The United States in general, offers ease of doing business, but complying with varied state laws may be a little challenging for businesses setting up their presence for the first time. All entities considering to setup a presence in US should consider the tax landscape as these can vary significantly between state, county and city. KNAV provides expert service and advise for start-ups as well as established businesses to meet the regulatory requirements and adherence to the accounting framework in the US.
FORMS OF BUSINESS STRUCTURE IN THE USA
A business can be structured in the following ways:
Sole proprietorship is the simplest form of business structure that is owned and controlled exclusively by one person who bears sole responsibility of the business, including all its liabilities and profit or loss.
Partnership is the simplest structure for more than one person to own a business and usually structured as limited partnerships (LP) or limited liability partnerships (LLP). The various forms of partnership differ based on the extent of liabilities borne by the partners for e.g. in a LP one partner bears unlimited liability while all partners have limited liability under LLP.
Limited Liability Company
An LLC is a hybrid of a corporation and partnership as it provides an ability to limit personal liability for members whiles providing access to profits without having to pay corporate taxes. It serves as an opportune structure for keeping tax rates lower than corporations and protecting personal assets of the owners.
Corporations are formed as a legal entity separate from its owners and depending on may be structured as:
- C corp
A C corporation is registered under subchapter C of the Internal Revenue Code and is a legal entity completely separate from its owners and also taxed separately from its owners. These are suitable for medium to high risk business that might need access to capital through stock sale, plan to go public or sell the business at some point.
- S corp
S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purpose and avoids double taxation limitation of a C corp. The corporation must file with the IRS to get the S corp status in addition to registering with their state and it is important to note that not all states provide same tax treatment to S corp like federal governments. S corp is limited by number of shareholder (100) and the requirement that all shareholders be U.S. citizens.
- B corp
A B corp or a benefit corporation, is a for-profit corporation recognized by a majority of U.S. states that only differ from C corps in purpose, accountability, and transparency and are taxed in the same manner as a C corp. Although the B coprs are for profit they are accountable and work to produce some public benefit and some states also require them to file annual benefits report.
- Non-profit corporation
Non-profit corporations referred to as 501(c)(3) corporations are organizations formed to carry out charitable, education, religious, literary, or scientific work and not for the purpose of generating profits. An organization planning set up would need to file with the IRS to get tax-exempt status along with registering with the state as required.
Branch of a Foreign Corporation
A foreign corporation may also choose to establish its presence by opening a branch in the US. A branch is usually not a separate legal entity and is considered more like the entire company doing business in the US which might not be favourable from tax and other liability perspectives.
Businesses structured as an LLC, corporation, partnership, or nonprofit corporation would require registering with the state where business activities would be conducted i.e. typically a state where:
- The state in which the business has a physical presence
- A significant portion of company’s revenue is earned from that state
- Employees of the business work in the state
For businesses that are operated from more than one state are considered domestic by the state that it is registered in and are required to file for foreign qualification in all other states where the business is active.
A registered business would then apply for an Employer Identification Number (EIN) which serves as the federal tax ID. A state tax ID number is also required to be obtained if the business is required to pay state taxes based on each state’s requirements.
The requirement for a business license or permit (both federal and state) depends on the type of activity; activities such as agriculture, aviation, mining, transportation and logistics that are governed by federal laws require federal licenses and permits and those activities that are regulated by the state require state permits.
AUDIT REQUIREMENTS FOR COMPANIES IN THE US
Financial statement audit requirements in the US depend on whether the business is public or private.
Public Company: Companies whose securities (equity and/or debt) are traded in public markets in the United States are required to have annual audits by an independent CPA firm registered with the Public Company Accounting Oversight Board (PCAOB). Public Companies are also required to have the quarterly financial reviewed by a PCAOB registered CPA firm.
Private: Although federal laws do not require audits for private businesses it is generally a requirement of other stakeholders such as investors, banks and/or other lenders. Although an audit might not be a regulatory requirement, financial audits are preferred by companies as they provide numerous benefits such as:
- An audit validates the compliance of the company’s accounting policies with applicable accounting framework.
- An audit provides insights into the internal control systems and policies of the company providing an opportunity to identify and correct the weaknesses in internal controls.