Choosing a U.S. Business Entity for International Expansion

By C. Matthew Schulz

Business leaders from other countries who plan to enter the U.S. market must consider more than taxation when choosing a legal entity. Corporations, limited liability companies, partnerships, joint ventures, and sole proprietorships can all conduct business in the United States, but they do not provide the same immigration, tax, liability, or ownership advantages.

This is especially important when the U.S. company may need to sponsor experienced foreign executives, managers, or other employees for L-1, EB-1C, E-1, or E-2 immigration benefits.

C Corporation

For most companies outside the United States establishing a U.S. operation, a 'C corporation' is the most practical starting point.

A foreign company can own all or part of a U.S. C corporation. That makes it easy to create and document a parent-subsidiary relationship.

If the foreign company owns and controls the U.S. corporation, the structure may support the qualifying relationship required for L-1 and EB-1C cases.

This does not mean that every foreign-owned corporation qualifies for L-1 or EB-1C. There are many other legal requirements. See Immigration Strategies for Entrepreneurs

The legal documents for a corporation makes it often easier to document to the USCIS and State Department such key factors as stock ownership, corporate records, directors, officers, and shareholder rights are generally clear.

A C corporation also permits non-U.S. company and/or individual shareholders. That is important for international companies.

The tax treatment is also straightforward. The U.S. corporation is a U.S. federal and state taxpayer. It files its own U.S. corporate income tax return and pays tax on its taxable income. The non-U.S. shareholder generally enjoys separate tax treatment, which is major advantage for a non-U.S. parent company. The non-U.S. shareholder can own the U.S. subsidiary without necessarily operating the U.S. business directly for federal income tax purposes.

Note that dividends by the U.S. corporation paid to shareholders may create additional tax or withholding obligations. Further, transactions between the U.S. company and related non-U.S. companies require careful tax planning.

In sum, a foreign company that wants to build a continuing U.S. business and transfer personnel to the United States will generally find that a C corporation provides a clean combination of ownership, governance, tax separation, and immigration planning.

Shareholders like non-U.S. companies should choose C corporations. Founders who plan to go public or seek outside investment tend to favor C corporation. Shareholders who are or will become U.S. taxpayers may consider S corporation and LLC to avoid double taxation.

S Corporation

This is not a good choice for non-U.S. shareholders.

While an S corporation initially looks attractive because its income generally passes through to its shareholders, S corporation status is not available to international businesses or non-U.S. shareholders because they do not want to become themselves subject to U.S. federal and state income taxes.

Federal tax law restricts who may own an S corporation. A corporation generally cannot be an S corporation shareholder. A nonresident alien generally cannot be an S corporation shareholder.

It can work well when the non-U.S. shareholder is/will become a U.S. resident for tax purposes.

Limited Liability Company

A limited liability company can also work well for an international business interested to bring experienced employees to the U.S. But if it is owned by non-U.S. shareholders are not/do not want to become U.S. tax payers, then there is no tax difference from using a C corporation.

Although a single-member LLC is generally disregarded for federal income tax purposes, that subjects that single-member (i.e., sole owner) to U.S. tax reporting unless it elects to be taxed as a corporation. Electing to be taxed as a corporation effectively makes the choice of an LLC effectively the same as choosing a C corporation.

This is why international companies should not choose an LLC simply because they have heard that LLCs offer "pass-through taxation." For a foreign company, pass-through or disregarded treatment may be exactly what it wants to avoid.

For a more detailed discussion of U.S. tax issues affecting foreign nationals and international business owners, see SchulzLaw's article on U.S. Immigration and Tax Planning.

Partnership

A partnership is rarely a good choice for expansion to the United States. 

A partnership can be formed as a business entity when two or more businesses or individuals are owners.

But partnerships create additional tax and immigration questions for foreign owners. A foreign corporation that becomes a partner in a partnership conducting a U.S. trade or business may itself be treated as engaged in that U.S. trade or business. That can create U.S. tax filing and payment obligations for the foreign partner.

Partnerships can also complicate the ownership and control analysis for L-1 and EB-1C cases.

Joint Ventures

A joint venture is not really a separate form of legal entity. Joint ventures are usually organized legally as a corporation, LLC, or partnership.

Sole Proprietorship

A sole proprietorship is also usually the least useful structure for a foreign company planning substantial U.S. operations.

A sole proprietorship is not a separate legal entity from its owner. The proprietor owns the business directly. There is no separate corporation or LLC between the individual and the business. That creates obvious tax and civil liability concerns.

It is rarely the right structure for an established foreign company seeking to enter the U.S. market, hire employees, transfer managers or executives, or build a long-term U.S. operation.

The Immigration Relationship Matters

For L-1 and EB-1C cases, USCIS looks at the relationship between the U.S. business and the foreign employer.

The companies generally must have a qualifying relationship as a parent, subsidiary, affiliate, joint venture, or branch.

Ownership alone does not always answer the question. Control also matters.

Companies planning an L-1A case followed later by an EB-1C case should consider that issue from the beginning.

E-1 and E-2 Visa Analysis

E-1 and E-2 visas use somewhat similar, but different rules. C corporations are generally the best choice.

E visas are based on treaties. The U.S. only has E visa treaties with certain countries. The U.S. business generally must have the nationality of the applicable treaty country. That nationality is determined through majority ownership.

If E-1 or E-2 status may be part of the company's plans, ownership should be reviewed before shares or membership interests are issued or transferred.

Taxes Matter

Immigration does not replace tax or other legal considerations, but must be considered when planning U.S. expansion.

For a more detailed discussion of tax planning for foreign nationals and international business owners, see U.S. Immigration and Tax Planning.

Plan Before Forming the Company

The best time to address these issues is before the U.S. entity is formed.

A business should decide who will own the company, how it will be taxed, who will control it, and whether the structure will support future immigration plans.

Changing the structure later can be possible, but it may create tax costs, corporate complications, or immigration problems.

SchulzLaw advises international companies, business owners, executives, and managers on U.S. business formation and immigration planning, including L-1, EB-1C, E-1, and E-2 matters.

This article provides general information and does not constitute legal or tax advice.