Foreign entrepreneurs entering the United States market may choose between acquiring an existing business or creating a new company. While purchasing a business can provide an established operation, building a company from the ground up allows the entrepreneur to shape the business according to their own vision from the very beginning.
Building a company from the ground up also gives the entrepreneur more control over how the business is structured and how operations are set up from the start. Key decisions about the legal form of the company, internal processes, and day to day management can be established according to the entrepreneur’s own plans and objectives.
Before the business can open its doors, several legal and administrative requirements must be completed. The sections below explain the main elements involved when entrepreneurs establish a new company in the United States.
Choosing the Legal Structure of the Business
When establishing a company in the United States, entrepreneurs must decide what legal structure the business will operate under. This decision shapes how the company is taxed, how ownership is organized, and whether the owners may be personally responsible for the business’s debts or legal obligations.
Because of these differences, entrepreneurs often evaluate business structures by considering two central issues. The first is taxation. Different structures determine how business income is reported and taxed. The second is liability. Some structures separate the business from its owners, while others allow creditors to pursue the owner’s personal assets.
Several structures are commonly used in the United States. These include sole proprietorships, partnerships, corporations, and Limited Liability Companies (LLCs).
A sole proprietorship is owned and operated by one individual. A partnership involves two or more people who share ownership of the business. Corporations exist as separate legal entities from their owners and operate under specific governance and tax rules.
Many entrepreneurs consider forming a Limited Liability Company (LLC). This structure can provide liability protection for the owners while allowing flexibility in how the business is managed and taxed.
The Internal Revenue Service (IRS) explains that the type of business structure determines how a business is taxed and the level of personal liability the owners may have.
Deciding Where to Form the Business
Once the structure of the company is selected, the business must be formally created through a state registration process. In the United States, companies are generally formed under state law, which means the business entity is registered with a state authority rather than through a single national registry.
Because of this system, entrepreneurs must decide which state will serve as the legal home of the business. The state of formation determines the legal framework that governs the company, including filing requirements, fees, and certain compliance obligations.
In many cases, entrepreneurs choose to form the business in the state where the company will operate. Forming the company in one state while operating in another may require registering the business in multiple jurisdictions.
To establish the company, entrepreneurs typically file formation documents with the appropriate state office. For example, a Limited Liability Company (LLC) is commonly created by filing Articles of Organization, while a corporation is formed by filing Articles of Incorporation.
In some situations, a company may be formed in one state and later register to operate in another. When this occurs, the state where the business was originally formed considers it a domestic entity, while other states may require the business to register as a foreign entity before conducting activities there.
Determining the Business’s Federal Tax Identification
After a company is formed under state law, the business may need to obtain a federal tax identification number. In the United States, many businesses do this by applying for an Employer Identification Number (EIN) issued by the Internal Revenue Service (IRS).
An EIN is a unique number used by the federal government to identify a business entity for tax purposes. The IRS uses this number to track tax reporting and other obligations associated with the company.
Businesses commonly obtain an EIN when they plan to hire employees, file certain tax returns, or open business bank accounts. Financial institutions and government agencies may also request the EIN when verifying the identity of the company.
The IRS explains that the EIN functions as the federal tax identification number assigned to a business entity.
Licensing and Permit Requirements
In the United States, certain business activities require licenses or permits before operations can begin. These requirements depend on the type of work the business performs and the location where it operates.
Some industries are regulated at the federal level. For example, businesses involved in activities such as transportation, aviation, agriculture, firearms, or the sale of alcoholic beverages may fall under federal regulatory oversight.
Many other licenses are issued by state or local authorities. Businesses providing services such as construction, food preparation, childcare, real estate, or certain professional services may need permits or professional licenses issued by state or municipal agencies.
Because regulatory authority is divided across several levels of government, the licenses required for one business may differ from those required for another. Entrepreneurs typically review the rules that apply to their specific industry and location before beginning operations.
Establishing Financial Records and Accounting Practices
Businesses operating in the United States are expected to maintain records that document their financial activity. These records support tax reporting and provide a clear account of the company’s income, expenses, and other transactions.
The Internal Revenue Service (IRS) explains that businesses must keep records showing income received, expenses paid, and other information reported on tax returns. These records allow businesses to prepare financial statements and support the figures reported to the government.
In practice, maintaining financial records usually involves documenting several categories of information, including:
- income received from customers or clients
- operating expenses such as rent, supplies, and utilities
- payroll payments to employees
- business purchases and other deductible expenses
Businesses typically organize this information through accounting systems or bookkeeping records that track transactions over time.
Accurate financial records help businesses prepare tax filings and demonstrate the financial history of the company.
Sources:
- IRS. https://www.irs.gov/businesses/small-businesses-self-employed/business-structures
- SBA. https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
- SBA. https://www.sba.gov/business-guide/launch-your-business/register-your-business
- IRS. https://www.irs.gov/businesses/employer-identification-number
- SBA. https://www.sba.gov/business-guide/launch-your-business/apply-licenses-permits