Establishing a Company in the United States

Before opening a company in the United States, it is important to examine the tax aspects, reporting obligations, holding structure, and implications in both Israel and the United States. This allows you to choose a structure that fits the nature of the activity and helps avoid complications later on.

More and more Israeli entrepreneurs, business owners, and investors are considering opening a company in the United States in order to work with American customers, establish an operational or commercial arm, hold assets, build an organized presence in the U.S. market, or prepare for fundraising from American investors.

Establishing a company in the United States requires an initial review of the holding structure, the manner of management, the flow of funds between the parties involved, the pricing of services or activity, and whether a capital raise, investor entry, or restructuring is expected. These decisions have direct implications for tax liability, reporting obligations in Israel and the United States, the relationships between the entities, and the ability to grow, bring in investors, distribute profits, or change the structure in the future.

How to Choose a U.S. Company – LLC, C-Corp, or S-Corp

A limited liability company (LLC) is a common form of incorporation in the United States because it combines limited liability with tax flexibility. It may be held by individuals, companies, partnerships, or other entities, and in many cases it is subject to fewer ownership structure restrictions than certain alternatives.

For U.S. tax purposes, an LLC may be treated as a transparent entity, meaning that income and losses are attributed to the interest holders rather than to the entity itself. When the interest holders are not U.S. residents, it is important to check whether the income is U.S.-source income and which tax and reporting obligations actually apply.

It is important to note that the analysis does not end with U.S. law. For Israeli companies and controlling shareholders, the fact that an LLC may be treated as transparent in the United States does not mean that Israel will adopt the same classification. A mismatch between the tax systems may affect the manner of reporting, the timing of taxation, the ability to claim a foreign tax credit, and the risk of double taxation. Therefore, the establishment of the company should be reviewed under both U.S. law and Israeli law.

A C-Corp is the classic corporate form in the United States. It is a legal entity separate from its shareholders, and is therefore common in structures intended for external investments, growth, employee options, or fundraising.

From a U.S. tax perspective, a C-Corp is generally taxed at the company level. If the company later distributes profits as a dividend, an additional tax may also apply at the shareholder level. When the shareholders are not U.S. residents, the dividend distribution may also be subject to withholding tax, subject to the provisions of the relevant tax treaty.

From a business perspective, this structure may be suitable where the intention is to retain profits in the company for growth, bring in external investors, or grant employees options and other equity-based incentives.

An S-Corp is a corporation that, for tax purposes, may receive treatment similar to a transparent entity, so that income and losses are generally attributed to the shareholders. However, this status is subject to clear limitations, including restrictions on the identity of shareholders, their number, and the classes of shares. Therefore, for Israeli controlling shareholders, this is generally not a practical alternative.

The choice between an LLC, a C-Corp, and an S-Corp depends on the nature of the activity, the identity of the owners, the manner of profit distributions, the holding structure, and the business’s growth and fundraising plans.

Holding, Control, and Management Considerations in a U.S. Company

It is not enough to decide whether to establish an LLC or a C-Corp. It is also necessary to examine how the U.S. company should be held and how it should be managed in practice – whether ownership should be held directly by the Israeli individual, through an Israeli company, under a holding company, or through another structure.

The manner in which the entity is held, controlled, and managed affects the company’s tax residency, profit distributions, admission of investors, withholding tax, estate tax in certain cases, and flexibility to carry out future restructurings.

Even if a company was incorporated outside Israel, this does not automatically mean that it will be treated as a foreign resident for tax purposes. Even if the company is considered a foreign resident, it is still necessary to examine whether its activity creates a permanent establishment in Israel and whether Israeli shareholders may be subject to rules such as a controlled foreign company (CFC) or a foreign professional company (FPC).

The classification of the company may affect the very existence of tax liability in Israel, the scope of reporting obligations of the company and its shareholders, the application of tax treaties, the possibility of dual tax residency, and exposure to audit by the Israel Tax Authority. Therefore, already at the planning stage, it is important to examine the holding structure, the identity of the decision-makers, the location of the activity, the manner of actual management, and the corporate documentation. Each of these decisions may affect the tax implications, business flexibility, and the ability to make structural changes later on.

For further reading on this topic, we recommend reading the article on “Determining The Tax Residency Of A Company In Israel“.

The Tax Treaty Between Israel and the United States

Alongside the review of the entity type and holding structure, it is also important to examine the provisions of the tax treaty between Israel and the United States, to the extent relevant to the circumstances. The treaty may affect withholding tax, dividend distributions, interest and royalties, capital gains in certain cases, and the allocation of taxing rights between the countries.

However, the treaty does not replace domestic law in the United States and Israel, and it does not resolve every difficulty involving classification, control and management, or double taxation. Therefore, the treaty provisions, local tax laws, and the actual structure of the activity should be examined together.

Key Risks in Establishing a Company in the United States

One of the key risks is establishing a U.S. company that appears suitable under U.S. law but does not align with the tax and reporting implications that apply in Israel. When control, management, financing, or part of the activity remains in Israel, issues such as international taxation, reporting obligations, control and management, transfer pricing, and the interaction between Israeli law and U.S. law should also be examined.

