No. You don't need to set up a US company in order to sell to US customers.
The idea that you have to establish a US C-Corporation in order to start properly trading in the US is a very unhelpful myth, which holds back smaller ecommerce firms in particular from just getting going in a new market. There are easier ways to set your business up if you're based abroad.
There are a few possible trading structures open to you, including setting up a traditional C Corporation. One option not available to you is the 'S Corporation', which allows pass-through taxation, as this structure is only available to those who are personally resident in the US (even if they are foreign born).
Although a C Corporation isn't necessary for foreign entities trading in the US, it wouldn't be fair to trash it without at least mentioning its advantages.
A foreign business which is registered as a C Corporation in the US benefits from credibility and trust, in that it's an immediately recognised business structure. Unlike some corporations in other countries, foreign individuals and organisations can have 100% ownership of the shares, and of course there is limited liability protection. A C-Corporation can raise capital from US investors, and issue stock options to US employees.
And it's worth mentioning that since 2017, the US federal corporation tax rate has only been 21%, which is a lower rate than many other countries, including the UK where rates are currently 19-25%. A double taxation treaty with countries such as a the UK means that the C Corporation would only be taxed once for corporation tax.
Most of these advantages are obviously appealing to larger businesses with the time and resources to set up a C Corporation.
Establishing a US C Corporation involves a non-trivial amount of administration expense initially. For example, state filing fees alone can be over $500. You may need to hire a registered agent based in the state of incorporation, and get legal advice in setting up the corporation. These initial costs can quickly add up to a few thousands dollars.
More significantly, you have ongoing reporting requirements and costs. These apply at both the state and federal level, and can include franchise taxes, fees for annual reports, and of course reporting of taxes to the US Internal Revenue Service, where the reporting will need to be at least as detailed as accounts filed in your home country. That's a lot of additional work for your accountant - in fact you'll probably need a new one with experience in the US.
There may be an easier route for smaller UK companies who want to keep things lean and simple. Please bear in mind before reading any further that we are not accountants or lawyers at Eirios, and of course you'd be wise to verify everything we say before relying on it.
The simpler route involves not establishing a C Corporation, but trading in the US using your current limited liability company setup, as a foreign corporation. In the case of UK companies, this is the limited company. You could trade as your current limited company, or even set up a new UK-based limited company specifically for the purpose of trading in the US.
In either case, the first thing to do is to call up the Internal Revenue Service (IRS) and request an Employer Identification Number (EIN), which is the key number you need for various documents including import documents and tax reporting. This is free, and you should be able to get it in a single phone call. With your EIN number in hand, that should allow you to do things like register in a state, assuming you have a physical presence there and are working with a 3PL.
On gaining your EIN as a foreign business, you have the option to ask the IRS to treat you (tax you) as a corporation. This seems a good option as it is the structure most similar to your UK limited company setup, and as you'll see below, keeps the reporting simple. The alternative may be being taxed as an individual, which you don't want, so make sure to request to be treated as a corporation (and seek written confirmation from the IRS of this), unless you have good reason not to.
Notice how quick this is to get going - you just call up the IRS and get given an EIN over the phone - which is one immediate advantage. The US is a business-friendly environment which allows foreign businesses to operate and sell to consumers in the country.
The obvious advantage of simply trading through a UK limited company is that you don't have to establish a new entity, or if you do decide to operate under a separate limited company, you found this in the UK, which as you're probably aware if very simple and low cost. This gives you both limited liability protection and allows you to designate your preferred ownership structure according to UK laws and practices.
The following section does not constitute tax advice, and you're further advised to do your own research or consult a professional when it comes to matters such as IRS forms and exemptions
On the level of state taxes, foreign entities are liable for sales taxes. We won't go into detail on that here as it's a complex area, varies by state and needs its own dedicated article, but the point is that you shouldn't have any difficulty in registering and paying sales taxes as a foreign company, and there is no obvious disadvantage versus being a US-based C Corporation.
