How to open a company for a startup in the USA
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How to open a company for a startup in the USA
Opening a US company is fairly straightforward but there are a few caveats. Founders must be aware of the administrative and legal aspects involved in registering their business.
There are important decisions to be made beforehand, especially on the business structure and location of your new company. Your choices will influence the company’s management, operations, costs, expenses, and funding opportunities.
Go Global World platform helps give birth to startups and nurtures them all the way through to maturity. Our team of legal and finance experts supervised the formation and incorporation of many small businesses.
This guide summarizes our knowledge and experience of registering companies in the USA. Both residents and non-residents can use it to open a company on their own or otherwise take advantage of express business formation services .
Can non-residents open and operate a US company?
If you are a non-resident, you can’t physically operate your business in the United States. Otherwise, you are free to register, own, and operate a US business from abroad as a founder, shareholder, and CEO.
Can you do it yourself or use lawyers and platforms?
If a founder has the time and is willing to put in the effort, then opening a US company yourself may be an option. But there’s an interconnected web of knowledge that a founder has to be well-versed in to get their business registered right.
Your business structure or how your company is organized and managed often influences its legal status, liability, and taxation. Different states and counties have their own regulations and licensing requirements. There is also the issue of protecting your brand name, logos, and intellectual property.
All these different aspects entail drafting and registering various legal documents: from forms of incorporation to operating agreements to business permits and licenses, and trademark registration.
If you are doing it for the first time and by yourself, you are bound to make mistakes. That’s why it’s recommended to seek help from experts like lawyers and CPAs. An easy and sure way to go is through incorporation services like Firstbase, Clerky, and Go Global World.
How to choose the right business structure and maneuver taxes
Before registering your company with the State, you will need to choose your business structure. The company’s business structure determines your level of liability for the company, its style and the complexity of management, and the taxation of your income.
Your choices here are sole proprietorship, partnership, limited liability company (LLC), C-corporation, and S-corporation.
Shielding yourself from liability
Sole proprietorships and partnerships generally don’t need to be registered and only require filing for a fictitious name or “Doing Business As” (DBA). It’s a name that you will be using for business purposes that differs from your legal name. The DBA is filed with the county clerk. Sole proprietorships and partnerships are a quick way to start a new business with almost no administration hassle. However, the owners are personally responsible for the company’s debt and any violations. This means your customers and their lawyers can come after your personal assets.
Creating an LLC or corporation protects you from that, as the company is legally regarded as its own separate entity. An LLC creates additional layers of administrative overhead for your company. You will need to draft an operating agreement, hold partnership meetings, and pay more attention to such things as accounting and cost management. It’s important to mention that not all activities are protected by LLCs, therefore, thorough research and consultation are needed.
Pass-through taxation vs double taxation
Sole proprietorships, partnerships, LLCs, and S-corporations are “pass-through business entities” which means that the company’s income is added to the owner’s personal tax return.
By choosing this business structure, you escape paying federal and state corporate income taxes. However, you are still required to pay the franchise tax charged for keeping your business operating within the state.
This could be convenient for small business owners who don’t want to complicate their tax filing and would like to avoid the “double taxation” that comes with operating a C-corporation. Owners of a C-corporation are taxed once on its profits and then taxed again when they receive their dividends as shareholders.
Appealing to investors via C-corporation
C-corporations are attractive to investors since the shareholders of a C-corporation only pay taxes when they receive dividends from the company. Unlike an LLC and other types of entities where the members share (based on their ownership percentage) the company’s profits and tax burdens regardless if they receive any distributions.
Also, a corporation has the privilege of deducting expenses from their tax returns. And the federal corporate income tax, in most cases, is much lower than the individual income tax for LLCs.
Corporations are harder to manage than LLCs as you will have to adhere to corporate management, draft corporate bylaws, hold board meetings, and record minutes and decisions. Managing accounting is also much more difficult since you have to balance income, costs, dividends, and personal and corporate taxes.
On the other hand, a corporation is the ultimate tool for funding and investments, since you are able to raise capital by distributing various classes of stock and creating incentives by allowing transfer of ownership. Corporation status adds much prestige to your company.
Saving money with S-corporation
Unfortunately, an S-corporation is unavailable for non-residents. US citizens, on the other hand, can benefit from this business entity by saving on employment taxes. That is in addition to avoiding double taxation involved in C-corporations.
Just like an LLC, an S-corporation is a pass-through entity, with its income delivered to shareholders as distributions. However, while members of an LLC are considered business owners and have to pay the 15.3% self-employment tax, an S-corporation is another story.
S-corp shareholders who play an active role in the business operations can be considered an employee. As such, they receive part of their distributed income as a “reasonable salary” subject to the 15.3% payroll tax. The remaining part is regarded as an actual distribution and is no longer affected by payroll taxes.
This tactic is only viable if the distributed income is enough to cover a reasonable salary and provide for a sizable distribution. Otherwise, your savings will be irrelevant.
