U.S. Incorporation Services
Muso & Co.
Muso & Co. provides one-stop support for establishing a corporation or company in the United States. The first step to establish a company in the U.S. is to determine which state to incorporate in. Each state in the U.S. has different laws, so the documents for incorporating a company will differ. There are also several forms of corporations, so it is necessary to select the most appropriate form of the corporation for your business. Through our many and longtime experiences in the U.S. businesses, we can provide complete support for such complicated incorporation processes in Japanese. Please feel free to contact us for a consultation.
U.S. Company Formation Services Overview
To establish a new company in the U.S., we first need to clarify your business, objectives, and goals. In the U.S., the laws are completely different in each state that it may seem like a different country. We first clarify the characteristics of the products or services you are trying to provide. Then, based on that, we will research local information such as prices, salaries, land, housing, etc. in each city in the U.S.
Based on this information, we will carefully discuss with you which state would be the most appropriate to incorporate in. We will make a proposal on which state would be the most appropriate to incorporate in. At this time, we will also discuss investment plans, recruitment plans and work visa arrangements, etc.
Points to consider when selecting a state
- Which markets will you focus your business on? (e.g., Eastern, Midwestern, Internal, Western)
- How will you reach your target customers?
- What about the market rate of funds, the level of annual income, whether it is easy to secure human resources, and the unemployment rate?
- Is it safe or not?
- To establish a company, is the procedure easy or not?
- Taxes: how much is the state corporate income tax, sales tax, and property tax rates?
Steps to Establish a U.S. Corporation
Selection of promoters
Selection of directors and officers
Determination of the bank's signatory authority
Decide on a name for the company
Prepare Articles of Incorporation (ByLaw) of the company
Preparation of minutes
Opening a bank account
When incorporating a company in the U.S., the first and most important step is to decide who will be the incorporator and who will hold the four positions, including the president, that will be listed on the registration. This is not so much of a problem for those who are already in the U.S., but it is a common pitfall for clients who have their headquarters in Japan and are considering establishing a subsidiary in the U.S.
That said, under the regulations, the incorporator is not required to have a specific work or residence visa. However, in order to establish the company, it is necessary to open a corporate bank account, etc. If the president of the Japanese headquarters is the “promoter” of the U.S. subsidiary and the registration is also done by a person from the headquarters, there may be an obstacle in the timing of opening the bank account. It is necessary to plan in advance whether to hire a local manager for the subsidiary or send an employee from Japan (if so, how to obtain a visa). We are happy to consult with you on the establishment plan, but it may take as long as one or two years to obtain visas and reliable local staff.
If you already reside in the U.S., or if you have determined the person listed in the registration of the subsidiary, please select an agent for service of process. (Muso & Co, can make it!)
Although the politeness and detail vary from service agent to service agent, we will send our clients a checklist of documents and preparations required for incorporation, such as the “Declaration of Incorporation,” “Bylaws of Articles of Incorporation,” “Minutes of Decision of General Meeting of Shareholders,” and so on. We will then explain each one to you and create a progression and timeline.
The administrative filing fee for the incorporation itself is about a few hundred dollars but does not include the service fees for attorneys and incorporation firms. Therefore, advance planning and preparation is important to minimize these service fees.
- Is the desired company name available?
- What is the address of the head office?
- Obtain a Federal Employer Identification Number (EIN)
- Obtaining visas, Social Security Numbers (SSN), Individual Tax Identification Numbers (ITIN), etc. for visitors from Japan
Some items you can prepare yourself, while others we can help you with.
We are committed to working with you to plan and execute your plan to ensure that your incorporation is achieved quickly and reliably.
Corporate and Business Forms in the U.S.
There are following business forms in the U.S..
Sole Proprietorship is the simplest form of business. The individual and the proprietor are the same person and are treated as one individual for both tax and legal purposes. In other words, for tax purposes, an employer is an employee. There is no distinction between employer and individual, so business debts are personal debts. Federal tax returns are filed on Form 1040 and Schedule C, the individual tax return. Social insurance premiums are included on the income tax return as Self Employment Tax Schedule SE.
- All tax advantages accrue to the individual.
- You can save the cost of incorporating a company.
- You can save legal, accountant, and clerical fees.
