Step-by-Step Guide for International Ecommerce Entrepreneurs Launching a Business in the US
Did you know that the US e-commerce market is the second largest in the world, with yearly online sales of $1.16 trillion on average? So, expanding your ecommerce business into the United States is an exciting move as an international entrepreneur. The potential for growth by accessing the huge American consumer market is massive. But before you get carried away with dreams of rapid expansion, there’s some key groundwork you need to lay first, especially in terms of understanding the USA bookkeeping laws!
The US has a complex set of laws and regulations around running a business. You’ll need to tackle things like registering your company properly, setting up your accounts and tax compliance, and more. Don’t worry, though - we’ll break it down step-by-step so you know exactly what to focus on. With some upfront preparation, you can set yourself up for success.
Why Launch a Business in the US?
First, let's examine why the US is so appealing for e-commerce entrepreneurs and some of the unique challenges they face when coming from abroad.
The US has one of the largest populations of online shoppers in the world. Ecommerce sales in the United States saw impressive growth in 2023, rising 7.6% to reach approximately $1.119 trillion, up from $1.040 trillion the previous year.
They tend to readily adopt new technology and trends, making them highly engaged digital consumers. Factors like high disposable incomes and widespread internet access add to the huge ecommerce potential.
At the same time, you can’t just launch a US website and be done. The complex legal and tax environment means you’ll need to comply with a whole host of regulations around company registration, sales tax, income tax filing, accounting standards, and more. Mistakes or non-compliance in these areas can lead to nasty fines or penalties down the road.
The key is to take it step-by-step, get the right advice, adhere to the USA bookkeeping laws, and build compliance into your processes from the beginning. Follow the tips in this guide to set yourself up for US e-commerce success!
Step 1: Choose and Establish Your Business Entity
Your first big decision will be what type of business entity or structure to establish. This impacts things like taxes, liability protection, and reporting requirements. Two popular options are:
LLC vs C-Corporation
A Limited Liability Company (LLC) is one of the most common entity types for small businesses. It combines pass-through taxation with personal liability protection. The operating rules are also less complex than those of a corporation. For many e-commerce entrepreneurs, starting with an LLC makes practical sense.
A C-Corporation has more complicated rules and formalities but may offer some tax advantages, especially if you plan to seek US-based investors down the line. Income is taxed separately from the owners. Talk to an advisor to see if this is a better fit.
Take time to consider factors like ownership structure, liability risks, and plans for financing/investors. This will steer you towards either an LLC or C-Corp.
Registering in the Right State
Apart from federal laws, entrepreneurs need to comply with the specific laws of the state in which they are operating. So, you'll also need to choose which US state to register and incorporate in. Here are some of the best states with favorable tax rates for e-commerce businesses:
Completing Formal Registration Paperwork
Finally, complete formal registration paperwork and secure an Employer ID Number (EIN) from the IRS. While obtaining your EIN is a federal requirement, state and local authorities also use it for tax dealings with businesses. After that, you can document your operating agreement or corporate bylaws.
Step 2: Set Up Your Bookkeeping System
Now it’s time to get your books in order. Proper accounting and following USA bookkeeping laws will make tax compliance a breeze.
Start by choosing either the cash or accrual method for tracking income and expenses. Accrual is better for e-commerce businesses that have inventory.
Ensure your financial accounts align with Generally Accepted Accounting Principles (GAAP). This is the standard in the US.
Implement accounting software early on. Look for a cloud-based platform optimized for e-commerce sellers. This will simplify managing your financial records.
Institute organized record-keeping and controls right away. Carefully track all transactions so you have thorough supporting documentation.
Step 3: Register for Sales Tax Compliance
Sales tax can get tricky for e-commerce sellers who are shipping to customers across multiple states. Here are the key steps:
First, determine any states where you have an “economic nexus” based on revenue or transaction volume. You’ll need to register and collect sales tax there.
Apply for sales tax permits in each required state through the Department of Revenue. This authorizes you to collect and remit tax.
On your ecommerce platform, set up sales tax calculations to charge the correct rate at checkout based on the customer’s location. Integrating sales tax compliance into your platform from the start ensures adherence to USA bookkeeping laws.
Put a process in place for regularly filing and paying the sales tax you collect to each state. Generally, this is done monthly or quarterly.
Staying on top of sales tax compliance helps avoid penalties from state authorities.
Step 4: Prepare for Federal Tax Obligations
As a foreign-owned business operating in the US, you will have specialized federal tax filing and payment requirements that US-owned companies do not. Here are some key things to know:
Work with a US tax advisor to determine your business's most optimal tax classification. For example, you may choose to file as a C-corporation by submitting Form 8832 to the IRS. Your advisor can help with proper entity classification filings.
One major difference is that foreign-owned businesses must pay estimated quarterly income taxes. This is required to stay current on your tax obligations throughout the year. Estimated payments are due on April 15th, June 15th, September 15th, and January 15th. The amount is generally calculated as 100% of your prior year's tax liability. Failing to make timely quarterly payments can result in penalties.
