Three common mistakes made when incorporating a business in the US
Article 2 minute read

Three common mistakes made when incorporating a business in the US

02 June 2016

There are common mistakes made by companies looking to operate in the United States. These mistakes can result in additional costs, time spent and even sanctions. Our local expert explains.

1. Not evaluating the company’s business needs

It is important to be clear on business goals, in particular the need to establish presence in the US. In the haste to sign contracts and start operations, setting up the legal entity becomes secondary with many relying on their company’s current organisational structure. This may work for some, but for others can result in unnecessary additional costs, paperwork, and ongoing obligations. Taking the time to evaluate goals can help determine if the desired business structure is in place.

2. Incorporating in another state to avoid taxes

In the US, there are states that may be more attractive to incorporate in as there is no corporate income tax. However, this does not mean the company will have no corporate tax obligations. In every state the company creates ‘nexus’ – does business in – can trigger local tax and entity registration requirements. This means paying tax initially thought avoidable, as well as an additional registration fee and ongoing compliance requirements. A major consideration when selecting the state of incorporation will depend on the business objectives.

3. Choosing how many shares the company must have

Choosing share options can be as varied as choosing an insurance plan, especially when you throw in terms like no par value, common stock, authorized shares, and values from 1 to 50,000. The share structure a company chooses can restrict ownership flexibility, investment, and even result in unnecessary costs. For example, a company may choose to have 100,000 authorized shares with no intention of becoming public or selling these shares to raise capital.  If the company’s state franchise tax happens to be based on the authorized shares, they can end up paying thousands of dollars in annual taxes.

Avoid mistakes

Listen to our on-demand webinar, where Jessica Valenzuela, COSEC Manager at TMF Group, goes into detail on these mistakes, and provides guidance on how companies can choose the right legal entity when incorporating in the US.

For more information about our business in the US, please visit our US country page.

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