I'm Starting a U.S. Business. Now What?

Starting a U.S. business as a foreign owner can be exciting, but forming the company is only the first step.

After the entity is created, you may need an Employer Identification Number (EIN), an Individual Taxpayer Identification Number (ITIN) for each foreign individual owner, U.S. tax filings, bookkeeping, tax elections, and ongoing federal and state compliance.

The biggest mistake is assuming: "I formed the company, so everything else must be automatic." It isn't.

The entity you create, how it's classified for federal tax purposes, who owns it, and what the business actually does will determine how both the company and its owners are taxed.

Step 1: Understand What You Actually Created

Foreign entrepreneurs commonly operate through a sole proprietorship, a single-member LLC, a disregarded entity, a multi-member LLC, a partnership, or a corporation.

One of the most important things to understand is that an LLC is created under state law. "LLC" by itself does not tell you how the business will be taxed for federal purposes.

For federal income-tax purposes, an LLC may be treated as a sole proprietorship for a single individual owner, a disregarded entity, a partnership, a C corporation, or an S corporation, if eligible.

For a foreign individual who is a nonresident alien, S corporation treatment generally isn't available, because a nonresident alien can't be an S corporation shareholder.

That means simply telling a tax professional "I have an LLC" doesn't provide enough information. We also need to know: How many owners are there? Who are they? Where do they live? Are they U.S. or foreign taxpayers? What federal tax classification applies? Has another classification been elected? What does the business do? Where is the work performed? How will money move between the business and its owners?

These questions determine how the entity will be taxed and how its owners will be taxed.

Step 2: Get the Business an EIN — and Know How It Will Be Taxed

An Employer Identification Number, or EIN, is the federal taxpayer identification number assigned to the business by the IRS. Despite the word Employer, a business may need an EIN even when it doesn't have employees.

The EIN may be used for federal tax filings, business reporting, payroll, business banking, state registrations, and identifying the business to the IRS. But the EIN application is about more than simply getting a number — when it's prepared, you're providing the IRS with important information about what type of entity you created and how it will be treated for federal tax purposes. For an LLC, that includes the number of owners and the applicable federal tax classification.

This is not something at which to guess. Many LLCs receive a default federal tax classification based on their ownership. If a business wants a different classification, a separate tax election may also be required. The important point for a foreign business owner is this: you should understand how the entity will be taxed before you apply for the EIN.

That classification can determine which U.S. tax returns must be filed, whether income is reported by the entity, its owners, or both, how profits and distributions are taxed, what foreign-owner reporting is required, how money should move between the business and its owners, and future U.S. tax compliance.

Do not choose a classification simply because it sounds familiar or because an online company-formation service suggests it. The decision can have tax consequences long after the EIN is issued. There are ways to change an entity's federal tax classification later, but doing so can itself create tax consequences, additional filing requirements, or transition issues. It's much easier to understand the structure before the business begins operating than to choose first and try to unwind it later.

If you're not sure how your business should be taxed, contact ITIN Abroad before applying for the EIN. We can help you understand the available options, how they affect the business and its foreign owners, and assist with obtaining the EIN once the appropriate structure has been determined.

Getting an EIN Creates an Ongoing Filing Expectation

Here's something many new business owners don't realize: once the IRS issues an EIN, it generally expects to see a business tax return filed for that year, and for every year afterward, until the business is formally closed — even years where the business had no income, no activity, or was completely dormant.

This surprises a lot of foreign owners specifically. You might form the LLC, get the EIN, and then not actually start operating for months, or you might pause the business for a year without shutting it down. In either case, the IRS doesn't automatically know that. As far as its records are concerned, the EIN exists and a return is expected, whether or not the business did anything that year.

Simply not using the business isn't the same as closing it. If you want the filing obligation to stop, the business generally needs to be formally dissolved and the closure properly reported to the IRS — not just left inactive. Until that happens, "we didn't do anything this year" is a reason the return might be simple, but it's rarely a reason no return is due at all.

Step 3: The EIN Is for the Business. The ITIN Is for the Foreign Owner.

Once your U.S. business has an EIN, any foreign owners will also need to apply for an ITIN so the required U.S. tax filings for the business and its foreign owners can be completed correctly.

The EIN identifies the business. The ITIN identifies each foreign individual owner who isn't eligible for a Social Security Number. How the ITIN is used depends on how the business is taxed — it may be needed for income reported personally by the owner of a sole proprietorship or disregarded entity, the foreign owner's U.S. individual tax return, partnership reporting involving foreign partners, reporting connected with a foreign-owned corporation, or other federal filings identifying the foreign owner.

