Introduction – The Age of Indian-American businesses
While VP Kamala Harris is making her mark in the political realm, Parag Agrawal has made it to the news as Twitter’s new CEO. The bottom line here is – Indians are making and breaking waves in the US.
President Joe Biden himself has recognized the contribution that the Indian-American community is making to the country. They make up a decent portion of entrepreneurs with businesses established within the country’s borders and are also helping some of the tech giants in Silicon Valley. Tech mogul Elon Musk also tweeted that the US is benefiting greatly from the presence of Indians.
A report titled “Indian Roots, American Soil 2020” attested that around 150 companies with origins in India have brought in $22 billion in investments to the US and are responsible for a remarkable number of new jobs.
Is the US really the Land of Opportunity?
There is no doubt that setting up a business in the US gives access to a new and different market. It provides an economically conducive environment for growth. The relatively stable political environment and availability of skilled workers is any businessman’s utopia. US laws also treat domestic businesses on par with non-resident owned businesses. If ever there was a tussle or a dispute, both the parties involved would be subject to the same procedure with zero bias, partiality or favouritism. Apart from that, the US provides a great diving board for launching your business and yourself to the rest of the world. It doesn’t matter what your product or your service is, you will undoubtedly find takers there.
Look at Uniqlo. It is a Japanese company that is becoming a new favourite with young women in the Indian market. How do you think it gained such sudden popularity? You guessed right. It expanded and set itself up first in the US, and then took over other markets like India. And now, it is the world’s third-largest fast-fashion brand, behind Zara and H&M.
If you are someone who is still weighing your options and contemplating as to whether to set up your business in the US or not, think no more! The force is with you. The odds are in your favour.
Now that you have made the smart move of setting up a company in the US, where do you begin? Step 1, of course. Of all the multitude of decisions that will need to be made when it comes to setting up a business, there is one that holds a great deal of importance – a decision on which of the myriad types of business structures best suits your purpose. Whether you are already on a growth curve in India, or just starting off, the type of structure you choose for your business in the US will bear long-term consequences for your expansion and finances. A business structure is essentially a legal structure. It determines how you will be allowed to raise capital, how and who will be taxed, and what benefits you will receive (Also how much paperwork is in store for you!)
This leads us to the next question.
What choices do I have?
Broadly, there are 4 options available in the US – a) Sole proprietorship b) Partnership c) Corporation d) Limited Liability Company
You need to be wary when choosing which one to go for based on what product or service you will be introducing in the US market.
A sole proprietorship is suitable for something on a small scale, like a catering business. Businesses with lesser compliance, lesser capital requirements, or an unorganized structure are ideal for a sole proprietorship. But these businesses are not something that can go global or break the metaphorical glass ceiling.
A partnership is very simple and commonly found. But it comes with a very high liability. This means that if a business comes under debt or becomes insolvent, the partners’ personal assets will be at stake. This, again, is not very beneficial if you wish to take your business global in the longer run.
Since the aforementioned two options are not viable for launching a global business, let’s focus on the remaining two.
Should I structure my business as a Corporation?
In a corporation, the biggest financial advantage is that the owner is liable only to the amount of investment he has made. If the company becomes indebted, his personal assets will not be at stake, unlike a partnership or sole proprietorship. This happens because a corporation is treated as a legal entity on its own that is separate from the owners/investors/shareholders.
A corporation can also raise a sizeable amount of capital from the public by selling shares or issuing bonds. So, if you aim to take your business public, wish to get it listed on the stock exchange and take the stock market by storm, then the business has to be registered as a corporation.
But, a downside to a corporation is that it faces Economic Double Taxation. What it means is that an income is taxed at two levels- the first time as an income tax of the corporation and the second time in the hands of the shareholders when dividends are being paid out.
It also comes with a higher cost of functioning as, in the US, it will have to pay a state tax and a federal tax.
A corporation can be of two types –C-corporation or S-corporation
When you incorporate your business, it will be incorporated by default as a C-corporation. To register as an S-corporation, you will have to specifically elect to do so with the IRS by filing Form 2553. An S-corp brings with it some tax advantages, which is why the rules for it are more stringent.
- One such rule is that the shareholders must be US residents or citizens. So unless you are a US resident already or are set to gain US citizenship before establishing your business in the US, you cannot structure your business as an S-corp.
- The number of shareholders for an S-corp is also limited to 100 only. So it can’t possibly be listed on an exchange if that is one of your end goals. But if going public is not something you visualize for the business’ future, an S-corp may be a good idea. If you end up changing your mind, then an S-corp can always be elected to be treated as a C-corp.
An edge that the S-corp has is that it can be treated as a pass-through entity. The profits and losses are passed on to the shareholders. This eliminates the problem of Economic Double Taxation that was mentioned earlier.
Should I structure my business as an LLC?
The best of both worlds – that’s how you can describe a Limited Liability Company. It is a hybridized structure that is composed of aspects from partnerships and corporations. It has fewer requirements than a corporation, like a partnership, and provides protection against the business entity’s liabilities, like a corporation.
It is also not subject to any limit on the number of owners like an S-corp. There is also no requirement for the owners/members to be residents or citizens of the US. Even though there is no limit on the number of shareholders, LLCs are not allowed to issue shares or get listed on the stock exchange.
An LLC doesn’t face the problem of Economic Double Taxation either. The profits and losses pass through to the members/owners. The entity itself does not get taxed, but the income of the owners does.
Creating and registering an LLC is a much easier process. The creation of LLCs also depends on which state they will be situated in. So the owners can compare and contrast the various hurdles and benefits that each state provides and choose according to their convenience.
It comes down to a few simple steps-
- Choosing a state to be located in.
- Naming the LLC.
- Hiring a Registered Agent that receives and sends legal papers on your behalf.
- Filing Articles of Organization and Certificate of Formation with the Secretary of State (some states provide this facility online as well)
- Obtaining an EIN (Employer Identification Number)
- Getting a physical mail address
And you’re done! You have successfully established an LLC!
An LLC does seem like a very attractive option, doesn’t it? Hold on. It has a few disadvantages.
- Taxation wise, the members are required to pay a self-employment tax of 15.3%
- An LLC can also be dissolved if it fails to report its filings, on death/withdrawal of a member without the appointment of a successor, or if there is a change in structure.
- As mentioned previously, each state treats an LLC differently. If the business is being conducted in states other than where it is incorporated, then the registration needs to be done in those states as well.
This is just the tip of the iceberg. All the advantages and disadvantages that your business will face are based on a plethora of other factors as well. The structure must, therefore, be selected with a lot of diligence. Not just new business, subsidiaries of an existing Indian business also need to go through the same amount of care while being incorporated. The nitty-gritty of the legal and the taxation formalities must be understood before a leap into the US is taken. Professional help must be sought to understand the workings of the system and to be prepared for all the formalities that will ensue.