- You can save federal and state income taxes.
- Business owners may be able to apply the 20% business expense deductibility rule.
- Office management is relatively simple.
- The sole proprietorship form can be changed to another business form.
- The individual must assume the debt.
- Taxable income cannot be distributed with others.
- Businesses receive fewer additional benefits than companies.
- Self employment tax is imposed.
Key Points for Establishing a Sole Proprietorship
Sole proprietorships are the easiest form of business and are easy to start businesses. The name of the business can be easily registered with the state; a Doing Business (DBA) name is required to be advertised in newspapers.
Withdrawal of Funds
Withdrawals and deposits of business funds are at the discretion of the business owner and are not taxable. Separate accounts must be opened for withdrawals and deposits of funds, and a distinction must be made between personal expenses and business expenses.
Employer’s Tax – Self Employment Tax – SECA
The self-employment tax is 15.3% of income. in 2022 self-employment tax will be levied on up to $147,000.
Sole proprietors report their business, income, and expenses on Schedule C, along with their U.S. individual income tax return (Form 1040), to the IRS once a year.
Estimated Income Tax
Sole proprietors are required to prepay income taxes each year. The prepayment amount is 90% of the current year’s taxable income or 100% of last year’s taxable income. Payment is made in four installments each year on April 15, June 15, September 15, and January 15.
A partnership is a case in which two or more people develop a business. Capital is invested by more than one person, and profits and losses are divided among the partners. The investment can be in cash, in kind, services, or technology. Partners are syndicates, groups, pools, joint ventures, or other non-corporate organizations that do business, manage capital, or co-invest (Venture). A partnership is not a partnership if the co-investors are not involved in the business.
- Partnership profits are distributed to each partner, who files a tax return for each profit distributed.
- Partnerships have reporting requirements (Form 1065) but are not taxed.
- Partners may be able to deduct up to 20% of their income, which may be deductible.
- Distributed earnings are distributed out of the partnership’s pre-tax earnings, so there is no double taxation of dividend taxation.
- A partnership agreement determines the distribution of profits to each partner and allows for special allocations.
- There is no debt limitation on the unlimited liability partners, and they are liable for the partnership’s debts.
- Partners are taxed on their share of the partnership’s profits, even if there is no actual distribution of profits.
- Partners must file a tax return with each state in which the partnership operates.
Key Points for Establishing a Partnership
A partnership requires a partnership agreement. The partnership agreement stipulates the income and expenses, etc. to be distributed to each partner.
Partnership Tax Return (Form 1065)
The Forn1065 must be filed annually by March 15. Each partner must obtain a Schedule k-1 (Form 1065)
Limited Liability Partners
There are two types of partners: general partners (partners with unlimited liability) and limited partners (partners with limited liability). The limited partners usually do not participate in management.
The partnership’s fiscal year ends on December 31st. However, the end of any other month may be selected if deemed necessary for the development of the partnership’s business.
Limited Liability Company
Limited Liability Company – LLC
A Limited Liability Company (LLC) is not a separate legal entity for tax purposes. Therefore, a Limited Liability Company (LLC) can make the following elections for tax purposes
- C Corporation
- As partnership, LLC’s profits and losses are distributed to each LLC member.
- LLC members have limited liability and are not liable for the debts of the LLC; LLC members are permitted to participate in the management of the LLC.
- An LLC avoids double taxation. If you choose to form a corporation, the corporation is subject to taxation, and in addition, the shareholders who receive dividends must report the dividends as income and are subject to taxation. However, an LLC, like a partnership, is not taxable.
- In some states, Subchapter S Corporations (S corporations) have restrictions on the number of shareholders and nonresidents cannot be shareholders, while LLCs do not have these restrictions.
- Depending on the state, choosing an LLC may be disadvantageous.
- If you are a manager and involved in the management of the business, you are subject to Self-Employment Tax.
- In California, nonresident members are also taxed on California source income.
- The State of California imposes a minimum franchise tax of $800 per year on LLCs.
A Chapter C Corporation is a separate taxable entity. The corporation itself is taxed as a legal entity, separate from its shareholders. Initially, the corporation pays corporate income tax and the shareholders report dividends received as income and pay income tax.