How to choose the best state to open a US company
The state where you register your company will be regarded as your home state. For the most part, this is where you will be filing and paying taxes.
If your business activities reach beyond your home state, you may have a “nexus” (presence) in other states which will require you to pay taxes and register as a foreign business entity in those states. However, to reach the state income tax nexus threshold you need to have a noticeable physical presence or derive a strong revenue stream from that location.
As a startup looking to minimize your expenses, a good idea is to open your company in the state where you will be physically located and doing most of your business. Although many US-based founders and non-residents (starting a US business from abroad) might instantly think of Delaware, there are other options that are equally appealing.
Reasons for choosing Delaware as your business location
Delaware is famous for its profound corporate law ecosystem and business-oriented culture. The state houses its own court system called the Chancery Court which handles business cases, and it bases its decisions on a multitude of legal precedents that benefited corporations in the past.
Investors who reside outside of Delaware are exempt from paying taxes on shares issued within the state. Most Angels and VCs will expect you to be incorporated in Delaware because of these legislative and taxation benefits.
However, while Delaware is the place to be for startups in search of great funding opportunities, opening and operating a company from this state can be costly for small businesses.
The costs of choosing Delaware as a base of operations
With an 8.7% corporate income tax, a personal income tax that ranges from 2.2% to 6.6%, and an additional gross receipt tax of up to 1.9914%, Delaware is not the best location to start your small business. On top of that, it has an enormous franchise tax, which is $300 for LLCs and $400 per million of gross value for corporations. For large corporations, the tax is fixed at $250,000.
These expenses are only worth it if you’re daydreaming of angel investors and VC funding. Otherwise, if you have other options for raising capital for your startup, we recommend finding another place for your base of operations.
Finding a state for a base of operations
Your home state (where you incorporate) should be where you plan on doing most of your business. Ideally, it’s a place where you can relocate and make the base of your operations. Your decision should be based on your chosen business structure and the state tax rates.
Wyoming and South Dakota are the best locations for opening a new company in the US. These two states are the only ones that have no corporate income tax, no gross receipt tax, and no personal income tax. The only tax they levy is a state sales tax which is 4% for both of them, and it's the lowest amount. These states will be perfect for any type of business structure.
Alaska can also be a good place to start since it has no state individual income or sales tax. This means it works well for LLCs and S-corps since a path-through entity will also guard you against corporate taxes. Your only concern will be the federal individual income tax.
Corporations will benefit from registering in states with no corporate income tax: Wyoming, Washington, Texas, South Dakota, Ohio, and Nevada. Forming in these locations is one other way to avoid double taxation. Nevada, Ohio, Texas, and Washington do, however, apply gross receipt taxes, but they are considerably lower than a state corporate tax.
As path-through taxation businesses, LLCs, S-corps, and partnerships will thrive in states with no personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, Tennessee, and New Hampshire.
For a company that will be involved in manufacturing and selling physical products, consider states with no sales tax: Delaware, Alaska, Montana, New Hampshire, and Oregon.
You may want to avoid states that levy a franchise tax: Alabama, Arkansas, Delaware, Georgia, Illinois, Louisiana, Missouri, New York, North Carolina, Oklahoma, Pennsylvania, Tennessee, and Texas.
If none of these locations is a good fit, but you still want to save on state taxes, consider opening your business in Utah or Indiana. They leverage all of these taxes but have the lowest rates.
For other options, you can use the latest state tax maps published by Tax Foundation to find a location with a business climate that suits your company’s needs.
How to file the articles of organization/incorporation
Once you’ve decided on your business structure and location, you can move on to registering your company with the Secretary of State. You do this by completing an article of organization for LLCs or an article of incorporation for corporations.
After you’ve filed this document and the State approves your submission, you’ve officially opened a new company.
There are a few things you will have to determine and specify in these forms:
Choose your company name and specify the address
Your company’s name has to be unique and it must include appropriate suffixes such as “LLC” or “Inc.”. Make sure not to infringe on any trademarks or apply for a name that is already used by another company in your state. The name shouldn’t include words used to describe state agencies like Treasury, FBI, Department of Defense, etc.
Use the Company and Person Lookup tool of the US Securities and Exchange Commission to search for registered company names. To find registered trademarks, use the Trademark Electronic Search System offered by the US Patent and Trademark Office. It’s also a good idea to search the web.
Name Reservation
If you’re forming a company in Alabama, you will need to file to reserve your company's name at least two weeks prior to registration. The reservation fee is $25 by mail and $28 if you reserve your company name online . In all other states, reservation is optional with a fee ranging from $10 to $50.
Reserving a business name is a good idea if you don’t plan to register your company right away and want to prevent others from claiming it. Usually reservations last one year.
Designate a registered agent
A registered agent is a person or company who will be responsible for receiving official mail and legal documents from the State. The agent must be a US resident with a physical address in the state where you are opening the company. Sometimes founders choose to act as registered agents themselves and it's possible. Non-residents have to hire a person or an agency.
