Tax Trolls Episode 6- How Foreign Businesses Setup In US | CPA for Startups
Disclaimer- This podcast is for entertainment purposes only. If you have any questions about taxes or any financial matters please consultant a professional accountant.
Lenard: Hello everybody, this is Lenard de Guzman and Argel Sabillo. We are the tax trolls. In this episode we're going to go over how to set up a US company if you're a foreign business owner so Argel you're the expert on this, how do we do it?
Argel: Well, first of all, where are you right now.
Lenard: I'm here in LA. To be more specific, this is my wife's office. Trying to get better internet speed. I'm trying to clean it up, kind of like an attic setup.
Argel: Right now I'm at a coffee house. This is a Colombian coffee house and we're going to use it for a study for today, assuming that let's say this company has a foreign owner. So if you have let's say this company and you're in Colombia or other countries where you own a company and you're deciding to come to the United States one of the questions that come up with is what kind of company should I set up? Should I be an LLC or a corporation? In this case, a corporation would be the best way to go.
As far as where you should incorporate like many companies incorporate in Delaware but I would say incorporate wherever you're going to live. Let's say if you're going to live in LA incorporate in California that's where you can do most of your business. Unless you're like a high-tech company then that's when I would consider incorporating Delaware. There are also other states.
Lenard: Wait, so what's so great about Delaware because I hear like Microsoft I believe is incorporated there. Are there some tax benefits there?
Argel: It's not tax benefits. Delaware is very tech-friendly state so when it comes to like IP and protecting your IP. If you're a Delaware company and you challenged like robbers fringing on your IP and you take it to Delaware Court then they're more tech-friendly. I think California is also becoming more tech-friendly now that you know I think most people just want to do Delaware this is that trend of it's passed down that's where you should go but you're just paying double the taxes because now you're paying Delaware franchise taxes and in the state where you're operating.
So yes, I would say if you're going to be, let's take this example of this coffee shop being in New York you know incorporated in New York. There's a couple of ways to structure your company so let's say you have a parent coffee house and you want to have a New York subsidiary then the parent company which is a foreign company basically owns a US company. You as a U.S. corporation has to file a disclosure form and this form is called the 5472 right. What the 5472 does is that you're required to report corporations that are like your parent company.
The idea behind it is the IRS knows that there are companies out there, they're playing games and moving money from one foreign jurisdiction to another so US has been known for having a corporate tax. And so oftentimes you'd see companies move money overseas where the tax is a lot lower. That's what kind of like the wild wild west back in the 50s and then in 1960 that's when the government created this role where okay every time you file your tax return you have to disclose your parent company. The transactions that happened between you and that parent company for that year you have to disclose and you also have to report your financials and US gas.
As you know the US is the only one that's using gas everybody else is using [inaudible 04:53]. And so you have to kind of convert that into US dollar. So I think the bottom line is like it's a complicated filing process and you know the penalty for late filing non-filing or under-reporting it's $25,000 per year.
Lenard: Now is there is a yearly deadline that it comes up where you have to file these corporate papers?
Argel: Yes, so you follow with your corporate tax returns so if you have a calendar year tax it's due on April 15 and then you can have an extension to October 15.
Lenard: Okay so like when you file as a foreign business owner and let's say you're able to set up Delaware and then that allows you to open up a US bank account and then you're kind of off to the races or do you need a EIN etc and then you're off to the races?
Argel: Yes, so as soon as you register in Delaware you apply for an EIN with the IRS, that's kind of like a company's social security number that they can track. Once you have an EIN then it's off to the races. You can open a bank account without an EIN. So once you have the bank account open then if you have a foreign company then you're going to transfer that money to the U.S., right then you already have a filing reporting requirement with the 5472.
Lenard: So as far as citizenship how does that work? Do you have to get a green card or a visa? How does that whole process even work?
Argel: Without getting into so much of the legality of it getting a visa. You can apply for a visa to whenever you have an investment in the U.S. So there's an investment visa where basically you have to disclose that you have a US company and you're operating it just like a real company and you go through the process once you get approved then you can come to the US and I think there's a deadline on how long you can stay here but there's unlimited number of extension that you can file for. So a lot of foreign individuals who want to come to the U.S. and they want to build a company here that's one way than to get a visa.
Lenard: Okay, so then, in essence, you can extend and just never leave?
Argel: Yes, I mean the US is encouraging that because they want you to help the US economy right and pay taxes here.
Lenard: What do see like more from foreign companies coming in, what types of companies do you see are they like tech companies or are they like more e-commerce? What are the trends you're seeing?
Argel: Well, what we're seeing is there are tech companies that are coming here and also e-commerce company the reason for that is our market is much larger than their market. So, let's look at tech right so you come to the US there's a lot of like talent here; research engineers and so if you were in say Europe and there's talent there as well. I mean there are talents everywhere but like all the funding and all the engineers and even clients or customers are here in the US right and so it just makes sense for them to be here as well to grow their global market share. For e-commerce companies, it makes sense to bring your business here in the US so maybe you're like big and Asia and you capture a large percentage of market share there.
