Key Takeaways
- Entity selection drives tax cost and funding outcomes: Delaware C-Corp is VC-preferred, while LLCs create pass-through exposure for non-resident founders.
- Indian founders are typically Non-Resident Aliens (NRA); US tax applies only to US-source income and Effectively Connected Income (ECI).
- Federal corporate tax is 21%; dividend withholding is generally 25% under the India–US DTAA (subject to conditions).
- State taxes depend on economic nexus; sales tax thresholds commonly start at USD 100,000 revenue or 200 transactions.
- Key filings include Form 1120, Form 5472, Form 1065, payroll forms, and state returns, often due by 15 April or 15 October with extension.
- Incorrect IP ownership and entity structuring can trigger Permanent Establishment (PE) risk under the India–US DTAA.
- Indian CA firms can scale by offering US tax services through white-label models without disrupting existing client relationships.
Introduction
For Indian Chartered Accountants advising startups, US expansion has moved from an exception to a core advisory theme. SaaS, fintech, and D2C founders are incorporating in the US early to access customers, payment rails, and venture capital. With this shift, Indian CAs are increasingly expected to guide clients on US tax structures, filings, and cross-border risks.
This article is written practitioner-to-practitioner. It explains how Indian entrepreneurs and startups are taxed in the US, how entity and state choices affect compliance, and how early decisions influence funding and exits. The focus is not on individual tax filing, but on how you, as an Indian CA, can structure and manage US tax obligations for clients.
We cover resident status, ECI, entity selection (LLC vs C-Corp), Delaware considerations, sales tax nexus, visa interactions, and a step-by-step US expansion checklist. The goal is to help you deliver confident, scalable US tax advice while avoiding common pitfalls seen in Indian startups entering the US market.
Introduction: Why US Tax Planning Matters for Indian Startups
Rise of US expansion among Indian founders
Indian startups increasingly incorporate in the US to sell globally, onboard US customers, and attract foreign investors. Accelerators and VCs often require a US parent even when operations remain India-centric. This trend has made US tax planning a front-loaded decision rather than a downstream compliance task.
For Indian CAs, this means understanding US tax concepts early in the lifecycle. Advising after revenue or funding has commenced often results in restructuring costs and avoidable tax exposure.
Why tax structure impacts funding, exits, and compliance
Entity type determines how income flows to founders, whether losses can be utilized, and how exits are taxed. A misaligned structure can block VC funding or disqualify founders from favorable capital gains treatment.
Practitioner Tip: Position US tax structuring as part of valuation and investor readiness, not just compliance.
How Are Indian Entrepreneurs Taxed in the US?
Resident vs Non-Resident Alien status
Most Indian founders remain Non-Resident Aliens (NRA) for US tax purposes unless they meet the Substantial Presence Test. NRAs are taxed only on US-source income, unlike residents who are taxed globally.
Visa type does not automatically determine tax residency, but physical presence does. This distinction is critical when founders spend time in the US.
Effectively Connected Income (ECI)
ECI refers to income connected with a US trade or business. For Indian founders owning US pass-through entities (like LLCs), business income is typically ECI and taxable in the US.
This is where many founders are surprised by personal US tax filings despite not living in the US.
Withholding taxes on US-source income
Dividends, interest, and royalties are generally subject to 30% withholding, reduced to 25% or lower under the India–US DTAA. Form W-8BEN is critical to claim treaty benefits.
Practitioner Tip: Always align withholding positions with treaty documentation to avoid refund-driven compliance.
Key Tax Obligations for Indian Startups Operating in the US
Federal Income Tax
US C-Corps pay federal tax at a flat 21%. LLCs are pass-through by default, pushing tax to owners. Foreign-owned single-member LLCs are disregarded but still require reporting.
State Taxes and Nexus Rules
States impose income and franchise taxes based on physical or economic nexus. For example, California asserts nexus based on sales, payroll, or incorporation.
Economic nexus thresholds for sales tax commonly start at USD 100,000 revenue or 200 transactions, though states vary.
Self-Employment and Payroll Taxes
Founders drawing salaries from US entities trigger payroll compliance. Misclassifying compensation as dividends is a common audit issue.
Estimated Taxes and Compliance Calendar
Quarterly estimated taxes are due in April, June, September, and January. Missing estimates leads to penalties even if annual tax is paid.
Practitioner Tip: Build a US compliance calendar alongside the Indian one for startup clients.
Setting Up a US Subsidiary from India: Structural Options
Direct US entity vs subsidiary of Indian company
Founders may incorporate directly in the US or create a US subsidiary of an Indian parent. VC-backed startups almost always prefer a US parent with India as a subsidiary.
The structure impacts IP ownership, transfer pricing, and exit taxation.
IP ownership and transfer pricing considerations
IP should generally reside where value creation and funding occur. Improper IP migration can trigger Indian exit taxes and US transfer pricing scrutiny.
Permanent Establishment (PE) risks
Significant decision-making or revenue activity in India for a US entity can create PE under the India–US DTAA.
Refer clients to IRS guidance on starting a business in the US for baseline requirements.
Practitioner Tip: Document inter-company services clearly to defend against PE assertions.
LLC vs C-Corp: Entity Selection Guide for Indian Founders
How LLCs are taxed for non-resident owners
LLCs are pass-through by default. For NRAs, this means direct US tax filing and ECI exposure. Compliance includes Form 1065 or individual returns.
C-Corp taxation and dividend implications
C-Corps pay tax at 21%. Dividends paid to Indian shareholders attract withholding, typically 25% under DTAA.
Annual filing is through IRS Form 1120 – U.S. Corporation Income Tax Return, with additional Form 5472 for foreign ownership.
