The American dream of business ownership in the United States is not limited to only U.S. citizens. Neither citizenship nor residency is required to start a small business in the U.S. Of course, there are rules and processes that non-citizens must follow to make their dream a reality. Overall, the steps are similar to those that a U.S. citizen must take when starting a business in the USA.
7 Steps for Entrepreneurs Without U.S. Citizenship to Start a Small Business in the United States
1. Have the Necessary Federal Approvals in Place.
Generally, foreigners do not need a green card to own a business or to be listed as a corporate officer or director of a U.S. company and earn profits from it, provided they pay taxes. However, to work in a business that they have invested in, individuals must have approval from the U.S. government through either an E-2 Treaty Investor Visa or EB-5 Visa.
E-2 Treaty Investor Classification
To qualify for E-2 Treaty Investor classification, a non-immigrant, non-citizen investor must:
- Be a national of a country with which the United States maintains a treaty of commerce and navigation;
- Be actively in the process of investing (or have already invested) a substantial amount of capital in a bona fide U.S. company; and
- Be in (or seeking to be in) the United States for the sole purpose of developing and directing the investment enterprise. (Must show 50 percent ownership of the company or have operational control through a managerial position or other corporate device.)
E-2 classification allows non-immigrant investors an initial stay in the U.S. of up to two years. Extended stays may be granted in up to two-year increments. While there’s no limit to the number of extensions that can be requested, E-2 investors must intend to leave the United States when their E-2 status expires (or has been terminated).
Keep in mind that E-2 treaty investors may only perform the work they were approved for when E-2 status was granted. So, non-immigrant, non-citizen, business owners must be cautious about their involvement in the business.
You will find detailed information on the U.S. Citizenship and Immigration Services (UCIS) website about the process and required forms for E-2 classification.
EB-5 Visa Classification
The EB-5 Immigrant Investor Program is named after the employment-based fifth preference visa that participants receive if they qualify. EB-5 visa classification is available to foreign entrepreneurs who invest at least $1.8 million—or $900,000 if the entity is in a TEA (targeted employment area)—in a commercial enterprise and create ten new full-time jobs. Foreign investors who qualify for EB-5 classification may become eligible for permanent U.S. residency and eventually citizenship as a result of their financial investment and commitment.
According to the UCIS, investors may also qualify for EB-5 classification by investing through designated EB-5 regional centers. EB-5 regional centers are economic units, public or private, in the U.S. that are involved with promoting economic growth.
With an EB-5 visa, a conditional permanent residence may be granted to the investor and family members for a two-year period. Within 90 days before the two-year period has expired, the EB-5 investor may apply for the conditional permanent resident status to be changed to lawful permanent status. USCIS provides detailed information about the forms and process for obtaining EB-5 Investor status.
2. Choose a Business Entity Type.
There are some restrictions on the business structures that foreign entrepreneurs may form for their U.S. companies. For example, nonresidents may not form an S Corporation because each shareholder must be a U.S. citizen or permanent resident alien. Generally, the C Corporation and the Limited Liability Company (LLC) business entity types are chosen because they offer personal liability protection for business owners and offer some tax flexibility. To form either entity, an entrepreneur must file business registration paperwork in the state(s) where the business will be operated.
C Corporations are a separate legal and tax entity from the business owners (known as “shareholders.” Therefore, owners’ personal assets are protected from the legal and financial debts of the company. The company reports its profits and losses on a corporate tax return. Outside investors and financial institutions will often prefer to invest in companies set up as C Corps rather than other business entity types. This is due to the compliance checks in place to ensure they’re run properly. Potential downsides to the C Corporation structure are the paperwork and deadlines required to stay in compliance and “double taxation.” Some of a corporation’s profits are taxed twice; the corporation pays taxes on its profits, and then the individual shareholders pay taxes on the dividend income they receive from the business.
LLCs are regarded as separate legal entities from their owners (known as “members”), thus providing personal liability protection for entrepreneurs. LLC members may choose if they want the business to be taxed as a C Corp or have its profits and losses pass through to the owners’ personal tax returns. Like C Corps, LLCs must fulfill ongoing compliance requirements, though not to the same extent.
Non-citizen owners, just like any other business owner, must pay income taxes to the U.S. Internal Revenue Service (IRS) and the state. Other taxes and fees at the federal, state, and local levels might also apply.
3. Appoint a Registered Agent.
LLCs and C Corporations must designate a registered agent in each state where it has filed formation documents to accept service of process on behalf of the company. "Service of process" refers to legal notices, correspondence from the Secretary of State, and other official government notifications.
Requirements for registered agents vary by state. Generally, an agent must be over 18 years of age, have a physical street address within the state, and be available at that address during normal business hours. There are also companies that provide registered agent services. Check with the Secretary of State's office in the state where you formed your U.S.-based business for a list of companies that are authorized registered agents.
4. Obtain an EIN (Employer Identification Number).
The IRS requires all U.S. businesses to have a Taxpayer Identification Number (TIN). For corporations and LLCs, it must be an EIN. Since mid-2019, the IRS will only allow individuals with an SSN or ITIN to be the “responsible party” on EIN applications. Entities may not use their existing EINs to obtain additional EINs.
Because foreign entrepreneurs do not have Social Security numbers, they can apply instead for an Individual Taxpayer Identification Number (ITIN). The IRS form (W-7) requires documentation that confirms the individual’s identity (such as a driver’s license or birth certificate) and the connection to a foreign country (e.g., a passport).
After receiving an ITIN, foreign business owners can request an EIN using Form SS-4.
5. Set Up a Business Bank Account in the U.S.
To create an entity based in the U.S., you must open a bank account based in the U.S.
It has become more complicated for foreigners to open accounts in the U.S. since the USA Patriot Act was passed, but with official documentation and proof of identification, it can be accomplished.
Generally, the required items include:
- Official corporation documents that include the official U.S. business address
- ITIN number and EIN
6. Obtain Required Licenses and Permits.
Just like any other business, non-citizen-owned companies must apply for licenses and permits relative to their industry, business activities, and the jurisdictions where they operate. It’s important to check with the Secretary of State, county clerk, and local government authorities to determine what requirements your business is subject to.
7. Stay on Top of Ongoing Compliance Tasks.
Depending on the entity type and where the business is located, entrepreneurs must complete certain compliance formalities. For example, they must file and pay taxes on time. And they may have to submit an annual report to the state, renew licenses and permits, hold shareholder or member meetings, and more. Failure to comply with reporting rules and pay required fees can result in fines, penalties, loss of owners' personal liability protection, and even suspension or dissolution of the business.
Final Thoughts for Starting a U.S. Business as a Foreigner
As a non-citizen, you will face some additional work and potential challenges. However, these obstacles are by no means insurmountable when you enlist the help of trusted professionals to guide you through the process. I encourage you to seek the expertise of accountants and attorneys familiar with helping foreigners start businesses in the United States. Also, SCORE mentors, who have knowledge and experience with starting businesses in a vast range of industries, can provide valuable guidance as you explore entrepreneurship in this land of opportunity.