When Should You Form Your Company in the United States?
Through the magic of the internet, we are working with several early-stage companies whose founders are not American citizens and who are not located in the United States. As part of our intake process for these clients, we ask some questions that help us better understand why they want to create American companies. Many times there are legitimate reasons and we proceed with a client relationship, but there have been situations where we have advised against incorporating in the United States based on how a particular business is expected to operate.
The biggest advantage to forming a company in the United States is to provide assurances to potential outside investors. Corporate laws in the United States are settled and well-established. This means that investors know what their rights will be when they invest into an American company. Should a company be incorporated outside the United States, then the potential investor will need to become familiar with the corporate laws of that country. Many investors in the private markets do not want to assume the burden of learning the corporate laws of different countries and so they only invest in American companies or companies from their home country. Since the largest number of angel and venture investors is located in the United States, the comfort investors have with US laws means that American companies have more potential sources of outside funding. The vanishingly small risk of having an American company nationalized is also a positive for non-Americans considering incorporating in the United States.
The biggest disadvantage to incorporating in the United States if you are not an American citizen or permanent resident is taxes. The corporate tax rate in the United States is currently 21%. This means that for every $100 of net income your company earns, $21 will go to the US government (in the most simplified application of the US tax system). This is in addition to whatever taxes your home country, province, territory, etc. will levy upon the distributions you receive from the corporation. The United States also has a worldwide taxation regime, which is not the norm in most of the world. This means that the United States taxes the income of American citizens and companies regardless of whether that income is earned in the United States or in another country. Many other countries use a territorial taxation regime where they only tax the income from products sold or services delivered in that country.
These main advantages and disadvantages will weigh differently in different circumstances. There are also other factors that may be relevant to your situation beyond those described in this article. Before making the momentous decision of where to incorporate your new company, you should take the time to weigh the options and seek the advice of someone with experience in helping founders make that choice.