Asia is so different it's a different game than the US right. The U.S. is like NBA it's the highest level and so I mean so basically like if you're in the US then you can have your distribution work here too. So basically there's a high cost of shipping all your products right so you want to have a base here where you can have your inventory housed and then also you want to try to get into retail, for example and this is one distribution channel that you can take advantage of and they're all here in the US, physical locations. So you want those in a truck everywhere.
So yes, it just makes business sense to be in the US especially for protecting income and expenditure.
Lenard: Okay now on the reverse side, do you see a lot of your clients going like to say like China or India because it's such a big market like the NBA right, the National Basketball Association they had recently had a controversy with China right and China just kind of just stopped showing games. Now, do you see like a lot of U.S companies going overseas to expand and what are your experiences with that?
Argel: Yes, so that's also interesting because one strategy is like to create a US brand and then if it's getting a lot of adoption overseas then you take your business overseas right. Expand your market share not just to the US but globally. So let's take this coffee shop, for example, let's say Colombian Americans, a lot of social media following really popular, even Colombians come here so now they want to expand. We want to go to Colombia and they want to have their footing there. So there's more too just like any Asian products here that you build like eventually you want to expand Western products so it makes sense to like go over there eventually.
If it's India and they have a billion people over there like more adoption in your app or something that makes your life easier I think you could expand there as well. So what does that mean for a US company going overseas? So depending on the country you're going to when you registering in that country you can either register as having a subsidiary or you can register to have a foreign branch or altogether you can have a company that's unrelated where you maybe just need somebody in, I don't know, Colombia to license some sort like royalty from them right like licensing a brand.
So there are some different ways but if you want to have a person in Colombia and rather than just pouring brand. The difference varies in every country but it has something to do with how much capital they require you to bring in in order for them to allow you to exist to create a business there. Especially if you're non-local, your non-Colombia right. So I'm just using Colombia as an example, [inaudible 13:32] in Colombia but this is kind of a good general idea of the process of being in one country and why would a country allow you to do business there.
Obviously, you have to bring in money in the country and there's a big chance in that country and the requirement is different for foreign nationals. Yes and jobs. The requirement would be different for someone who's foreign national versus someone who's local because they want to protect their local business owners right. So in this case whenever you have a theory you have this reporting requirement in the US and that's the form 5471 that form is basically for you it's also expensive. I mean and for non-filers it cost you $10,000 per form up to $25, 000 per year, 25 or 50, 000 I think 50,000 but it's a huge penalty if you don't file it and it's the same thing as 5472 you file with your tax return on April 15 or extend it to October 15.
And this isn't just like oh yeah the IRS won't look into it I'm a small company. We've had small companies audited for this prior to them being our clients and they receive a thirty-thousand-dollar notice from the IRS. Can you imagine a small business what I owe $30,000? Luckily we got them out of it, we put together some abatement paperwork and just like let the IRS know that this was something that they are a small business, they didn't know anything. They didn't know they have filing requirements, moving forward we'll start filing it.
Then luckily the IRS said okay and you know we didn't have to pay that thirty thousand dollar but it's a serious thing and I think that if you are thinking about or if you already have a foreign company or foreign subsidiary you should definitely talk to an accountant and make sure that your tax preparer or your CPA are filing those forms.
Lenard: Yes, okay. Well, I'm going do the disclaimer though. This podcast is just for entertainment purposes only. So I'll end the podcast right there. This is Lenard de Guzman and Argel Sabillo. We are the tax trolls. We'll see you on the next episode
Argel: Can i push in one more in there.
Lenard: Push in one more thing.
Argel: One more thing so the foreign bank account. If you have a foreign bank account which is if you are trying to bring money to the US you [inaudible 16:27] account so your aggregate foreign bank accounts are like over ten thousand dollars there's a reporting requirement that you do every year as well with the IRS and that's the one where the IRS basically just want to know how you're moving your money around, foreign banks account and which country you have it in. If it's Cayman Island, Ireland [inaudible 16:55]. Yes, so they want to see if you have over ten thousand dollars and you're moving right.
They want to make sure that there's no money laundering involved. They want to make sure that when you're moving one money from one country to another that they want to make sure that you're properly disposing it in your tax return so that they know the type of activities happening between countries. Because what happens oftentimes is like I said companies would move money from one country to another and now there's like arm's length transaction and then transfer pricing regulation. Just make sure that you're pricing your products right and you're not just kind of like behind the scene like moving products or money from one country to another. It has to be a legitimate business.
Lenard: Alright, everyone got a bonus tip there. We'll get more bonus tips later on in the next episode. Bye-bye Argel we'll see you later.