As global commerce continues to expand, many foreign e-commerce entrepreneurs are seeking opportunities in the lucrative U.S. market—and chances are you have clients who need your help figuring out how to do business in the United States. While this can be highly profitable for foreign companies, there are several critical concerns they must navigate to ensure success.
To help you advise your clients, here are three concerns for foreign e-commerce entrepreneurs doing business in the United States.
1. Legal structure for U.S. operations
One of the primary considerations for foreign e-commerce business owners is deciding the appropriate legal structure for their U.S. operations. The choice of legal entity can have significant implications for various aspects of the business, including payment processing, business banking and credit, legal liability, and transaction fees.
Most foreign entrepreneurs prefer to establish a U.S.-based entity, such as a limited liability company (LLC) or a corporation. This preference is driven by several factors:
- Payment processing: U.S.-based entities often enjoy lower payment processing fees compared to their foreign counterparts. By transacting in U.S. dollars, these businesses can avoid costly foreign exchange fees, as well as friction when they open payment processing accounts with American merchant account providers.
- Business banking and credit: Establishing a U.S. business entity allows foreign entrepreneurs to access U.S. business banking services and build credit in the country. This can also lead to lower, or eliminated, foreign exchange fees, as well as access to American financing options.
- Limiting legal liability: An LLC or corporation provides limited liability protection, along with robust U.S. case law history that can safeguard the business owners’ personal assets from potential business liabilities and risks.
2. Income tax implications
The decision to operate through a U.S. business entity brings about various tax implications that foreign e-commerce entrepreneurs must carefully consider. Understanding these implications is vital to ensure compliance with U.S. tax laws and optimize tax efficiency.
For foreign business owners operating through an LLC, the term "effectively connected income" (ECI) is used by the IRS to determine the taxability of income generated from sales to U.S.-based customers. ECI refers to income that is effectively connected with the conduct of a trade or business within the United States. This income is subject to U.S. federal income tax, regardless of whether the business owner is a U.S. resident.
On the other hand, foreign owners of corporations are subject to a fixed 21% corporate tax rate on business income. This tax applies without regard to ECI, meaning that all income generated by the corporation is taxed at the same rate.
In addition, foreign e-commerce entrepreneurs must navigate other complex tax planning concepts, such as foreign tax credits, transfer pricing, and withholding taxes on dividends. These areas require specialized knowledge and expertise to ensure compliance, and reduce the risk of undesirable tax scenarios that can be avoided with proper planning.
3. Sales tax compliance
Sales tax compliance is a challenging area for all e-commerce entrepreneurs, including foreign business owners. The complexity arises from the varying sales tax regulations across different states and the evolving nature of economic nexus laws.
While physical nexus—having a physical presence in a state—may not be a significant concern for foreign e-commerce businesses, economic nexus can still pose substantial risks. Economic nexus refers to the requirement to collect and remit sales tax based on the volume of sales or the dollar amount of transactions in a particular state without regard to the physical presence of the business in that state. Even if a foreign business does not have a U.S. business entity, it may still be subject to sales tax obligations if it meets the economic nexus thresholds set by individual states.
Navigating the landscape of sales tax compliance requires a thorough understanding of state-specific regulations, accurate recordkeeping, and timely filing of sales tax returns. Failure to comply with these requirements can result in hefty penalties and interest charges, even for non-American business entities.
Work with your clients for success
Foreign e-commerce entrepreneurs looking to do business in the United States face several complex challenges. Choosing the right legal structure, understanding income tax implications, and ensuring sales tax compliance are critical concerns that require careful consideration and expertise. Given the intricacies of these areas, foreign business owners are strongly encouraged to consult with accountants and lawyers who specialize in international e-commerce to navigate these challenges successfully and optimize their business operations.
By helping address these concerns proactively and seeking professional guidance, your clients and foreign e-commerce entrepreneurs can position themselves for success in the competitive U.S. market.
