How to set up a business in USA

How to Set Up a Business in the USA from India: The FY 2026-27 Compliance Playbook

Setting up a US entity from India is no longer exotic — it is the default move for SaaS founders chasing ARR in dollars, e-commerce operators selling on Amazon US, and service businesses invoicing US clients. Done correctly, a Delaware C-Corp or LLC gives you a US bank account, Stripe merchant access, a credible entity for US investor term sheets, and pass-through simplicity where needed. Done carelessly, it triggers FEMA contraventions, Black Money Act penalties, and Place of Effective Management re-characterisation — all of which are live enforcement risks in FY 2026-27.

Why Indian Founders Register a US Entity

The decision to form a US business usually comes down to five concrete, operational needs — not aspiration.

1. USD invoicing and banking. US clients, marketplaces (AWS Marketplace, Shopify App Store), and platforms require a US legal entity for vendor onboarding. Mercury, Brex, and Relay open accounts for foreign-founded US entities entirely online, using passport-based KYC.

1. Payment gateway access. Stripe's US merchant account requires a US entity and a US EIN. An Indian-resident founder who forms a Delaware C-Corp can receive USD directly into a Mercury account, bypassing the AD (Authorised Dealer) bank conversion friction that comes with an Indian Stripe account.

1. Investor readiness. US VCs, angels, and accelerators — Y Combinator, Techstars, and most seed-stage funds — strongly prefer Delaware C-Corps. Delaware's General Corporation Law (DGCL) is the most investor-familiar framework in the world; preferred share classes, SAFEs, and convertible notes all plug in cleanly.

1. DTAA efficiency. The India–USA Double Taxation Avoidance Agreement lets resident founders claim credit in India for US tax paid on US-sourced profits, reducing — though not eliminating — double taxation.

1. Contractor and SaaS tool compliance. US SaaS vendors and contractor platforms require a US Tax ID (EIN) before issuing a Form W-9. Without an EIN, you cannot be paid or pay certain US counterparties without withholding obligations.

Choosing the Right US Entity: C-Corp, LLC, or LLC?

The entity decision cascades into your cap table mechanics, US annual filing obligations, Indian FEMA categorisation, and exit optionality. Restructuring later is expensive — get this right at formation.

Delaware C-Corporation

The Delaware C-Corp is the only entity type that cleanly supports:

• Multiple share classes (common + preferred) required for VC equity rounds
• SAFE notes and convertible instruments in their standard YC/NVCA forms
• Incentive Stock Options (ISO) and Non-Qualified Stock Options (NSO) for US employees
• 83(b) elections that protect founder equity from phantom income at each vesting milestone

Choose this if you are pre-seed or seed stage and intend to raise from US institutional investors, or if you plan a US exchange listing.

Tax trade-off to understand: The C-Corp pays US federal corporate income tax at 21% on its taxable profits. Dividends paid to Indian resident founders are subject to US withholding tax — capped at 15% under Article 10 of the India–USA DTAA — and then taxed again in India at applicable slab rates, with a DTAA credit for the US withholding. Retained earnings inside the C-Corp avoid this second layer, which is why most VC-backed startups do not pay dividends.

Delaware LLC

A single-member LLC is treated as a disregarded entity by the IRS — the LLC pays no federal income tax itself; income flows through to the member's personal return. A multi-member LLC is taxed as a partnership by default.

For Indian resident founders, three complications apply:

• Pass-through income from a US LLC is still US-source income, reportable in India under the worldwide income rule
• LLCs cannot issue preferred equity classes, making them structurally incompatible with standard VC term sheets
• A single-member LLC with 25%+ foreign ownership must file IRS Form 5472 (Information Return of a 25% Foreign-Owned US Corporation) together with a pro-forma Form 1120 by 15 April each year — and the penalty for failure to file is USD 25,000 per year per form, one of the steepest per-form penalties in the entire US Tax Code

Choose this if you are bootstrapped, invoicing US clients for consulting or services, need no VC equity, and want simpler governance.

Wyoming LLC

Wyoming's annual fee is approximately USD 60 per year versus Delaware's USD 300+ minimum franchise tax. Wyoming has no state income tax and offers strong charging order protection (a creditor cannot seize your membership interest, only receive distributions if declared). Popular with e-commerce sellers and asset-holding structures.

Important: Wyoming LLCs are sometimes marketed as "anonymous." As an Indian tax resident, anonymity provides no protection — Schedule FA in your Indian ITR requires full disclosure of all foreign assets regardless of which US state you incorporated in.