On the level of federal taxes, things may be fairly simple (subject to the disclaimer above!). Each year, you'll need to file a US Income Tax Return of a Foreign Corporation. This is known as form 1120-F (note the 'F' part on the end, which is the version of the form specifically for foreign corporations). Note that the US financial year aligns with the calendar year, unlike in the UK.
The first part of form 1120-F is simply completing your company details and contact information. Then, because of the UK-US tax treaty, which is designed to prevent companies having to pay double taxation, you're able to tick box W(1), which states that you're taking a position under a US tax treaty that means you effectively aren't liable for federal corporation tax.
Our reading of the accompanying instructions for form 1120-F is that the entirety of the rest of the form can be left blank if you are a UK entity claiming exemption for your US sales under the UK-US tax treaty. Here's the relevant section on page 2 of the 2023 accompanying instructions:
"Treaty or Code exemption. If the corporation does not have any gross income for the tax year because it is claiming a treaty or Code exemption, it must still file Form 1120-F to show that the income was exempted by treaty or Code. In this case, the corporation should only complete the identifying information (including items A through G) at the top of page 1 of Form 1120-F and a statement that indicates the nature and amount of the exclusions claimed. In the case of a treaty exemption, the corporation may complete item W(1) on page 2 of Form1120-F, which includes completing and attaching Form 8833, if required in lieu of attaching a statement."
This point about only completing these parts of the form, and subsequently claiming treaty exemption, applies as long as there is no additional taxable US income beyond what is excluded by the treaty.
In this case, Form 8833 would then need to be filed alongside 1120-F. This is a single page form where you refer to the specific parts of the UK-US tax treaty which prevent your UK-based company from paying federal taxes in the US, because you are already registered and paying corporation tax in the UK. You also state what your gross revenues were in the most recent year and the portion of those sales made in the US.
I won't go into the detail of the specific sections of the UK-US tax treaty and the completion of form 8833 here but it's something you can investigate and I will possibly write a separate article about that for those interested. You may wish to seek professional advice on your first filing of this, then rely on that same point in future years, assuming the UK-US tax treaty remains in force.
The point is that once you've filed forms 1120-F and 8833 for one year, you're simply making the same or very similar statements each year, subject to updating your figures depending on the sales you've actually made. I like to send an accompanying letter as well, outlining the activities of our business and providing full contact details should the IRS wish to discuss anything further.
This process means that you fully disclose your US activities and sales, while preventing you from paying tax twice on your US revenues. And it's simple enough to be done by your UK accountant, or even yourself as a business owner once it's been done the first time.
This seems to me to be by far the easiest path for UK SMEs looking to dip their toe into the US market. There's no need to debate what state in which to incorporate. No need to pay US registers, US solicitors or US accountants to set things up, and importantly, no need to complete an entire start-to-finish US tax return each year (beyond the basic elements of the two forms outlined in the previous section).
You can just get going with your existing UK limited company, as soon as you have your EIN from the IRS. Or, as alluded to earlier, you could even set up a separate UK limited company specifically for the purposes of trading in the US.
Why do that though if your existing Ltd is fine?
Setting up a new limited company has three advantages. The first is that you can ringfence your US operations, including the new risk involved, from your existing business. If something goes wrong in the US and your business is the subject of legal action, it doesn't have to drag your UK operation into the mix.
The second advantage of a separate limited company for the US is that you have clear visibility of the finances of your US operation. All US-related income and expenses can be run through that company, entirely separately from the sister organisation which keep trading in the UK and elsewhere. This is less of an advantage, as your accountant should be able to separate out US-related expenditures from your UK operation anyway, but if you want total separation then this achieves it.
A third advantage is that you can designate a different ownership structure for your new US-focused company. Perhaps that makes sense if you have multiple owners and only some are keen on a US operation, or if funding for the new venture is to come from different sources. Again there are other ways of achieving this via your existing limited company, but alongside the other considerations, this could help sway the decision.
Start trading now and you can always create a US Corporation in future years should you later decide that's appropriate.