In other words: the EIN identifies the business. The ITIN identifies the foreign individual behind the business for U.S. tax reporting.

We explain the difference in more detail in Do I Need an ITIN, an EIN, or Both?

Step 4: Determine Your Business and Personal Tax Filing Requirements

Foreign-owned U.S. businesses can have filing requirements even when the owner believes very little happened during the year. Depending on the structure, there may be an entity-level U.S. tax return, foreign-ownership information reporting, a personal U.S. tax return for one or more foreign owners, withholding requirements, state tax filings, and other federal reporting requirements.

This is one reason understanding the entity classification is so important. A sole proprietorship, disregarded entity, partnership, and C corporation are taxed differently, and tax may be imposed at the owner level, the entity level, or both, depending on the structure. Foreign-owned entities can also have reporting obligations even when the business didn't generate traditional taxable profit — this frequently surprises new business owners, who assume "the business didn't make money, so there's nothing to file." That may be wrong.

The better questions are: What happened inside the business during the year? and What happened between the business and its foreign owners? The answers determine what needs to be reported.

Step 5: Understand How the Owners Will Be Taxed

Choosing the entity also affects how its foreign owners are taxed. Depending on the structure and circumstances, business income may be taxed directly to the individual owner, through a partnership allocation, at the corporate level, or through a combination of entity-level and owner-level taxation.

For a foreign owner, additional questions may include where the owner lives, where services are performed, where business activities occur, what type of income is earned, how the entity is classified, whether the owner travels to or works in the United States, whether a tax treaty applies, and how profits are distributed.

This is why choosing an entity isn't simply a legal-formation question. It's a tax-planning decision for both the business and its owners.

Step 6: Understand How Money Will Move Between You and the Business

Foreign owners often form the company before considering how they'll fund it or how they'll take money back out. Those transfers matter.

Depending on how the entity is taxed, money moving between the business and its owners might represent an owner contribution, a distribution, compensation, a dividend, a loan, repayment of a loan, a reimbursement, or another type of transaction. These categories aren't interchangeable — they can have different accounting, reporting, and tax consequences. Repeatedly transferring money between personal and business accounts without documenting what those transfers represent can create problems later.

Ideally, decide from the beginning how the owners will fund the company, how business expenses will be paid, how owners will take money from the business, and how those transactions should be recorded.

Step 7: Keep Business and Personal Money Separate

Keeping business and personal money separate matters for bookkeeping and taxes, but there's an even bigger reason: liability protection.

One of the main reasons people form an LLC is to separate the business from its owners. If you form an LLC but repeatedly mix personal and business funds, pay personal expenses from the company, or otherwise fail to treat the LLC as a separate entity, you can undermine the legal separation the LLC was designed to provide.

You should generally maintain a separate business bank account, separate payment-processing accounts when appropriate, business expenses paid from business funds, personal expenses paid personally, records of money contributed by each owner, records of distributions or withdrawals, and documentation for loans and reimbursements. The company should operate like a separate business — because legally, that's one of the reasons you created it.

Step 8: Keep Accurate Records From the Beginning

This is one of the most important habits a foreign business owner can develop.

Many foreign entrepreneurs come from countries where the tax system doesn't require the same level of bookkeeping, receipts, documentation, or transaction-level records that may be expected in the United States. That can create a major surprise later.

You may be accustomed to a tax system where the government calculates much of the tax automatically, detailed business bookkeeping is uncommon for small companies, bank records alone are considered sufficient, receipts aren't routinely retained, owner contributions and withdrawals aren't tracked separately, and personal and business activity is handled more informally.

A U.S. business requires a different mindset. Your tax preparer may need to know where each payment came from, what each expense was for, which owner contributed money, whether money taken from the business was a distribution, loan, reimbursement, or compensation, which country services were performed in, whether an expense was business or personal, when property or equipment was purchased, whether payments were made to employees or contractors, and what transactions occurred between the business and its foreign owners.

If the records don't exist, the tax return doesn't become simpler. It becomes more difficult, more expensive, and potentially less defensible.

What Records Should You Keep?

Depending on your business, useful records can include bank statements, credit-card statements, receipts and invoices, sales records, contracts, payment-processor reports, loan documents, owner contribution records, distribution records, payroll records, contractor payments, asset-purchase documents, travel and business-purpose documentation, records of transactions between owners and the company, and copies of prior tax returns and IRS correspondence.