Avoid California and New York Without Physical Presence

California imposes a minimum franchise tax of USD 800/year on any LLC or corporation that is registered in or doing business in California. New York requires LLCs to publish a formation notice in two local newspapers for six consecutive weeks — a process that costs USD 1,000–2,000 in New York City boroughs. Register in Delaware or Wyoming and only qualify to do business in California or New York when you actually hire local employees or open a physical office.

Step-by-Step Registration Procedure

Follow this sequence from Day 1 to avoid costly back-tracking.

Step 1 — Decide entity type and home state. C-Corp in Delaware for investor-ready; LLC in Delaware or Wyoming for bootstrapped operations. Document your reasoning — your CA will need this for the ODI filing.

Step 2 — Appoint a Registered Agent. Every US entity needs a registered agent with a physical US address to receive legal notices and service of process. Stripe Atlas, Firstbase, and Doola bundle registered agent service for Year 1. Standalone agents (Northwest Registered Agent, Incfile) cost USD 50–125 per year.

Step 3 — File Articles of Incorporation / Articles of Organisation. The Delaware Division of Corporations processes standard filings in 1–3 business days. Same-day processing costs an additional state expedite fee. Confirm filing through the Delaware Division of Corporations online portal.

Step 4 — Obtain an EIN from the IRS. File Form SS-4 (Application for Employer Identification Number) with the IRS. Indian founders without a US Social Security Number must file by fax — the IRS fax line for international applicants is listed on the IRS website under EIN for International Applicants. Processing takes 4–6 weeks by fax. The EIN is free; do not pay a third-party service more than a nominal convenience fee.

Step 5 — Open a US business bank account. Mercury, Brex, and Relay are the most accessible options for foreign-founded US entities. You will need: the EIN, Certificate of Incorporation, Operating Agreement or Bylaws, and identity documents for all owners with 25%+ equity. Keep the account active — some banks close accounts dormant for 6–12 months.

Step 6 — Issue founder shares and file the 83(b) election. Issue shares immediately after incorporation, before any vesting period commences. File the 83(b) election with the IRS within 30 calendar days of the share issuance date. This is a hard statutory deadline under Section 83(b) of the US Internal Revenue Code. There is no administrative relief, no late-election procedure, and no exceptions. Missing it means you recognise ordinary income in the US at every vesting cliff event.

Step 7 — Set up payment infrastructure. Connect your Mercury account to Stripe using the US EIN and entity documents. Configure Stripe Atlas settings for Indian tax residency if the platform prompts for it. For SaaS companies selling across multiple US states, evaluate Paddle (which acts as a Merchant of Record) or a sales tax automation layer from Day 1.

Step 8 — Complete FEMA and ODI reporting from India. This step runs in parallel from the moment you incorporate — see the next section.

FEMA and ODI Compliance: The Non-Negotiable Indian Layer

Most Indian founders treat FEMA as an afterthought. The FEM (Overseas Investment) Rules and Regulations, 2022, effective 22 August 2022, replaced the old ODI framework and tightened reporting timelines. Non-compliance is a continuing violation — every day of delay adds to the exposure.

What Qualifies as ODI?

If an Indian resident holds 10% or more of the equity or voting rights of a foreign entity, the investment is classified as Overseas Direct Investment (ODI). A founder holding 50% of a Delaware C-Corp is by definition an ODI investor, not merely a portfolio investor.

LRS Remittance and TCS

The Liberalised Remittance Scheme (LRS) permits an individual Indian resident to remit up to USD 2,50,000 per financial year for permissible capital and current account transactions, including equity investment in overseas entities. Your AD (Authorised Dealer) bank reports your LRS transactions under Form A2.

Under Section 206C(1G) of the Income-tax Act 1961 (as amended by Finance Act 2023), Tax Collected at Source (TCS) at 20% applies to LRS remittances exceeding Rs. 7,00,000 per year. This TCS is not a final tax — it is a credit that appears in your AIS/TIS on the Income Tax e-filing portal and is offset against your total tax liability for AY 2027-28.

ODI Form on FIRMS Portal

Within 30 days of making an overseas investment, you or your AD bank must file the ODI report on the FIRMS portal (Foreign Investment Reporting and Management System, rbi.org.in). The FIRMS portal replaced the old OLTAS-based reporting system. Your bank typically handles this submission — verify with your relationship manager that it has been filed and obtain the acknowledgement reference number.

Annual Performance Report (APR)

Every Indian ODI investor must file an Annual Performance Report (APR) on the FIRMS portal. The APR covers:

• The overseas entity's audited financial statements for the preceding financial year
• Dividend received or profit remitted back to India
• Any changes in shareholding, directorship, or nature of business

Deadline: 31 December of each year for the preceding financial year. For the calendar-year 2025 financials of a Delaware C-Corp, the APR is due 31 December 2026. Ensure your US entity's bookkeeping and annual accounts are complete well before November.

