Most guidance on U.S. entity formation is written for domestic founders. When the owner is a foreign person or foreign company, the analysis changes substantially — and the advice circulating online largely ignores this. The result is foreign-owned businesses that are structured correctly under state law but incorrectly for their actual tax and governance situation.
This piece focuses on the decisions that matter most for foreign-owned U.S. entities: the choice of entity type, the tax treatment under U.S. and applicable treaty law, and the governance structures that protect the foreign owner's interests without triggering unintended U.S. tax exposure.
The Entity Choice Question
Foreign owners typically have three practical options: a U.S. limited liability company (LLC), a C-Corporation, or a branch of the foreign entity. Each has distinct tax and operational implications.
LLC
An LLC is treated as a pass-through entity by default under U.S. tax law. For a foreign owner, this means the foreign person is directly subject to U.S. tax on income effectively connected with a U.S. trade or business — and may trigger withholding obligations on distributions. The pass-through treatment that makes LLCs attractive for domestic owners can be disadvantageous for foreign ones, depending on the owner's home jurisdiction and applicable treaty.
C-Corporation
A C-Corp is a separate taxable entity. The foreign owner is generally taxed only on dividends received, not on the corporation's operating income (subject to GILTI and related rules for substantial foreign ownership). For many foreign-owned businesses, particularly those with active U.S. operations, the C-Corp structure offers cleaner separation between U.S. and foreign tax exposure. It is also the required structure for VC-backed startups and companies intending to raise institutional capital.
Branch
A branch is not a separate legal entity — it is simply the foreign company doing business directly in the United States. This exposes the foreign company itself to U.S. tax on branch profits and creates direct legal liability in the U.S. It is rarely the optimal structure for ongoing operations, though it may be appropriate for limited-duration projects.
The Tax Issues Most Counsel Miss
FIRPTA
The Foreign Investment in Real Property Tax Act imposes withholding obligations on dispositions of U.S. real property interests by foreign persons. If the U.S. entity holds real estate — including certain leasehold interests — FIRPTA can apply to a sale of the entity itself, not just a direct sale of the property. This surprises many foreign owners at the point of exit.
FDAP Withholding
Fixed, determinable, annual, or periodic income paid to foreign persons is subject to 30% withholding under U.S. law, reduced by applicable treaty. Interest, dividends, royalties, and certain rents are all covered. The structure of intercompany payments between the U.S. entity and the foreign parent should be reviewed with this in mind from the outset.
Treaty Elections
Many foreign owners can reduce or eliminate U.S. withholding tax on certain payments through treaty elections, but the treaty must apply to the specific type of income and the ownership structure must satisfy the treaty's limitation on benefits provisions. Structuring the ownership incorrectly — for example, interposing an entity in a non-treaty jurisdiction — can forfeit treaty benefits entirely.
Governance Considerations
Foreign owners frequently underinvest in governance documentation at formation. The operating agreement or shareholders' agreement should address: the rights of the foreign owner to appoint directors or managers; the treatment of distributions; dispute resolution mechanisms that account for the cross-border nature of the ownership; and restrictions on transfer that comply with applicable securities laws.
For C-Corps with foreign majority ownership, the governance structure should also account for CFIUS — the Committee on Foreign Investment in the United States — if the business involves technology, infrastructure, or other sensitive sectors. A transaction that triggers CFIUS review after the fact is significantly more difficult to resolve than one planned for at formation.
The decisions made at formation are difficult and expensive to undo. The right structure depends on the owner's home jurisdiction, the nature of the U.S. business, anticipated capital structure, and exit horizon. These are not default questions — they require analysis specific to each situation.
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.