Why Delaware C-Corp is VC-preferred
Delaware offers predictable corporate law, investor familiarity, and flexible equity structuring. Most US VCs mandate Delaware C-Corps.
| Criteria | LLC | C-Corp |
|---|---|---|
| Taxation | Pass-through | 21% corporate tax |
| VC Friendly | No | Yes |
| Founder Filing | Required | Usually not |
| Exit Planning | Complex | Simpler |
For foreign-owned operating companies, also consider filing exposure discussed in the Form 1120-F foreign corporation US tax return guide.
Practitioner Tip: Default to C-Corp for scalable startups unless there is a strong cash-flow-driven reason for LLC.
Delaware and Other States: Where Should Indian Startups Incorporate?
Why Delaware dominates startup incorporations
Over 60% of Fortune 500 companies are Delaware-incorporated due to its business-friendly legal framework and Court of Chancery.
Delaware Franchise Tax explained
Delaware franchise tax ranges from USD 400 to USD 200,000, depending on share structure and valuation method.
When Wyoming or other states make sense
Bootstrapped startups with no VC plans may consider Wyoming for lower costs, but may still need foreign qualification elsewhere.
Investment and Venture Capital Considerations
Why VCs insist on C-Corp structures
VC funds avoid pass-through entities due to UBTI and investor-level filings. C-Corps provide clean cap tables and exit paths.
QSBS and exit tax planning
Qualified Small Business Stock (QSBS) can exempt up to USD 10 million of gains, but only for eligible shareholders and structures.
SAFE notes, ESOPs, and tax implications
SAFE conversions and ESOP grants must be structured carefully to avoid unexpected tax at conversion or exercise.
Practitioner Tip: Align cap table planning with tax outcomes before the first priced round.
Double Taxation Between India and the US: What Founders Must Know
India–US DTAA overview
The DTAA allocates taxing rights and reduces withholding, but does not eliminate filing obligations.
Foreign tax credits in India
US taxes paid can generally be claimed as FTC in India, subject to documentation and timing alignment.
Common mistakes that trigger double taxation
Poor entity separation and undocumented reimbursements often lead to tax in both jurisdictions.
Sales Tax, EIN, Banking, and Other Overlooked US Compliance Areas
Sales tax nexus and SaaS startups
SaaS companies frequently ignore sales tax. States like California, New York, and Texas apply economic nexus based on revenue thresholds.
EIN application for non-residents
Non-resident founders can obtain an EIN via Form SS-4 without an SSN, typically by fax.
Opening US bank accounts remotely
Fintech banks allow remote onboarding but require EIN, incorporation documents, and beneficial ownership disclosures.
Practitioner Tip: Treat sales tax as a separate compliance stream from income tax.
US Visas and Immigration Considerations for Indian Founders
O-1 visa for startup founders
O-1 is popular for founders with demonstrated expertise. It does not automatically create tax residency.
L-1 for India-to-US expansion
L-1 requires an Indian operating company and supports executive transfers.
EB-2 NIW for long-term plans
Long-term immigration planning should align with tax residency exposure.
US Expansion Checklist for Indian Entrepreneurs
Pre-incorporation checklist
- Confirm business model and funding roadmap
- Select entity type and state
- Plan IP ownership and inter-company agreements
Post-incorporation compliance checklist
- Obtain EIN and open US bank account
- Register for state taxes and sales tax
- Set up payroll and compliance calendar
Indian CA firms supporting multiple startups may consider scalable, white-label US tax preparation support to manage volume efficiently without altering client relationships.
Common Mistakes Indian Entrepreneurs Should Avoid
Choosing the wrong entity type
LLCs chosen for simplicity often block VC funding and create founder-level tax filings.
Ignoring state and sales tax obligations
Sales tax audits are increasingly automated and retroactive.
DIY tax filings without US expertise
Errors in Forms 5472 and 1120 attract disproportionate penalties.
Conclusion
US expansion is now a standard growth path for Indian startups, and Indian CAs play a central role in making that expansion tax-efficient and compliant. Entity selection, state nexus, and cross-border coordination determine whether founders scale smoothly or spend years fixing structural issues.
By building structured US tax capabilities, Indian CA firms can become long-term advisors rather than reactive compliance vendors. Many firms achieve this through white-label US tax support that integrates seamlessly into existing practices, allowing you to serve globalizing clients with confidence.
FAQs
Should Indian founders always choose a Delaware C-Corp?
Not always, but it is the default for VC-backed startups. Bootstrapped or cash-flow businesses may consider alternatives. The decision should align with funding and exit plans.
Do Indian founders need to file US personal tax returns?
Only if they have US-source income or ECI. LLC ownership often triggers this. C-Corp shareholders typically do not file unless receiving US income.
How does sales tax differ from income tax in the US?
Sales tax is state-level and transaction-based. Income tax is profit-based. Many startups owe sales tax even when loss-making.
What is the biggest PE risk for Indian startups?
Decision-making and revenue generation happening in India for a US entity. Poor documentation increases exposure.
Can EIN be obtained without an SSN?
Yes. Non-residents apply using Form SS-4. Processing is slower but routine.
How does QSBS benefit Indian founders?
QSBS can exempt gains, but eligibility is complex. Treaty interaction and holding periods must be reviewed.
Are SAFE notes taxable at issuance?
Generally no, but conversion events require careful valuation analysis. Poor structuring can trigger tax.
When do US estimated taxes apply?
Quarterly, starting April. Penalties apply even if annual tax is paid later.
Does a US visa make a founder tax resident?
No. Tax residency depends on days of presence, not visa type.
How can Indian CA firms scale US tax services?
Through standardized processes and white-label partnerships that handle US filings while you retain the client relationship.
