Foreign companies entering the U.S. market frequently make their entity selection decision based on a single factor — usually either tax advice from their home country counsel or a quick conversation with a U.S. accountant focused narrowly on federal tax treatment. The decision deserves more analysis than either of these inputs alone provides.
The choice of U.S. entity affects tax treatment, legal liability, governance, capital-raising capability, employee equity programs, and exit flexibility. It is difficult and expensive to undo. Here are the mistakes I see most often.
Choosing an LLC Because It Sounds Simpler
The LLC is often described as the most flexible U.S. entity, and for domestic owners it frequently is. For foreign owners, the default pass-through tax treatment that makes LLCs attractive for Americans creates complications. A foreign corporate owner of a U.S. LLC may find itself directly subject to U.S. tax on the LLC's effectively connected income, with withholding obligations on distributions and potential treaty complications depending on the owner's jurisdiction.
The LLC is not the wrong answer for all foreign-owned businesses — but "it sounds simpler" is not a sufficient reason to choose it. The analysis should start with a clear picture of the owner's tax residence, applicable treaties, and the expected flow of funds between the U.S. entity and the foreign parent.
Delaware by Default
Delaware is the correct choice for most companies intending to raise venture capital or institutional investment. For all other foreign-owned businesses operating in New York, Delaware formation often creates unnecessary complexity: a Delaware entity operating in New York must register as a foreign entity in New York, pay New York taxes regardless, and maintain a registered agent in Delaware. The result is two sets of filings and fees with no meaningful benefit.
New York formation is often the better choice for businesses with no plans to raise institutional capital, no need for Delaware's specialized corporate law, and operations primarily in New York. The analysis is not complicated, but it requires asking the question rather than defaulting to Delaware because that's what a founder's cousin did.
Ignoring State Tax Obligations
Federal tax treatment is only part of the picture. New York imposes its own corporate tax, and New York City imposes a separate business tax on companies operating within the city. Foreign-owned entities that are structured correctly at the federal level can still face significant and unexpected New York State and City tax exposure if the structure is not designed with both in mind from the outset.
For companies with physical presence in multiple U.S. states — sales personnel, warehouse operations, or server infrastructure — the state tax nexus question expands further. A company that ships products from a warehouse in New Jersey may have created New Jersey tax nexus without realizing it.
Not Planning for the Exit
Entity selection affects exit options. A foreign-owned LLC that has operated successfully for years and now has a U.S. acquirer may discover that the preferred exit structure — typically a stock sale — creates complications because the LLC interests, not stock, are what's being sold. Converting the LLC to a corporation prior to a sale is possible but creates its own tax events and consumes time that a buyer under a letter of intent may not be willing to wait for.
The right entity for a business that expects to be acquired in three to five years may be different from the right entity for a business that intends to operate indefinitely. This is a conversation worth having at formation, not at the point of a transaction.
None of this is to say that entity selection is impossibly complex. For most foreign-owned businesses entering the U.S. market, the analysis reaches a clear answer relatively quickly. What it requires is asking the right questions at the outset — before the entity is formed, before the bank account is opened, and before the first U.S. contracts are signed.
This article is for informational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship. Laws and regulations change; readers should not rely on this content as a substitute for qualified legal counsel specific to their circumstances. Attorney Advertising.