Characteristics of the Corporation
- Business Object and Profit Division
- Continuity of Life
- Centralized Management
- Limited Liability
- Free Transferability of Interest
The IRS will determine whether the organization is a stock corporation in light of the above.
- The IRS corporate tax rate is 21%.
- Shareholders can save on taxes by taking into account the profits of the corporation and the income level of the shareholder.
- Fringe benefit expenses are deductible. e.g. employee health insurance, medical reimbursement, disability insurance, and group life insurance, etc.
- The ending month of the fiscal year is allowed in any month.
- Corporations are allowed to deduct 50% to 65% of dividends and deductible expenses.
- Large companies with revenues exceeding $25million are required to use accrual accounting.
- Taxes are levied both on corporate income tax and on dividends paid to shareholders. (Double taxation)
- If non-labor income, such as interest, dividends, rental income, royalties, etc., is substantial, it may be subject to special taxation as a Personal Holding Company (PHC).
Key Points for Incorporation of a Stock Company
When a shareholder acquires only shares in the incorporated corporation with assets contributed by the shareholder (cash, fixed assets, etc.) at the time of incorporation of the incorporated corporation and owns at least 80% of the shares as a shareholder of such corporation, the shareholder is not subject to tax. (IRS SEC §351)
This is called 80% stock control. In this case, the cost of the stock acquisition is the cost of the invested assets, and no gain or loss is recognized (No gain or loss). If the ownership percentage of the acquired shares is less than 80%, the cost of the acquired shares will be the market price at the time of acquisition of the shares, and the difference will be taxed if there is a gain (Step up) and will not be deductible for tax purposes if there is a loss.
Incorporation and Establishment Costs
Start Up Costs or Incorporation Expenses. If start-up or establishment costs exceed $15,000, the amount is amortized over 15 years.
Start Up Cost
The following expenses incurred during the opening period. (Examples of expenses include: market research, capital investment research, labor market research, advertising, salaried employee training, travel expenses, executive salaries, etc.)
Expenses directly related to the incorporation of the company. (Examples of expenses include: extraordinary board and shareholder meeting fees incurred for incorporation, corporate registration fees paid to the state, accounting and legal fees, fees for preparation of articles of incorporation, fees for preparation of minutes, etc.)
An S Corporation (S Corporation) avoids the double taxation (corporate income tax and dividend income tax) of a stock corporation; the S Corporation is taxed the same as a partnership and pays no corporate income tax; the profits and losses of the S Corporation are transferred to the shareholders; the S Corporation is not taxed as a partnership and pays no corporate income tax; and the profits and losses of the S Corporation are transferred to the shareholders.
Requirements for Establishment of S Corporation
- S Corporation must meet the following requirements
- The number of shareholders is not more than 100 and non-residents cannot be shareholders.
- There is only one type of stock.
- Must be a U.S. corporation.
- All shareholders must be in favor of the establishment of the S Corporation.
- S corporation distributes profits to shareholders and shareholders pay taxes.
- 20% of profits are deductible for tax purposes.
- Losses of S Corporation are deductible by the shareholders.
- S Corporation is not required to use accrual accounting.
- S Corporation’s obligations remain at the corporate level and do not extend to shareholders.
- S Corporation is allowed to charge deductible employee benefit expenses.
- S Corporation, interest on stock purchase fund borrowing can be a deductible expense for the shareholder.
- If there are new or non-consenting shareholders, the S Corporation condition may no longer be met.
- Accounting operations are complicated by the need to record the cost of each shareholder’s shares.
- Profits, even if not distributed, must be reported by shareholders as income.
- Some states do not allow S corporations and double taxation occurs along with state income tax.
- 65% dividend deductibility is not allowed for S corporations.
Which company form should I choose?
Sole Proprietorship, Partnership, Limited Liability Company, Corporation, and S Corporation all have their advantages and disadvantages.
Before establishing a company, it is essential to secure personnel familiar with U.S. business and corporate law, and to hire a reliable and responsible person in the U.S. who is familiar with the local area. It is also important not to invest a large amount of money at the beginning, but only as needed, and to improve business practices and systems from time to time.
Muso & Co. is ready to answer any questions you may have about incorporating a company and support you from the very beginning. If you have any questions, please do not hesitate to contact us.