Good bookkeeping creates the financial history that supports your tax filings. And for a foreign-owned business, accurate records are especially important because the IRS may require reporting not only about the company's income and expenses, but also about transactions involving its foreign owners.

Step 9: Do Not Wait Until Tax Season to Create Those Records

A common mistake is forming the company, operating for an entire year, and then asking a tax preparer: "What am I supposed to file?"

By then, we may be trying to reconstruct money transferred between countries, owner contributions and withdrawals, business expenses paid personally, personal expenses paid by the business, income received through different platforms, foreign and U.S. bank activity, contracts, payroll or contractor payments, and transactions that should have been documented differently.

If there are hundreds or thousands of transactions, reconstructing the year can become expensive. Worse, some information may no longer be available. A bank statement can show that $5,000 moved from one account to another. It can't necessarily tell us why. Was it revenue? A loan? An owner contribution? A distribution? A reimbursement? A transfer between accounts? That distinction can matter for U.S. tax reporting.

Keeping accurate records throughout the year is much easier than trying to recreate the story after the year has ended.

Step 10: Understand the Ongoing Cost of U.S. Compliance

Another surprise for many foreign entrepreneurs is the cost of maintaining the business after formation. Forming an LLC and obtaining an EIN may be relatively inexpensive. Ongoing compliance can involve federal business tax preparation, personal U.S. tax returns for foreign owners, state tax returns, state annual reports and fees, bookkeeping, registered-agent fees, payroll or sales-tax compliance, foreign-owner reporting, and professional tax advice.

Those costs can be considerably higher than the original cost of creating the company. That doesn't necessarily mean you shouldn't form the business. It means you should understand the commitment before you create it.

We cover this in much more detail in What Does It Really Cost to Keep a U.S. Business Compliant as a Foreign Owner?

Step 11: Remember That State Requirements Are Separate

Federal taxation is only one part of operating a U.S. business. The company may also have obligations in the state where it was formed or where it conducts business — annual reports, franchise taxes, income taxes, sales taxes, payroll registrations, business licenses, and registered-agent requirements, depending on the state and activity.

This distinction is important: the state creates the LLC. The federal tax system determines how that LLC will be taxed. Those are two different systems.

A Real Example

Panagiotis and Theodora, two business partners from Greece, formed a U.S. LLC together and obtained an EIN.

During the first year, both owners contributed money to the company. Customers began paying the business. The company paid expenses. The owners withdrew money. Some expenses were paid personally. They saved their bank statements but didn't maintain detailed bookkeeping — in Greece, as in many countries, businesses this size usually aren't expected to track every transaction in the level of detail the U.S. requires. They also assumed that because they lived outside the United States, their U.S. tax obligations would be minimal.

At the end of the year, several questions needed answers: How was the LLC classified for federal tax purposes, and was that the right classification for these two owners? What tax filings did the entity have? What reporting was required for each of them individually? Did both have ITINs? How would they each be taxed personally? How should their contributions and withdrawals be reported? Which transfers were business transactions, and which were personal? Were there withholding requirements? Did a tax treaty affect either of them? Were the records detailed enough to prepare accurate tax returns? And what would ongoing compliance require going forward?

Simply saying "they formed an LLC" didn't answer any of these questions. And a year's worth of bank statements didn't answer them either — the statements showed that money moved, not why. Untangling contributions from revenue from reimbursements after the fact took real work that could have been avoided with records kept as the year went along.

That's why understanding the tax structure and establishing good records before the business begins operating is so important — regardless of what recordkeeping looked like in the owners' home country.

What Should I Know Before I Start Operating?

Before the business becomes active, try to answer these questions:

• What did I form? Know the legal entity created under state law.

• How will it be taxed? Don't assume "LLC" answers that question.

• Is this the right tax classification for the owners? Consider the entity and owner-level consequences together.

• Who owns it? Foreign ownership can create additional reporting requirements.

• Does the business have an EIN? The EIN identifies the entity for federal tax purposes.

• Have all foreign individual owners applied for ITINs? Those numbers will be needed for the required U.S. tax reporting involving the foreign owners.

• What tax filings will be required? There may be business filings, personal filings, or both.

• How will the owners fund the company and take money out? Document those transactions correctly from the beginning.

