Tax Features of Doing Business in the U.S.: What Foreign Entrepreneurs Need to Know

The United States is one of the most attractive jurisdictions for launching IT businesses, startups, and scaling operations. However, the U.S. tax system is complex and multi-layered: federal taxes, state-level taxes, specific rules for non-residents, and unique treatment of software, SaaS, and IP.
This article covers the key points you need to understand before starting a company in the U.S.

Transparent or Opaque Model?

There are two main tax models for businesses in the U.S.:

Transparent — the company itself doesn’t pay taxes; all obligations fall on the owner.
Example: a single-member LLC.
Opaque — the company pays taxes as a separate legal entity.
Example: a C-Corporation.

Both models are available to foreign entrepreneurs, but each carries risks:

For transparent structures — the possibility of U.S. tax liability (effectively connected income, FDAP).
For opaque structures — risk of double taxation and costly exit tax upon liquidation.

Software and Taxes: New IRS Rules

As of January 15, 2025, updated IRS guidance on software taxation came into effect:

SaaS is now officially classified as a service, not a sale or lease.
Downloadable software (copyrighted articles) is taxed based on the billing address.
Recurring-license payments may generate U.S. source income and tax obligations.
Providing services from abroad can still be taxable if nexus with the U.S. is established.

LLC or C-Corp?

Choosing the right legal structure is one of the most critical decisions. Both options have their advantages:

LLC — Simplicity and Flexibility

Best suited for:

Businesses with no physical presence in the U.S.;
Selling downloadable software or know-how;
Custom IT services;
SaaS with non-U.S. servers;
Launching MVPs without raising capital.

Benefits:

Minimal reporting;
Simple management;
Privacy;
Easy conversion to C-Corp without creating a new entity.

But: converting from C-Corp back to LLC is usually expensive (exit tax up to 21%).

C-Corp — For Investment and Growth

Recommended when:

You plan to raise capital from investors;
You have a team or servers in the U.S.;
You generate revenue from IP licensing;
You need to offer equity compensation to employees.

Bonus: IP can remain outside the corporation and be licensed — reducing overall tax burden.

Nexus: How States Determine Your Tax Obligations

There are 51 tax jurisdictions in the U.S. Even if you're exempt from federal taxes, states may still impose obligations due to:

Physical presence (office, agent, employee);
Sales volume (over $100,000/year or 200 transactions);
A substantial portion of business activities in the state (25% of sales, payroll, or property).

Some states — like California — impose taxes even for minimal connection to their territory.

Other Taxes: Sales, Gross Receipts, and Estate Tax

Sales Tax — up to 9.75% in some states.
Gross Receipts Tax — based on total revenue; applies alongside sales tax in Texas, Washington, New Mexico, etc.
Estate Tax — up to 40% if a non-resident owns shares in a U.S. C-Corp.
Solution: own the C-Corp via a foreign legal entity to avoid exposure.

Final Thoughts

Starting a business in the U.S. is not just about registering a company — it’s about choosing the right structure, income model, and IP setup. Key considerations include: