Establishing A Trust Or Company In The USA
People often create trusts to help them manage their assets. Here’s a quickie on the basics of a trust, along with a description of common uses.
A trust is created by the grantor (that’s you). The grantor writes the rules governing how the trust is to operate, what it is to do, and how and when to do it. If the trust is revocable, you can change the rules at any time. If the trust is irrevocable, you can’t. (Each form has advantages and disadvantages, including tax implications.)
When creating the trust, you appoint a trustee, who will have the job of managing the trust and its assets. (People often appoint themselves to serve as trustee.) The trustee must follow the trust’s rules, although, some trusts let the trustee use discretion in certain matters.
After you create the trust, it receives gifts from a donor (that’s also usually you, although you might permit your trust to receive gifts from others in addition to you or instead of you). The trustee collects the gifts and invests the money in accordance with the rules of the trust. As a result, the trust will find itself with three things: principal (the money it was given, also called the corpus), interest and dividends earned on the principal (called income), and profits (if any) from increases in value enjoyed by the principal (called capital gains). The rules you’ve written for the trust will determine who gets the income, capital gains and, ultimately, the principal. The recipient is called the beneficiary.
Some trusts have lots of beneficiaries. They can be family members, friends, or charities -- anyone you want, in any combination. Some trusts give the income to certain beneficiaries, while others get the capital gains, and still others get the corpus -- with the trust itself stating who is to get what and when (or under what conditions). It’s the trustee’s job to make sure all this happens in accordance with the provisions of the trust.
Because different trusts do different things, it’s routine for people to have more than one. In fact, having four or five trusts is not uncommon. In some cases, trusts are even created by other trusts or in a will!
Is a trust right for you? Your answers to these questions can help you decide.
- Are you worth more than $5 million? If yes, read about the Bypass Trust.
- Are you concerned about a family member who has a disability that limits his or her ability in any way? If yes, read about the Special Needs Trust.
- Do you fret that your heirs might squander the money you leave to them? If yes, read about the Spendthrift Trust.
- Do you own a lot of life insurance? If yes, then read about the Life Insurance Trust.
- Would you like a charity to receive a substantial amount of money upon your death? If yes, read about the Charitable Remainder Trust.
- Do you have children and expect your spouse to remarry after you die? Then read about the Qualified Terminal Interest Property (QTIP) Trust.
- Do you want to make certain that your assets are used for your benefit even if you are unable to manage them yourself? Do you want your assets to go directly to your heirs, avoiding the costs, delay, and publicity of probate? If so, read about the Living Trust.
- Do you want the bulk of your assets to go directly to your grandchildren? If yes, then read about the Generation-Skipping Trust.
Bypass trusts. Also called the credit shelter trust, marital trust, and family trust, this trust is designed to help a married couple avoid estate taxes. Each person may pass to heirs a certain amount of money at death with no estate tax. The bypass trust can increase this. Because tax laws vary year to year, contact us to make sure you have current information.
Special needs trusts. This trust provides financial support to a person who is disabled and unable to earn sufficient income to support him- or herself. To avoid the risk of interfering with the support that’s otherwise available from social services, this trust’s assets typically cannot be used for housing, clothing, or food.
Spendthrift trusts. Instead of leaving an heir a bucket of money that he or she may quickly squander, you place that inheritance into this trust. The trust would then distribute the inheritance to the heir later, perhaps when the heir reaches a certain age, or in the form of an allowance, or for specific expenses, such as college or medical expenses.
Life insurance trusts. For high net-worth individuals, owning their own life insurance is a big mistake -- because the death benefit is subject to estate taxes. To solve this problem, have a life insurance trust own your policy. Instead of paying for the insurance yourself, you’d give that money to the trust, which would pay the premium for you. The trust would be the beneficiary, and your heirs would be the beneficiaries of the trust. An additional benefit of a life insurance trust: Instead of beneficiaries automatically getting the insurance proceeds immediately upon your death, you can instruct the trust to distribute the money to the heirs more slowly (see Spendthrift Trust above).
Charitable remainder trusts. If you plan to donate assets to a charity after your death, you may find it beneficial, instead, to donate to a CRT now. By doing so, you get a tax deduction right now for your gift. You also can name yourself as the income beneficiary (giving yourself an annual income) and the charity gets what’s left after your death, tax free -- just as you’ve intended. If you’re concerned that making the gift to the CRT denies your children their inheritance, you can buy a life insurance policy equal to the size of your gift, naming your children as beneficiaries of the insurance, using some of the trust’s income to pay the policy’s premiums (see Insurance Trust above).
QTIP trusts. Say you die leaving a spouse, minor children, and assets. Further say your spouse remarries, then dies. Result: Your spouse’s new spouse gets all your money, and your children are left with nothing. (We’ve seen this happen too many times.) To avoid this scenario, consider the Qualified Terminal Interest Property Trust. Instead of leaving your assets to your spouse when you die, you leave your assets to the QTIP trust. The trust gives income to your surviving spouse for his or her lifetime. But when your spouse dies, the assets remain in the trust for the benefit of your children. Because your spouse doesn’t directly own the assets, he or she can’t convey them to a new spouse and his or her own heirs.
Living trusts. This tool is designed to pass your assets to heirs without going through probate. Also, it can help insure that your assets will be used for your benefit and welfare if you become unable to manage your own affairs.
Generation-skipping trusts. Such trusts, intended for truly wealthy estates, can preserve your assets for several generations while avoiding estate taxes. You can fund a GST with the same amount as the bypass trust for the benefit of your grandchildren and great grandchildren, and the assets will appreciate free of income and estate taxes. Such assets can also be protected from creditors.
Neither US citizenship nor residency are requirements for forming a Delaware LLC or Delaware corporation. You can start a business in Delaware from anywhere in the world.
In fact, many of our clients are not living in America.
We do not charge foreigners more money for filings, however, we would encourage you to review our resources section to make the whole process easier for you, specifically checking our Delaware LLC and Delaware Corporation pages.
Steps to Starting a Non-U.S. LLC or Corporation
Here we focus on establishing a company in Delaware as this has many advantages over other states in the USA.
In Delaware, an LLC or Corporation is formed with the Delaware Division of Corporations. That will be referred to as your “domestic state.” Your business will be considered a “foreign entity” in states outside your domestic state (America has 50 different states and a couple extra jurisdictions).
The process for starting a business in Delaware is nearly the same process that a US citizen would go through:
Name the Company
Find a name for your business by performing a name search on the Division of Corporation’s website. Once you’ve found an available name, you are NOT required to reserve it. The name will automatically belong to your business entity once Delaware has recorded your company’s LLC or corporation filing.
Hire a Delaware Registered Agent
Delaware registered agents receive all official mail and service of process on behalf of your Delaware company. You must maintain a Delaware registered agent, which is what we do for $45 a year, to keep the Delaware company in good standing. They are required by law and must maintain a physical address and keep regular business hours in the state, which, since you do not live in the United States, are requirements you cannot meet. This is a necessary expense and you’ll need the registered agent’s name and address to complete the formation paperwork in the next step. You could try to list a relative or friend as your registered agent, but doing so might involve this person into your personal business notifications and put an unneeded burden on them to legally accept your legal documents.
File Certificate of Incorporation or Certificate of Organisation
The name of the formation document will depend on what type of entity you are forming. Certificates of Incorporation are for corporations. Certificates of Organisation are for Limited Liability Companies (LLCs). There are two ways to file these documents with the Delaware Division of Corporations: by mail or by fax. Delaware does not offer online filings, although you can sign up with us online and we’ll file your Delaware LLC or corporation for you.
Many foreigners choose a corporation because it aligns better with your home country’s rules and regulations. Also it is defaulted to a C corporation which is how you’ll have to pay your taxes to the IRS should you owe IRS taxes on income you derive from the U.S.
