1. Start with the ownership question, not the state question
Most founders begin by asking "Delaware or California?" The more consequential question is who will own the U.S. entity: a foreign individual, a foreign parent company, or a mixed cap table with U.S. persons. That answer drives entity choice, withholding exposure, and which international information returns you'll file every year.
- Foreign parent company → U.S. subsidiary: a C corporation is usually the default. Profits are taxed at the 21% federal corporate rate, and dividends back to the parent face U.S. withholding — 30% by default, potentially reduced by treaty (the U.S.–China income tax treaty generally reduces dividend withholding to 10%).
- Foreign individual owner: a C corporation shields the owner from filing a personal U.S. return on operating income, at the cost of two layers of tax. A pass-through (LLC taxed as partnership or disregarded entity) can create effectively connected income (ECI) — meaning the foreign owner files a 1040-NR and the entity may owe Section 1446 withholding.
- Note: nonresident aliens and foreign entities cannot be S corporation shareholders. If anyone suggests an S election for a foreign-owned company, that's a red flag.
2. Entity choice in practice
C corporation (often Delaware, registered in California if operating here)
Clean for venture financing, familiar to investors, and it contains U.S. tax at the entity level. The trade-off is dividend withholding on repatriation and the need for real transfer pricing discipline once the U.S. entity transacts with its foreign parent (see our transfer pricing primer).
Single-member LLC owned by a foreign person
Simple to form, but not "invisible" to the IRS: since 2017, a foreign-owned disregarded LLC must file Form 5472 attached to a pro forma Form 1120 every year it has reportable transactions with its foreign owner — capital contributions and distributions count. The penalty for missing it is $25,000 per form, per year. This is the single most common and most expensive surprise we see in new cross-border files.
Multi-member LLC / partnership
Flexible, but foreign partners trigger Section 1446 withholding on their share of ECI, Forms 8804/8805, and a 1040-NR filing obligation for each foreign partner. Suitable when the owners want flow-through treatment and accept the compliance load.
3. Where California fits in
Forming in Delaware does not avoid California. If the company has employees, an office, management, or economically significant sales here, it is likely "doing business" in California and must register with the Secretary of State and file California returns — including the $800 minimum franchise tax for LLCs and corporations (plus the LLC gross-receipts fee at higher revenue levels). Many founders end up paying two states' worth of fees for a structure that only needed one.
4. The identification layer: EIN and ITIN
- EIN: every U.S. entity needs one. A foreign responsible party without an SSN/ITIN can still obtain an EIN — the application just can't be done through the online system, so plan for extra lead time.
- ITIN: foreign owners who must file a U.S. return (1040-NR) or be listed on certain forms need an Individual Taxpayer Identification Number. As an IRS Certifying Acceptance Agent (CAA), our firm can verify passports directly, so clients do not have to mail original documents to the IRS.
5. The annual compliance stack (what actually gets filed)
- Form 1120 — U.S. corporate income tax return for a C corporation (state return alongside it).
- Form 5472 — for any U.S. corporation that is 25%-or-more foreign-owned, and for foreign-owned disregarded LLCs, reporting related-party transactions. $25,000 penalty exposure per missed form.
- Forms 8804/8805 + Section 1446 withholding — partnerships with foreign partners.
- Forms 1042/1042-S — withholding on dividends, interest, royalties, or service payments to foreign persons (FDAP income), at 30% or the treaty rate with a valid W-8BEN/W-8BEN-E on file.
- Payroll, sales tax, and city registrations — once there are U.S. employees or taxable sales; multi-state activity brings nexus analysis into play.
6. A sensible sequence for founders
- Map the ownership and where decisions/people/revenue will actually sit.
- Choose the entity and state with the year-3 structure in mind, not just formation cost.
- Obtain the EIN (and ITINs where needed) before opening banking.
- Put intercompany agreements and a basic transfer pricing position in writing from day one.
- Build a compliance calendar: federal, state, Form 5472/5471, withholding forms, and payroll.