Company Formations: A jurisdictional guide to setting up a business
QUESTION ONE – What are the most common structures used when international clients want to form a company in your jurisdiction? Any examples?
The most common structure used by international businesses operating in the US is the corporation. A corporation is organised under the laws of a specific state in the US, and each state has its own requirements and advantages.
Corporations can be formed quickly and inexpensively in Arizona. A limited liability company is an alternative to a corporation. Limited liability companies (or LLCs) are even easier to form in Arizona and are also available in all other states in the US.
US tax law features ‘check-the-box’ regulations which allow an LLC to choose its form of taxation. If it has multiple members, then it can choose to be taxed as a partnership or a corporation. If it has only one member, then it can also choose to be taxed as a corporation, or alternatively, as an entity disregarded from its owner for income tax purposes (but not for other legal and business purposes). Because of this flexibility, LLCs are used for new businesses more frequently than corporations. The international business operating in the US can enjoy the flexibility and ease of operation of an LLC with the tax attributes afforded a corporation.
A corporation or LLC taxed as a corporation, is generally the preferred method for an international client to establish a business in the US, to minimise income tax and compliance obligations for the international owner. If a partnership is used, then the international owner has filing and taxpaying obligations in the US more involved than when treated as a shareholder.
If multiple companies are needed in the US, it is easy to structure these as parent/ subsidiaries or brother/sister arrangements, using either corporations or LLCs. The US federal income tax rate on corporations is 21 per cent as of January 1, 2018. The Arizona state corporate income tax rate is 4.9 per cent. Other states’ rates range much higher and some states have no state income tax.
Income is apportioned among states based on the company’s operations in each state, so an international business operating in the US can generate tax liabilities in many states, regardless of where it is organised. The operations can be monitored and modified to minimise state and local income taxes as much as possible.
QUESTION TWO – Please detail some of the favourable and unfavourable legislation that businesses considering establishing a presence in your jurisdiction should be aware of? How can you help them to streamline the process?
The most favourable recent legislation for companies operating in the US is the reduction in the federal income tax rate on corporations from 35 per cent to 21 per cent effective January 1, 2018.
A corporation must file articles of incorporation with the Arizona Corporation Commission (or other state’s relevant authority, if formed elsewhere) when it is established. The requirements to maintain a corporation in Arizona are not burdensome and include an annual registration that is available to the public but has minimal disclosures. The corporation must also adopt bylaws, elect a board of directors, hold organisational and annual meetings, and keep minutes for these meetings.
Arizona requires very little to maintain an LLC. An LLC must file articles of organisation when it is established. No annual registration is required. Only a few circumstances require a change in registration with the state once the LLC is formed.
Corporations and LLCs in Arizona limit the liability of the owners as long as the few corporate and LLC formalities are followed. Directors can be subject to liability related to their responsibilities, so insurance coverage appropriate to this purpose is recommended.
QUESTION THREE – What due diligence is required to be undertaken by company formations agents under anti-money laundering laws in your jurisdiction?
In order to establish relationships with professionals and banks in the US, the international client needs to provide documentary evidence of the existence, validity and current status of the international owner. If this is a company, then it needs to supply the equivalent of the US articles of incorporation or articles of organisation certified by the issuing authority. The client must provide information about the activities of the international owner, including details of business activities, copies of financial statements, primary clients and their activities, primary creditors, and whether the client is associated with a foreign politically exposed person (PEP).
In addition to the information described above about the intended direct owner of the US company, information about any individual owning 25 per cent or more, directly or indirectly, of the equity interests in the US company must be made available. This information includes name, address, date of birth, citizenship country, residency status, government identification, etc. This information is also needed for the individual officer or manager who will have significant authority to control or direct the US company.