Obtain an EIN
In order to file and pay taxes in the United States, your Delaware company will need to obtain Employer Identification number (EIN). After the state sends verification that your articles of organisation (for Delaware LLCs) or articles of incorporation (for Delaware corporations) have been processed, you can apply for an EIN by filing Form SS-4 with the Internal Revenue Service (IRS). The IRS accepts EIN applications online, by phone, or by mail. The form is one page and comes with plenty of instructions.
Differences between a Delaware LLC and a Delaware Corporation
If you choose a Delaware LLC, your ownership of the company is in the form of membership interests. The members are the owners of the Delaware LLC.
If you choose a Delaware corporation, your ownership of the company is in the form of shareholder stocks. These stock certificates do not need to be physically made. They can just be documented on paper as to how many each shareholder owns. The shareholders elect the directors of the corporation. The directors elect the officers such as president, treasurer, and secretary of the corporation. If you are doing a Delaware corporation, we ask you for all this information, and as the incorporator, we elect the directors and officers on your behalf, and you sign the corporate bylaws as the shareholders.
In order to keep your business entity active, you will need to file an annual report and pay a franchise tax to the Delaware Division of Corporations if you operate a corporation; LLCs only need to pay an annual tax of $300. Annual reports and Delaware Corporate Franchise Taxes (a minimum of $175) are due each year by March 1; the LLC tax of $300 is due each year by June 1.
Opening a bank account
One of the most commonly asked questions about forming a business in the United States from abroad is how to open a business bank account. Opening a U.S. bank account is difficult if you are not here. Most people that go to that much effort actually have to fly into the U.S. and physically walk into a branch. We recommend Wilmington Trust, HSBC, Wells Fargo, U.S. Bank, Chase, or Citibank. Wells Fargo banks in Las Vegas are particularly versed in setting up bank accounts for non-U.S. residents. A business bank account in the U.S. does not need to be “Started” in the state of your formation. We do not assist in setting up U.S. bank accounts. Frankly, no one can really help you do that very well. You will have all the legal documents relating to the formation of your Delaware company that you will need to set up a bank account, in your online account, at all times.
Business owners also run into trouble trying to open an account in their own country for a foreign business. If your country is part of the Hague Convention, you will need an apostille (official certification of your business formation documents).
Paying US taxes as a Nonresident
Non-US citizens cannot be shareholders in an S corp, so this limits your taxable business entity choices. Mostly, non-US residents will choose between LLCs and corporations taxed as C-corps.
If you form a corporation in Delaware, your corporation will be taxed as like any other US corporation. The corporation will pay the same taxes that any other US corporation would on all US-sourced income and your Delaware corporation would also be taxed on all foreign earnings, in accordance with US Treasury regulations. Since the corporation was formed in the United States, it is taxed as a domestic corporation and you will file Form 1120.
As a non-US resident, your Delaware LLC will only be taxed in the US on income from US sources, meaning that income from other countries will not be taxed by the US. If you choose to form an LLC, any profits US-sourced income will be taxed by 30%. This 30% goes to the IRS. At the end of the year, you will file your US taxes on Form 1040-NR with the actual amount due. If the amount due is less than the 30% initially taxed, the IRS will issue a refund in the amount overpaid. To make sure the LLC is sending the proper amount to the IRS, the LLC must designate a tax withholding agent to calculate the proper amount that must be sent to the IRS before any of the money is released. Because of these difficulties, many non-US residents choose to form corporations, unless they are forming the LLC to do business strictly outside of the US, in which case, the LLC would not owe any US taxes.
Helpful Tips for US Non-residents Starting a Business in Delaware
- With a Delaware LLC or Delaware corporation, you only need one person. There is no need for multiple people.
- There is no need to pay a company a high fee for nominee service.
- You get a federal tax ID yourself, or you can hire us to do it for you at the bottom of our sign up form.
- If you need an apostile, you can add that at the bottom of our sign up form.
- Most people do NOT need a corporate book and seal. If you ask us, it’s a waste of your money. But if you want one, you can add that to your order at the bottom of the sign up form.