Annually, your business must file the appropriate federal income tax return. If set up as a C-corporation, you would file Form 1120. Partnerships file Form 1065, while S-corporations file Form 1120S. These list out income, gains, losses, deductions, and final tax liability. In addition, certain information returns may be required, such as Form 5472 detailing related party transactions.
You will also need to disclose foreign ownership details to the IRS, including owners' identifying information and ownership percentage. Filing requirements are based on factors like the percentage owned and the type of owner (individual, corporation, etc.).
Having guidance on USA bookkeeping laws and specialized federal tax rules for foreign-owned entities helps ensure you meet all tax filing and payment obligations correctly.
Step 5: Address International Tax Considerations
Given your global footprint, take care of key international tax issues:
Implement appropriate transfer pricing policies for transactions between your US entity and related overseas parties. Proper documentation will support you if questions arise and demonstrate adherence to USA bookkeeping laws.
For example, an Australian parent company selling products to the US subsidiary should follow arm's length pricing rules and document with a transfer pricing study.
Sending earnings from the United States to your country of origin will probably involve deducting taxes. Maybe your parent company is in Australia, and you have expanded to the US. The tax agreement between the US and Australia allows for a lower withholding tax rate of 15% on profits distributed to shareholders, as opposed to the standard rate of 30%.
In the case of a company based in the United Kingdom, the US-UK tax treaty allows for a 0% withholding tax rate on dividends sent back home as long as specific ownership requirements are fulfilled. Additionally, the treaty offers reduced rates of 5-15% on payments for the use of intellectual property.
Every foreign company participating in business activities in the United States must submit an annual tax return to the US government using Form 1120-F. For instance, a British corporation operating in the US market through a Permanent Establishment (PE) is obligated to submit a detailed Form 1120-F, which includes financial statements such as income statements, balance sheet, and a comparison of book income to taxable income.
On the other hand, a British company carrying out business in the US without a PE is required to file a simplified Form 1120-F along with Form 8833, outlining how the company complies with the terms of the US/UK tax treaty and is therefore exempt from paying US federal corporate taxes.
Seek guidance from advisors in both countries to ensure compliance. Understanding relevant tax treaties reduces leakage when repatriating funds.
Step 6: Establish Financial Reporting Procedures
Maintaining accurate financial records and reporting demonstrates your business's health and performance. International entrepreneurs setting up an e-commerce business in the US will have to focus on financial reporting based on the following GAAP requirements:
Recognition: Financial documentation must acknowledge and encompass all company assets, income, debts, and expenses.
Measurement: Reports on finances must disclose financial outcomes on the basis of an accrual method of accounting.
Presentation: Documents on finances must comprise four key components: a profit and loss statement, a balance sheet, a statement of cash flows, and a shareholder equity or ownership summary.
Disclosure: Financial documentation must disclose any necessary notes and explanations to elucidate accounting data found in reports fully.
Financial Statements
Prepare core financial statements on a monthly or quarterly basis. Understand what each type of financial statement should include. Take a look at Amazon's consolidated financial statements from the year 2023 to clear your understanding and become familiar with the financial reporting methodologies.
Income Statement
Sometimes called a profit and loss report, income statements explain how the company used the money it made and spent. This essentially shows what happened between financial reports. Income statements cover all the money earned, spent, gained, and lost during a certain period.
Balance Sheet
The balance sheet is a detailed breakdown of all the company's possessions, including assets, debts, ownership equity, and other factors at a specific point in time. These reports also show the exact value of the company, adding up all these factors into one total amount of money.
Cash Flow Statement
Cash flow reports demonstrate how the company utilizes its income. These reports offer investors and shareholders a direct view of how efficiently the company is using its funds, especially in terms of long-term and short-term investments.
Summary of Shareholder Equity
The equity statement details the modifications in ownership shares for the company's shareholders. It is a rather simple calculation: Just determine the difference between the company's total assets and total debts. However, this financial report delves deeper than just the calculation itself.
Implementing Internal Control Measures
Since the accounting scandals in the early 2000s, internal controls have become a vital aspect of every American company's operations. In response to the widespread corporate wrongdoing, the Sarbanes-Oxley Act of 2002 was passed to safeguard investors against deceitful accounting practices and enhance the precision and trustworthiness of corporate disclosures.
This led to a significant transformation in corporate oversight. The law held executives accountable for financial reporting and the establishment of an audit trail. Those who fail to adequately set up and oversee internal controls risk severe legal consequences.
Check out the key components of internal control measures according to the Sarbanes-Oxley Act of 2002:
Control Environment: The control environment sets the tone for compliance, with executives and employees both contributing to the strength of internal controls.
Risk Assessment: Risk assessment involves identifying and mitigating potential risks through continuous monitoring.
Control Activities: Control activities ensure that proper controls are in place, with regular testing and audits.
Information and Communication: Information and communication are vital for quickly addressing lapses in internal controls.
