Forming an LLC in an American state

Date : September 10, 2019

With the advent of globalization, organizations today have umpteen options as to where to operate their business from. Therefore, forming of an LLC in a foreign state is becoming increasingly popular and viable.

Expanding a business is any start-up’s priority, especially if it’s enjoying a growing clientele, meeting its business objectives and has enough monetary backing to expand. Forming an LLC in that respect is the most compliance efficient way make place in the American market. What makes this choice even more enticing is that a citizenship isn’t a requirement in the context. A citizen of India can effectively establish an LLC in America without the hassle of applying for a citizenship as having a foreign citizenship/residency does not affect the incorporation process. However, if the initiation of a bank account is required, then certain adjustments in taxation have to be borne in mind which shall be discussed in the article.

Meeting compliances to form an LLC.

Unlike companies, limited liability partnerships require lesser formalities and compliances to establish a business. For an LLC, a certificate of formation and a limited liability agreement drawn up as per/after consonance of the appropriate state’s laws is the minimum requirement. Certain general clauses along with Intellectual Property assignments and confidentiality stipulations should form a part of such an agreement from the very beginning. Along with these, the necessary filings have to be made in the state as per its own laws.

Intellectual Property that is to be made a part of the LLC.

Intellectual Property has territorial rights. This means that your intellectual property, be it certain inventions which have been granted patents, registered designs, trademarks and copyrights, may all have protection in the respective countries that they were given such registration in. However, worldwide protection under the PCT system for patents or the Madrid or Haugue system for trademarks and designs much be   applied for, in respect to Intellectual Property that is going to form a part of the business undertaken by the said LLC to avoid Intellectual Property claim complications.

Hiring professionals.

The laws encompassing initiation of a business in America, be it the registration of Intellectual Property or setting up a firm, are formed in a way as to render unassisted work impossible. Agents registered in America form a significant part of setting up a business. A ‘service of process agent’ is one of the most commonly required in this regard. These agents for service of process are professionals who receive legal and general documents on behalf of the business. These agents are registered as per the state and fulfill the requirements there under. In simple terms, these are professionals who inform the business of any lawsuits filed in the name of the LLC. Every state has a law which requires a notice to be served to the entity in case the entity is being sued. This service shall be made in accordance to the laws of the particular state. Hence, every state’s laws require the LLC to possess an agent for service of process in the state wherein the LLC is being formed along with the states wherein the LLC is registered to do business.

Additional Complications

There are a few additional complications that might come up in case of setting up of a company in the USA. Two main things that need to be kept in mind are-

  1. S. regulations that might apply to activity abroad
  2. Taxation

At the very outset it is recommended that a US council specializing in taxation issues as well as an attorney dealing with issues that might be problematic.

Specific US regulations-

Whenever a company is formed in the U.S., a legal entity is created. This means that a few US regulations that would not apply otherwise will come into play since there is a US legal person involved.  

Two such regulations are-

  1. The Foreign Corrupt Practices Act – It prohibits U.S. persons from bribing foreign officials, political parties and party officials to obtain or retain business, including bribes paid through intermediaries.
  2. Export Laws- The export laws of US are extremely complex and especially strict when it comes to trade with countries such as Cuba, North Korea and Iran. A company incorporated in the US will have to follow all these norms.

 

Taxation

There is a major difference between the taxation on income for LLCs and the taxation on income for corporations. While corporations are taxed as separate taxpayers, LLCs pass through their tax attributes to their equity holders (known as members).  These members then pay their tax separately.

Basic Facts to be kept in mind-

Foreign ownership of a company formed in the United States is generally allowed with little to no restrictions. A foreign citizen has to follow the same procedure as that of an US resident to form a company in the United States. A US citizenship or green card is not essential.

However, a work permit (either a green card or a special visa) issued by the United States is essential to work in the United States or receive a salary or compensation for services provided in the United States. Work permits allowing a foreign citizen to work only for a sponsoring employer would not be enough - a separate work permit to work for the new company would have to be obtained.

As far as the time period for the incorporation of the company is concerned, processing times for incorporating a company vary among different states. The procedure to obtain a Tax ID, when directors or owners are not US Citizens has to be filed with a special IRS unit. This causes extra delay.

