A corporation is simply a company or group of people authorized to act as a single entity (so called legal person).
U.S. corporations provide lots of personally liability protection, advantageous tax structures, but also require higher startup costs, regulatory compliance, and operating expenses.
Corporations must file Articles of Incorporation with the Secretary of State where they wish to be incorporated (also called Certificate of Incorporation). Your business’s name must have the word “Incorporated” or “Corporation” in its title. Some states allow “Inc.” or another term required or accepted by each state (e.g. In California, “Limited,” is also allowed in the title).
After this, all states require that a corporation file annual reports to stay in good standing, as well as other legal requirements in their operation including holding shareholder and board of director meetings, adopting bylaws, filing annual reports, among other tasks. Most states also require that corporation pay annual fees (sometimes called franchise fees, or corporate tax) that are required regardless of income.
The formal reporting requirements, annual fees as well as other regulatory obligations vary between each U.S. state’s incorporation laws. As a separate legal entity, a corporation will also have to file its own tax return each year separately from the owners. A corporation must also have
- a separate bank account,
- a tax identification number, as well as
- a registered agent in the state where it is incorporated.
- Personal liability protection, or the minimum personal liability
As a separate and distinct legal entity, the owners, managers, and executives of a corporation have no personal liability for the debts and obligations of a corporation, including lawsuits. This benefit usually means that a corporation can be a necessity for some businesses that would not be possible to operate without such protection against product liability, the management large amounts of “at risk” capital, or other risks too high for an individual to take on themselves.
- Ability to raise capital and grow
C Corporations are the best structure for raising capital from investors. A corporation can grow by selling ownership of stock to new owners. A corporation may also be structured to do this without shrinking the ownership interest of already existing owners, which is a key feature other business entities do not have. The ability to raise capital not only grows a business, but also provides the structure for saving the business from going bankrupt. This will be limited for some corporate structures, such as S corporations, which can only have 100 shareholders in total (even fewer for close corporations).
- Tax benefits
Corporate tax rates are lower than individual income and self-employment rates (however, they are subject to doble-tax unless structured as an S corporation). Corporations are often able to make significant deductions on their tax liability.
- Higher levels of regulatory compliance
Strict requirements for filings and reporting to the state, as well as restrictions on how a corporation are run are typically more complex and time consuming than other business entities (owners of a close corporation are exempt from many of these rigid formalities).
- Double taxation
While corporations are taxed separately on their business income at lower rates than individuals, the owners of a corporation will still pay income taxes on any distributed corporate taxes after the corporation is taxed.
- Higher costs than other business entities
The costs to form and operate a corporation are higher than other businesses, often between USD 1,000 - 2,000 per year, which does not account for the additional time needed to maintain records and comply with state laws on activities of the corporation.
The general legal costs of starting and maintaining a corporation (not including attorney fees or costs to produce and draft required documents) depend mostly on the type of activities the corporation engages in, and the location in which it is incorporated.
To start a corporation the initial fees generally range between USD 1,000 to 2,000, and it should be expected that annual fees are between USD 800 to USD 1,500 each year (not including taxes). This may change depending on the U.S. state of incorporation.
- State filing fee for Articles of Incorporation
To start a new corporation, you must file Articles of Incorporation (also called a “Certificate of Incorporation”) with the Secretary of State. The fee is different in each state, but typically is between USD 50 and 250, though some states are much higher. These fees do not include the costs of drafting or creating the documents needed, and although they may have minimal formal requirements from the state can still be complicated and lengthy.
- Annual Fees
After you incorporate, most states require a yearly fee (often called a franchise fee) that normally is between USD 200 to 1,000, often regardless of your corporation’s income. Some states waive this tax (Nevada and Wyoming), whereas others require a higher minimum (e.g. USD 800 in California).
- Operating Costs vary from state to state
Nearly all states have an annual reporting obligation on revenues, activities, changes in directors or executives, and accounting to stay in good standing with the state. Filing reports is sometimes required more frequently than once a year, or can be triggered by certain events (e.g. mergers, acquisitions, changes in status, etc.) and usually requires a filing fee for each required report in each state. These fees range between USD 50 to 200, depending on the type of form or report, and which state you are in. Other states have different requirements such as making publications announcing incorporation (e.g. New York requires such publications in commercial news outlets as part of a requirement to give notice to the public of the incorporation).
- Corporate income tax rate
The taxes a corporation must pay to a state will depend on the type of activities, and usually will vary depending on sales, acquisitions, or other concerns. The U.S. Federal corporate income tax rate is currently 21% of the corporation’s income before deductions and expenses, as part of the Tax cuts and Jobs Act in 2017 (down from 35%). These fees are paid separately from the profits that are then distributed to the owners, who must pay personal income tax (the “double-tax” effect).
Choosing to incorporate in the U.S. is a great way to structure your business so it can grow and provide you with the maximum personal liability protection. As a full-service business and corporate law firm with U.S. and German counsel, we will evaluate your business plan and determine the most advantageous strategy to incorporate in the U.S. so you can have access to the U.S market with the right structure to succeed. We
- pick the right location for your corporation based on your business plan, the local laws, and your goals, including registering the name you want, and the right type of corporation that fits your busines goals,
- draft all the necessary documents your corporation needs to operate according to your business plan, and that you will need to file with the Secretary of State (including Articles of Incorporation, Bylaws, and appointed agents) ,
- plan the best tax strategy to maximize your benefits under local and international law,
- obtain the necessary licenses and permits to carry out all your business activities,
- identify all the legal requirements you will have such as licenses, permits, registered agent services, tax registration and bank accounts for your corporation,
- take care of the necessary filings and administrative tasks to establish your corporation legally and in good standing with the U.S. state you choose,
- apply for the visas your corporation, directors and executives will need to work and operate in the U.S.,
- ensure you have the necessary protection for your corporation’s intellectual property and trade secrets,
- make sure you have the necessary internal documents to allow your corporation to operate and grow according to your goals,
- provide all the contracts and support services to allow your business to start working, including franchising, sales, joint ventures, non-disclosure agreements, employment, and
- identify the operating requirements by law and develop a plan to keep your corporation in good standing, and compliant with local rules.
If you have a sincere interest to expand your business and enter the U.S. market, whether to establish a corporation or invest in the U.S., our team is ready to support you. We explain all requirements establishing a U.S. corporation and support you on all steps ahead. Your attorneys for U.S. legal matters are:
We can provide you with a consultation and ongoing legal services in German and English. Get in touch! The easiest way to reach us is by email (email@example.com) or by phone (+49 (0)69 / 76 75 77 80). Tell us more about your U.S. business and we will offer a service package tailored to your particular needs.