tax problem with an "accountants and lawyers and paperwork and overhead and brain damage" solution.

Is it cost-effective? Maybe.

Then the next thing to consider is State income tax. The U.S. has a peculiar set-up for income tax. The Federal government imposes an income tax. Most of the States impose an income tax. Some cities also impose an income tax (stay the F away from Philadelphia and New York, for instance).

Your Delaware corporation must be doing business SOMEWHERE. "Must be somewhere, can't be nowhere." So you need a physical presence somewhere for your corporation, even if it is only a glorified Post Office Box. You put that in a tax-free location. More money.

In summary: sub-optimal.

OK. If you absolutely have to solve a business process problem with a legal solution, look at this as a possible solution:

1. Check with your tax advisor in Portugal. What type of entity is your company? You want it to be taxed as a corporation as defined in U.S. law. THIS IS ABSOLUTELY ESSENTIAL. (It doesn't matter how your company is taxed in Portugal. We're doing U.S. tax engineering here).

2. Form a Delaware limited liability company. If necessary, file Form 8832 to have the LLC treated as a disregarded entity.

3. Get your authorize.net or whatever account in the name of the Delaware LLC.

4. <the moment of magic> I don't know if this will work or not but if it does, then you win. You want the Delaware LLC to NOT be a "permanent establishment" of your Portuguese corporation as that phrase is defined in the income tax treaty between Portugal and the United States. See Article 5 of the Treaty if you want to be confused. :-)

5. The impact of NOT having a permanent establishment in the USA? Only Portugal can tax your profits. The USA cannot tax your profits even though they are earned in the USA.

6. The objective you are aiming for is this:

- you have a Portuguese corporation deriving profit from U.S. sources.

- The money pipelines through a Delaware LLC which is disregarded for tax purposes, so it is as if the Portuguese corporation is doing business directly in the USA for tax purposes.

7. You file Form 1120-F for the Portuguese corporation, and attach Form 8833 claiming the benefits of the treaty.

- By doing this you are saying to the U.S. tax authorities: "Yes, I have U.S.-source profits but the U.S. can only tax those profits if they are derived from a permanent establishment in the USA and my Portuguese corporation does not have a permanent establishment in the USA. So go bite tires."

That's what I would do.

(I do this in real life but I am not your lawyer, this is not legal advice, you'd be a damn fool to rely on random postings on a website to make critical financial ...

Paperwork is not a big issues because you can find attorneys easily.

But most will also happily wire the money. We're selling to enterprise customers mainly (banks etc), so it may be a different situation to you. Actually, I suspect the main reason some of our customers prefer credit card is to circumvent internal purchasing procedures.

Have customers told you precisely what their problem is? (or, can you identify them and ask them?) There may be a simpler solution that incorporating in the States (though I've heard that's helpful to being acquired, that doesn't sound like a concern in the present instance).