Worked Example: Rs. Numbers on TCS, FEMA Penalty, and Schedule FA

Scenario: Priya, a Bengaluru-based founder, incorporates a Delaware C-Corp in June 2026. She remits USD 60,000 (Rs. 49,80,000 at Rs. 83/USD) from her Indian savings account to the US entity's Mercury account as share subscription money.

TCS Calculation at the AD Bank:

• Total LRS remittance: Rs. 49,80,000
• TCS-exempt threshold: Rs. 7,00,000
• TCS-applicable base: Rs. 49,80,000 − Rs. 7,00,000 = Rs. 42,80,000
• TCS at 20% = Rs. 8,56,000 deducted upfront by the AD bank

This Rs. 8,56,000 is not a sunk cost. It reflects in Priya's AIS for FY 2026-27 and reduces her net income tax payable when she files her ITR for AY 2027-28.

If She Misses the ODI Filing (30-day window):

• FEMA contravention under Section 13
• Penalty: up to 3× the amount involved = up to Rs. 1,49,40,000 (3 × Rs. 49,80,000), or Rs. 2,00,000, whichever is higher
• Continuing penalty: Rs. 5,000 per day until regularised
• Voluntary compounding before detection attracts significantly lower actual settlement amounts — but the statutory maximum is severe

Schedule FA in Her ITR for AY 2027-28: Under Schedule FA of ITR-2 or ITR-3, Priya discloses:

• Country: United States of America
• Name of entity and registered address in Delaware
• Nature of interest: Equity shares
• Cost of acquisition: Rs. 49,80,000
• Date of acquisition: June 2026

If She Omits Schedule FA:

• Penalty under Section 43 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015: Rs. 10,00,000 flat per undisclosed foreign asset per assessment year
• This applies even if the Mercury account has zero balance and the C-Corp has zero revenue

Indian Tax Obligations on US Business Income

POEM — The Most Dangerous Structural Risk

Place of Effective Management (POEM) is defined under Section 6(3) of the Income-tax Act 1961. If the board or the key managerial personnel of the Delaware C-Corp make all critical commercial decisions from India — board resolutions signed by Indian directors in Mumbai, strategy calls led exclusively from Bengaluru, all contracts signed by India-resident officers — the Income Tax Department may hold that the POEM is in India. The consequence: the entire global income of the C-Corp becomes taxable in India at the applicable corporate tax rate (currently 25.17% for domestic companies, but the C-Corp may be treated as a foreign company taxed at 40% plus surcharge for POEM purposes).

To manage POEM risk:

• Ensure at least one genuinely US-based director or officer participates substantively in board decisions
• Hold board meetings with a physical quorum in the USA (video participation by Indian directors is acceptable, but the meeting must not be exclusively Indian-resident)
• Document that pricing, customer contracting, and hiring decisions are taken by US-based personnel
• Maintain US board minutes that reflect substantive deliberation, not rubber-stamping of Indian decisions

Transfer Pricing Under Sections 92–92F

Any transaction between Priya's Indian entity (or Priya as an individual) and the Delaware C-Corp is an international transaction subject to arm's-length pricing under Sections 92 to 92F of the Income-tax Act 1961. Common inter-company transactions include:

• Software or product development services provided by an Indian private limited company to the US C-Corp
• Royalties on IP developed in India and licensed to the US entity
• Loans or inter-company advances
• Shared services and management fee arrangements

Each category must be priced at arm's length, documented in a Transfer Pricing Study (mandatory if the aggregate international transactions exceed Rs. 1 crore in a year), and disclosed in Form 3CEB (Accountant's Report). Underpricing the Indian entity's services to inflate US-side profits triggers a primary adjustment in the Indian entity's hands, plus secondary adjustment and interest under Section 92CE.

Form 67 and Foreign Tax Credit

If Priya receives salary or dividends from the C-Corp that attract US withholding tax, she claims the credit in India by filing Form 67 on the Income Tax e-filing portal on or before the due date of the Indian ITR. The credit is limited to the Indian tax attributable to the foreign-source income — it cannot generate a refund.

