Establishing U.S. Presence

There are some direct selling companies operating in the United States without any U.S. physical presence. There is nothing illegal about that, but is it a good idea? One very important reason for using a U.S.-chartered entity for conducting business in the United States relates to taxation by the states. Let’s examine some issues.

Most U.S. states impose not only sales taxes, but also a corporate income tax (44 states) on business conducted in their state. However, under U.S. federal law, the many state governments are prevented from imposing their separate state income taxes on a single company chartered in any state, even though it does business in all of them. Only the state in which the business entity is chartered (and headquartered) is permitted to impose its income tax (if it has a corporate income tax). So as long as the company complies with the tax laws of its “home state,” it is effectively exempt from income tax in the many other states where it may be doing business. However, an offshore company chartered in a foreign country which is doing business in the U.S. has no “home” state and is subject to separate income taxation in every state that has a corporate income tax. One of the reasons Nevada is a popular location in which many non-U.S. companies or individuals choose to set up operations for a U.S. business is that it has no corporate income tax, and it has a very flexible law for setting up companies. The old standby, Delaware, and recently emerging Wyoming, are also popular locations.

Those choosing to establish a U.S.-chartered corporate entity have an additional option beyond the traditional S- Corp and C – Corp of an LLC (Limited Liability Company), which is available in Nevada, Delaware, and Wyoming. These states allow such an entity to be established with 100 percent ownership and management by non-resident, non-U.S. citizens. This type of entity has sometimes been referred to as an “Offshore Company” and is sometimes used without incurring taxation by individuals or enterprises who are doing business outside of the U.S. But, if this company is doing any business in the U.S., it will be subject to U.S. taxes.

The obligation to pay taxes applies even if the company is actually chartered at an offshore location, such as, say, Bermuda or Hong Kong. So long as the company does business in the U.S., it cannot escape the tax liability. The use of such an “offshore” vehicle, whether chartered in the U.S. or overseas, may bring some minor additional protection for assets of the company being held in a non-U.S. bank account, and perhaps some protection against possible personal liability within the U.S. for non-resident managers and owners. On the other hand, in the case of offshore companies established in non-U.S. jurisdictions, it may also raise more suspicions of the IRS or other regulators and invite unwanted scrutiny of the company’s U.S. activities.

An additional point to be made is that the decision of where to incorporate should be made for sound business and legal reasons, after consulting skilled counsel, BUT the decision is NOT affected by the direct selling specific laws of the U.S. Under those channel of distribution specific laws of which I am very aware, where the legal entity that is operating in the U.S. is chartered or incorporated does not matter.

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