Even without significant income, establishing and maintaining a company in the United States may be more complex than it initially appears. It may be necessary to deal with registration, reporting, and compliance requirements at the federal level, at the state level, and sometimes also before the Israeli authorities. Even when the incorporation stage itself seems relatively simple, ongoing operations require familiarity with local rules, reporting deadlines, tax requirements, and proper documentation.

A structure that was not planned in advance may also create business difficulties. A company that begins operating may soon want to bring in an investor, change rights, inject financing, register intellectual property, or engage with a major customer. If the initial structure does not support this, the business may face delays and unexpected costs.

In certain cases, questions of estate tax, inheritance, transfer of rights, and family planning may also arise, especially where the holding is direct or where significant investments are involved. This is not always the first issue examined, but it should not be overlooked.

The Advantages of Establishing a Company in the United States

Alongside the complexities, establishing a company in the United States may also offer real business advantages. A U.S. entity may make it easier to enter a broad and established market, provide more convenient access to customers, suppliers, and business partners, and support the development of an activity with international growth potential.

In certain cases, the tax environment may also be relatively favorable, depending on the state of incorporation, the nature of the activity, and the chosen structure. This is combined with a legal and business framework that is considered relatively friendly to entrepreneurial activity, as well as better exposure to investors and funds, especially where there is an intention to raise capital in the U.S. market.

In some cases, the U.S. structure may also be suitable for holding activity, assets, or intellectual property, subject to a legal and tax review of the circumstances.

How to Approach the Establishment of a Company in the United States

The first step is to define the nature of the planned activity, the purpose of incorporation, and the desired business structure. It is important to examine who will hold the U.S. entity, whether it is preferable to operate through a direct holding, through a subsidiary, through a sister company, or through another structure, where the business will be managed in practice, how it will be financed, what the expected profit model will be, and whether profits will need to be retained in the company for growth, fundraising, or expansion of the activity. Where related parties are involved, the pricing method, contractual framework, and documentation should also be addressed at this stage.

In addition, the type of entity and the state of incorporation should be selected. Delaware is a common option, but it is not the right choice in every case. When choosing the state, it is important to take into account the nature of the activity, the location of the customers, the state in which the activity will actually be carried out, access to banking and payment processing, ongoing costs, exposure to state tax, and regulatory requirements. If the activity is actually carried out in another state, additional registration and compliance with reporting and other obligations may be required there as well.

What Happens After Establishing a Company in the United States

Establishing a company in the United States is only the beginning. Even in the absence of income, employees, or substantial activity, the entity may be subject to ongoing obligations in the United States, and many business owners discover this too late.

One basic requirement is maintaining an active registered agent in the state of incorporation, and sometimes also in additional states where the company is registered to do business. This agent is the party that receives official documents and notices from the authorities. For owners who are Israeli residents, this is a regular part of the entity’s operation.

In addition, many states require an annual or periodic report, renewal fees, and sometimes annual charges related to the mere existence of the entity or to its activity. The requirements vary from state to state. Therefore, a company incorporated in one state and operating in another may be required to register additionally and comply with obligations in that state as well. At the federal level too, reporting obligations vary depending on the type of entity and its tax classification, and in certain cases reports must be filed even when the activity is limited or no taxable income has been generated.

When related parties, such as an Israeli company and a U.S. company, enter into ongoing transactions, such as management services, development, marketing, financing, licensing of intellectual property, or reimbursement of expenses, transfer pricing becomes an integral part of maintaining the structure. It is not enough to make a general charge between the parties. It is necessary to examine what each party actually does, which risks it bears, and how to determine consideration that reflects market terms, together with proper supporting documentation.

Failure to comply with these requirements may lead to penalties, interest charges, loss of the company’s good standing, and sometimes also difficulties with banks, status certificates, and transactions. Therefore, anyone establishing a company in the United States should build an ongoing maintenance mechanism in advance, and not settle only for the incorporation stage.

For further reading on transfer pricing, click here.

When to Seek Advice Before Establishing a Company in the United States

It is advisable to conduct a preliminary review before establishing the company, in order to examine alternatives, avoid mistakes, and build a structure that fits the activity from the outset.

Nimrod Yaron & Co. specializes in Israeli and international taxation. The firm’s team includes professionals with extensive experience at the Israel Tax Authority, leading firms, and law offices, bringing together both legal and economic perspectives. The firm advises private and public companies, Israeli and foreign companies, global venture capital funds, and clients seeking focused, clear, and practical advice.

If you are considering establishing a company in the United States, it is advisable to conduct the review before registering the entity, while the alternatives are still open. Nimrod Yaron & Co. advises Israeli companies, entrepreneurs, and investors on establishing activity in the United States, choosing the appropriate holding structure, and coordinating between Israeli and U.S. tax laws. We would be pleased to assist with a preliminary review of the appropriate structure and the relevant reporting obligations.

To schedule an initial consultation – click here.