US Tax and Annual Compliance Obligations

Delaware C-Corp

• Form 1120 (US Corporation Income Tax Return): due 15 April for calendar-year entities; extendable to 15 October via Form 7004
• Federal corporate tax: 21% flat (no graduated slab)
• Delaware Franchise Tax + Annual Report: due 1 March each year. Two calculation methods exist:
• Authorized Shares Method: Default — and potentially enormous. A startup with 10,000,000 authorized shares can face a bill exceeding USD 85,000 under this method
• Assumed Par Value Capital Method: Almost always dramatically lower for asset-light startups. Many pay only the USD 400 minimum under this method
• Action required: Contact your registered agent before paying Delaware's default invoice — always request the Assumed Par Value Capital Method calculation in writing

Foreign-Owned Single-Member LLC

• Form 5472 + Pro-forma Form 1120: due 15 April, extendable to 15 October
• Penalty for failure to file: USD 25,000 per form per year — no warnings, no graduated scale
• Engage a US CPA specifically for this filing even if the LLC has zero revenue; it is not optional

Sales Tax and Economic Nexus

Post South Dakota v. Wayfair, Inc. (2018), states may impose sales tax collection obligations on remote sellers who cross economic nexus thresholds — typically USD 1,00,000 in annual sales or 200 transactions in that state. SaaS subscriptions are taxable in roughly 25+ US states. Start with a sales tax automation tool (Avalara, TaxJar, or Anrok for SaaS) from your first USD of US revenue rather than retrospectively registering in 20 states after an audit notice.

Common Mistakes and How to Fix Them

1. Missing the 83(b) election deadline. The 30-day clock runs from the date shares are issued, not from any vesting date. File by certified mail with a return receipt to the IRS service centre for your registered address — the postmark is your evidence. Retain the green card permanently. There is no late-election relief procedure. If you miss it, your only remedies are expensive: repurchase unvested shares and re-issue, or accept phantom income at every vesting cliff.

2. Operating the US entity as a paperwork shell from India. Revenue booked in the US, all work done in India, zero US employees, all decisions made by Indian-resident founders — this combination triggers POEM and potentially invalidates the arm's-length transfer pricing structure. Fix by establishing genuine US economic substance: a US-resident officer with real authority, US employment contracts, and board minutes that demonstrate substantive US decision-making.

3. Omitting Schedule FA from the Indian ITR. The Black Money Act penalty of Rs. 10,00,000 per undisclosed foreign asset per year applies whether you have Rs. 1 or Rs. 1 crore in the Mercury account. Ownership — not income, not remittance — is the trigger. Even if you incorporated in June 2026 and your ITR is for the period ending March 2027, you must disclose the US entity in Schedule FA of the ITR filed for AY 2027-28.

4. Skipping the Annual Performance Report. Many founders file the ODI Form correctly and then forget the APR entirely. Set a recurring calendar reminder for 30 November each year to begin compiling the US entity's financials — giving yourself a full month of buffer before the 31 December deadline on the FIRMS portal.

5. Ignoring Form 5472 for a foreign-owned LLC. Most formation platforms (Stripe Atlas, Doola, Firstbase) do not proactively remind you about this filing. Budget explicitly for a US CPA to file Form 5472 + pro-forma Form 1120 every April, even for a zero-revenue LLC.

6. Mixing revenue flows between Indian and US entities. Routing US customer payments into the Indian entity's HDFC or ICICI account — even temporarily — does not make that revenue "US entity revenue." The correct structure is: US customer pays the US entity's Mercury account → US entity pays the Indian entity under a signed Inter-Company Services Agreement at arm's length pricing → Indian entity recognises income and pays Indian corporate tax. Without this documented flow, both entities face transfer pricing and FEMA exposure.

Key Takeaways

• Delaware C-Corp for VC-bound founders; LLC for bootstrapped service businesses — but both structures trigger FEMA ODI reporting, Schedule FA disclosure in the Indian ITR, and an Annual Performance Report on the FIRMS portal. Neither entity avoids the Indian compliance layer.
• File the 83(b) election within 30 days of share issuance, by certified mail, with no exceptions — missing this deadline is one of the costliest and most irreversible mistakes in the US startup formation process.
• TCS at 20% on LRS remittances above Rs. 7 lakh is a cash-flow planning item, not a permanent tax cost. It is creditable against your FY 2026-27 Indian income tax liability but requires upfront liquidity at the time of remittance.
• Schedule FA is triggered by ownership, not income. Every Indian tax resident who owns shares, LLC membership interests, or holds a US bank account must disclose these under Schedule FA. The Black Money Act penalty is Rs. 10,00,000 per undisclosed asset per year.
• Form 5472 carries a USD 25,000 per-year penalty for foreign-owned single-member LLCs — engage a US CPA specifically for this filing annually, regardless of revenue.
• POEM is a real enforcement risk in FY 2026-27, particularly as CBDT scrutiny of outbound structures increases. Keep genuine decision-making authority in the USA and document it in board minutes.
• Request the Assumed Par Value Capital Method for Delaware franchise tax before paying the default invoice — startup founders routinely overpay by thousands of dollars by accepting the Authorized Shares Method calculation without question.