Monitoring: Monitoring internal controls on an ongoing basis helps identify failures and make improvements to prevent major breaches.
Step 7: Integrate Technology for Compliance
Today's ecommerce businesses rely heavily on technology. Leveraging the right systems and software enhances tax and accounting compliance.
For inventory management:
Use a centralized platform like TradeGecko to sync inventory data across channels. This platform integrates with your sales orders and accounting software.
Automate reordering and optimize stock levels to avoid out-of-stocks. This provides accurate inventory valuation for tax purposes.
For sales tax calculations:
Use automated solutions like TaxJar that stay updated on complex rates across jurisdictions. This eliminates manual errors.
Integrate with e-commerce platforms like Shopify to ensure embedded sales tax compliance at checkout.
For accounting/bookkeeping:
Cloud-based software like Xero or QuickBooks Online can be used to centralize financial data in one secure platform. This enables easy report generation.
Implement controls like audit logging and two-factor authentication on accounting software access.
The right integrated systems provide the efficiency, accuracy and security needed for robust ecommerce tax and accounting compliance.
Step 8: Build Your US Professional Network
As you scale your e-commerce operations in the US, it's wise not to go completely alone. Connecting with knowledgeable American advisors provides valuable support and expertise.
For example, engaging an experienced US bookkeeper or accountant is extremely helpful for handling your day-to-day transactions, reconciling accounts, managing payroll, and ensuring compliance with reporting standards. Their oversight keeps your financial records organized. Plus, they'll alert you to any changes in regulations.
Moreover, establishing a relationship with a savvy US business attorney is prudent for periodically reviewing contracts, advising on compliance issues, and providing legal guidance as needed. Their counsel helps avoid missteps when navigating less familiar USA bookkeeping laws.
Other specialists, such as licensed customs brokers and payroll service providers, are great to have in your corner as well. They assist with importing/exporting efficiently across US borders and seamlessly handling payroll processing.
The bottom line is surrounding yourself with competent US professionals provides vital support. Leveraging their expertise helps your expanding ecommerce company stay compliant. It also enables you to focus on growing the core business.
Step 9: Create a Compliance Calendar
Staying on top of all the filing deadlines and compliance requirements can seem daunting as you scale your ecommerce operations in America. Fortunately, creating a thorough compliance calendar makes it manageable.
You'll want to carefully log key dates for remitting collected sales tax, submitting quarterly estimated income tax payments, and filing your annual income tax return. It's also wise to calendar monthly or quarterly financial reviews and account reconciliations.
In addition, you'll need to note renewal deadlines for important licenses, registrations, and required governmental approvals. Setting up reminders to re-apply ensures you don't experience any disruptive lapses.
The compliance calendar becomes your go-to guide, organizing all critical filings, payments, and renewals. Display it prominently as a visual reminder. Checking items off as they are completed brings satisfaction.
Step 10: Develop a Strategy for Ongoing Compliance
As exciting as your e-commerce business's rapid growth is, remember that compliance obligations will evolve along with it. It's critical to remain adaptable.
You must continually monitor changes in tax laws, accounting standards, and other pertinent regulations. Ongoing training and proactive alerts keep you up-to-date on requirements.
Also, frequently review your internal processes to ensure they can still scale well as sales and operational complexity increases. Growing is tough, but it can be smoothed with adjustments.
It's also smart to budget for expanded accounting, tax, and legal support services as the business matures. While those costs may initially pinch, consider them wise investments toward ongoing compliance.
With some forethought and adaptability, you can establish compliance practices that strengthen over time, fueling sustainable e-commerce success in the US market. Keep that competitive advantage in mind as you scale new heights!
Conclusion
Expanding internationally with an ecommerce venture is an exciting move, but it can also be challenging if you’re unfamiliar with the target market. By approaching a US launch strategically and managing key legal, tax, and accounting considerations upfront, you’ll avoid painful pitfalls later on.
Pay particular attention to properly registering your entity, implementing sound accounting practices that adhere to USA bookkeeping laws, meeting sales tax requirements, fulfilling federal tax filings and payments, and establishing relationships with US advisors. With upfront planning around compliance and diligent execution, your global ecommerce venture can thrive in the US market and avoid major pitfalls.
Use this step-by-step guide as your roadmap for getting it right from the start!
Appendices:
Appendix A
The data below showcases the following:
State ; Corporate Tax Rate ; State Sales Tax Rate ; Average Combined State and Local Sales Tax Rate
Colorado ; 4.4% ; 2.9% ; 7.81%
Delaware ; 8.7% ; 0% ; -
Georgia ; 5.75% ; 4% ; 7.38%
Minnesota ; 9.8% ; 6.875% ; 8.04%
North Carolina ; 2.5% ; 4.75% ; 7%
Appendix B: Table on Income Statement
3. Appendix C: Table on Balance Sheet
4. Appendix D: Table on Cash Flow Statement
Appendix E: Table on Equity Statement