• Are personal and business funds completely separate? Protect both your accounting records and the legal separation you created the LLC to provide.

• How will the business keep its records? Decide who will maintain the bookkeeping, which documents will be retained, and how transactions involving the owners will be identified.

• What will ongoing compliance cost? Budget for more than the initial company-formation fee.

  
  

How ITIN Abroad Can Help

ITIN Abroad does more than prepare Form W-7. We work with foreign individuals starting and operating U.S. businesses, and we can help you understand the tax and identification requirements that come with the company.

Depending on your needs, ITIN Abroad can help you determine how your proposed entity will be taxed, understand the tax consequences to each foreign owner, obtain an EIN, prepare ITIN applications for the foreign owners, determine the business's federal and the owners' personal filing requirements, prepare the tax return needed with an ITIN application, prepare future-year U.S. business and individual tax filings, explain what records should be maintained, help ensure transactions between the business and its owners are reported consistently, and help you understand ongoing federal and state compliance requirements.

If you've already formed the business but haven't applied for the EIN, this is an excellent time to ask questions. If you're unsure how your entity should be taxed, contact ITIN Abroad before submitting the EIN application. Choosing the appropriate tax structure at the beginning can be much easier than trying to change it after the business has already begun operating.

And receiving the EIN and ITINs isn't the end of the process. Once the company exists, the foreign owners also need to understand their recordkeeping and ongoing U.S. tax-filing responsibilities. Our goal is to help make sure the entity, EIN, ITINs, bookkeeping, business tax filings, and owner-level tax filings all work together correctly — both now and in future years.

FAQ

Can a foreign individual own a U.S. LLC?

Yes. Foreign individuals can own U.S. LLCs, although the federal tax treatment and reporting requirements depend on the ownership, tax classification, and business activity.

Is an LLC a Federal tax classification?

No. An LLC is created under state law. For federal income-tax purposes, it may be treated as a sole proprietorship/disregarded entity, partnership, or corporation depending on its owners and elections.

Can a single-member LLC be taxed as a sole proprietorship? Yes. A single-member LLC owned by an individual is commonly treated as a sole proprietorship/disregarded entity for federal income-tax purposes unless another classification is elected.

Can a foreign individual elect S corporation treatment?

A nonresident alien generally cannot be an S corporation shareholder.

Does the EIN application affect how my company will be taxed?

Yes. The EIN application identifies important information about the entity and its federal tax classification. LLCs also have default classification rules, and a separate election may be required when choosing a classification different from the default.

Can I change the tax classification later?

Potentially. There are ways to change an entity's federal tax treatment, but doing so can create additional tax consequences and filing requirements. It's better to understand those consequences before making a change.

Do foreign owners need ITINs?

Foreign individual owners who aren't eligible for SSNs need ITINs so the required U.S. tax filings involving those owners can be completed correctly.

Does having no profit mean there's nothing to file?

No. Foreign-owned businesses can have tax or information-reporting obligations even when they have little or no traditional taxable profit.

My business had no activity this year. Do I still need to file?

Generally, yes. Once the IRS issues an EIN, it expects a return for that year and every year after, including dormant years with no income or activity, until the business is formally closed. Simply not using the business doesn't stop the filing expectation — that requires properly dissolving the entity and reporting the closure to the IRS.

Do I really need bookkeeping if my business is small?

You need records sufficient to support accurate U.S. tax filings. Bank statements alone may not tell a tax preparer what each transaction represents. Good bookkeeping can prevent expensive reconstruction and uncertainty later.

My home country does not require this much recordkeeping. Does that matter?

U.S. requirements apply to the U.S. business regardless of what your home country's tax system normally requires. Foreign owners should establish recordkeeping procedures that support their U.S. filing obligations from the beginning.

Can ITIN Abroad obtain my EIN?

Yes. ITIN Abroad can assist with obtaining the EIN, preparing the foreign owners' ITIN applications, and preparing the related U.S. tax filings.

What if I have not decided how my business should be taxed?

Contact ITIN Abroad before applying for the EIN. We can help you understand how the available classifications affect both the business and its foreign owners before you commit to a structure.

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Forming a U.S. business is the beginning, not the end. Before applying for the EIN, understand how the entity will be taxed and what that means for its foreign owners. Then obtain the EIN, complete the owners' ITIN applications, establish accurate records, and put the correct tax-filing system in place from the beginning. Getting those decisions right early can prevent much more complicated — and expensive — problems later.