Essential requirements for setting up of LLCs vary between states; you typically need the following:

  1. Tax ID for the company, called EIN – Employer Identification Number

For getting an EIN you need-

  1. Business name (Or two alternative choices)
  2. US business address
  3. Brief explanation of the principal business activity
  4. Brief explanation of principal service or product
  5. Name, address and SSN (if applicable) of the responsible party to fill out the IRS form “Application for Employer Identification Number”.
  6. 2. Operating agreement

Many states require an operating agreement defining the rights and responsibilities of each LLC member and describing the organization’s operating terms.

  1. Articles of Organization

To form the company, you have to file the “Articles of Organization” with a state entity (this entity differs from state to state). A Business name, US business address, nature of the business as well as the names, addresses and percentage of ownership of all members is required for the articles of association.

  1. Registered agent

A third party, registered in the same state as the business is established is the registered Agent. The registered agent is nominated to receive and send official documents on your behalf, such as service of process notices, official government notifications, tax forms and notice of lawsuits.

  1. Licenses, permits, and other requirements

Certain licenses and permits are required by US laws depending on the chosen state and the nature of your business. This will generally be specific to the business activity, not the LLC itself. A few states may also require advertisements of the LLC in local publications. (E.g. - New York). Filing of an annual report with the state and renewal of the registered agent service is also generally required.

  1. Bank account

Although a bank account is not essential, having one is highly recommended. Without a separate bank account, personal funds may be at risk, defeating the purpose of the LLC. It is difficult for a foreign individual to open a US bank account, however a US LLC can easily open a corporate US bank account. Depending on the bank, you have to open the account remotely or in person.

INDIAN GUIDELINES[1]

What are the general permissions available to persons (individual) resident in India for purchase / acquisition of securities abroad?

General permission has been granted to persons (individual) resident in India for purchase / acquisition of securities as under:

  1. a) Out of funds held in the RFC account;
  2. b) As bonus shares on existing holding of foreign currency shares;
  3. c) When not permanently resident in India, from the foreign currency resources outside India.

General permission is also available to sell the shares so purchased or acquired.

A resident Indian can remit, up to the limit prescribed by the Reserve Bank from time to time, per financial year under the Liberalised Remittance Scheme (LRS), for permitted current and capital account transactions including purchase of securities and also setting up/acquisition of JV/WOS overseas with effect from August 5, 2013 (vide Notification No. 263).

Can overseas direct investment be made in any activity? What are the prohibited activities for overseas direct investment?

An Indian Party can make overseas direct investment in any bonafide activity.

Prohibited sectors for overseas direct investment-

  1. Real estate
  2. Banking

Indian banks operating in India can set up JVs/WOSs abroad provided they obtain clearance under the Banking Regulation Act, 1949, from the Department of Banking Regulation (DBR), CO, RBI.

Specific approval of the RBI is necessary for an overseas JV / WOS, with equity participation (direct or indirect) by an Indian party, to offer financial products linked to Indian Rupee (e.g. non-deliverable trades involving foreign currency, rupee exchange rates, stock indices linked to Indian market, etc.)

What is JV and WOS?

Joint Venture (JV)"/ "Wholly Owned Subsidiary (WOS)" means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party/Resident Indian makes a direct investment;

A foreign entity is termed as JV of the Indian Party/Resident Indian when there are other foreign promoters holding the stake along with the Indian Party. In case of WOS entire capital is held by the one or more Indian Party/Resident Indian.

 

Author: Mridula Dalvi, Intern at Khurana & Khurana, Mumbai. , Intern at IP and Legal Filings  and can be reached at support@ipandlegalfilings.com.

References:

[1] https://onlinetaxman.com/open-us-llc/

[2] https://onlinetaxman.com/us-llc-tax-haven-for-foreigners

[3] https://www.activefilings.com/incorporation-services/international-plan/faqs/

[4] https://www.foundersspace.com/company-formation/how-does-an-indian-citizen-and-resident-form-a-company-in-the-u-s/

[5] https://www.foundersspace.com/company-formation/how-does-an-indian-citizen-and-resident-form-a-company-in-the-u-s/

[6] https://www.charteredclub.com/us-company/

[7] https://www.rbi.org.in/scripts/FAQView.aspx?Id=32

[8] https://www.rashminsanghvi.com/downloads/foreign_exchange_law/FEMA/Setting_up_companies_abroad_under_LRS.html

[9] https://archive.india.gov.in/business/doing_business/legal_aspect.php