Define how you will authorize shares (for corporations)
If you are forming a corporation you will have to specify how you would like to authorize the company’s shares. Generally, you will have to outline:
Management: managers, members, directors, and officers
You will need to designate and outline the managing body of your company. For an LLC you will have to choose if it will be manager-managed, member-managed, or director-managed. For both LLCs and corporations, you have to list all managing parties and their addresses.
File the article of organization/incorporation to the Secretary of State
Once you’ve completed the form, visit your Secretary of State's website to find out the mailing address and file it. Some states allow you to complete and send the forms online. Filing for company formation comes with a fee ranging from $35 to $500, depending on your state and business entity.
Montana, Kentucky, and Arkansas boast the lowest business setup fees of just $35, $40, and $45 respectively.
Steps to take after registering your company
Forming a company is your inception into the US business world. In order to operate and survive in it you will have to make a few more important steps:
1. Register for a federal tax ID number (EIN)
EIN is a prerequisite for filing federal and state taxes, and you will need it to open a business bank account. Acquiring an EIN can be done through the Internal Revenue Service.
With an online application , you can get an EIN instantly, however, it only works for citizens or residents with a SSN number or for those non-residents who have already applied for ITIN.
Non-residents without an ITIN will have to file an application for EIN by fax or mail and wait for 1 to 4 weeks before they receive it. When you file for incorporation with Go Global World , we apply on your behalf and get you your EIN immediately.
2. Create an operating agreement / corporate bylaws
Drafting an operating agreement/bylaws is highly recommended. These documents outline your business’ management structure, the roles, rights, and responsibilities of directors, members, shareholders, and officers. They describe the rules and regulations that govern your company, as well as define ownership and distribution of shares and income.
These documents protect your rights and are also used in court to determine liability. If you don’t draft one yourself you will be provided with a default version that may not be beneficial for your business.
3. File for “Doing Business As” (DBA)
If you would like to conduct business under a brand name that is different from your official company name specified in incorporation documents, you can file for a DBA. Visit the website of your Secretary of State or the Clerk of the Superior Court to find out how and where to register a DBA. Most states charge a small fee of $10 to $100 for filing your DBA.
4. Acquire business licenses and permits
Various licenses and permits are required for compliance with federal, state, and local government regulations. It all depends on your given business activity.
If you will be selling products and services, you need to acquire a sales permit. Food and beverage companies will likely need health permits, signage, and fire safety. Specialists like lawyers, medical care providers, accountants, etc. require a license to provide their services.
Check with your state requirements and with the Small Business Association to make sure you have everything you need.
5. Open a business bank account
A business checking account is essential if you want to separate your personal finances from your company's income and protect yourself from liability. You can also open credit accounts and start establishing a credible credit history for your business.
Opening a bank account for residents is fairly easy. All you have to do is provide your business details, incorporation documents, licenses, etc. Non-residents can avoid KYC scrutiny by applying with one of the Neo banks:
6. File for a trademark
To protect your brand name, logo, and intellectual property from infringement you may want to create a trademark for your business. You can file for a trademark at the federal ($250 or $350) or state ($15 to $75) level. Visit the Patent and Trademark Office or your Secretary of State website to find out more about your possibilities.
7. Publish a formation statement in a local newspaper
In Arizona, Nebraska, and New York you are required to publish a statement of formation in a local newspaper. In other states this is optional, however, you may want to create a buzz for your new product or services that your new company provides. It’s a good way to attract investors and lure new customers. Publishing costs can be anywhere between $40 and $2000.
8. Acquire some type of business insurance
You most likely will require some type of insurance to protect your company. For any type of business, you need general liability insurance. This will protect you from costs associated with property damage, injuries, and accidents.
Professional liability insurance will protect you from lawsuits associated with your line of work. Product liability insurance is necessary for companies that sell manufactured goods. Workers' compensation insurance covers your employees’ job-related illnesses, injuries, or fatalities.
Go Global World offers a sure, simple, and speedy way to open a US company
Sure, a founder may try and succeed in registering a US company on their own. However, quite often this quest unravels complications and takes more time than expected. Even our guide does not make it straightforward.
There are a multitude of legal and administrative factors at every step, from name reservation to filing articles of incorporation, to trademark registration, and other steps that may or may not be optional or better be skipped. In addition, you have to take the time to draft your partnership agreement / corporate bylaws.
Going through corporate laws and legal peculiarities for filing documents, various requirements for different business entities, and terms and dates for filing annual reports and taxes. It’s all a huge burden and a process bound for mistakes that many founders would rather like to avoid.
Go Global World's founder platform offers our end-to-end incorporation and setup services as an expressway to start your US company. You get all the essentials from an instant EIN to a US address with a representative. We also provide partner links to Brex and Mercury Banks with a setup bonus to your account.
We compile a standard package of incorporation documents such as articles of incorporation, bylaws, and organizational minutes. Our experts provide legal and tax advisory services. You also become part of a global startup community and get access to direct fundraising opportunities.