California Corporations for Non-U.S. Founders: Cross-Border Tax and Banking Considerations

If you’re a non-U.S. founder considering incorporating in California, you’re facing a significantly more complex decision than domestic entrepreneurs. You’re not just choosing between an LLC and a corporation—you’re navigating two layers of taxation (federal and California state), international withholding obligations, beneficial ownership reporting requirements that change based on where your entity is formed, and banking compliance procedures that treat foreign owners with heightened scrutiny. Add to that the reality that incorporating your business doesn’t give you the right to work in the United States, and you begin to see why so many foreign founders end up with structures that either overpay on taxes or fail compliance reviews when they actually need their entity to perform.
This guide examines how California corporations work specifically for non-U.S. founders and foreign-owned companies. We’ll cover when a California C-corporation makes sense compared to other entity structures, how federal and California tax obligations combine to create your actual tax burden, what the Corporate Transparency Act’s beneficial ownership reporting requirements mean for domestic versus foreign reporting companies, why banking remains difficult even when you’ve handled all the legal compliance, and what you need to understand about work authorization before you assume that owning a U.S. corporation lets you operate within the United States.

 

Why Entity Structure Matters More for Foreign Founders

When a domestic U.S. founder incorporates in California, they’re making a straightforward choice between pass-through taxation (LLC) and corporate taxation (C-corp or S-corp). For foreign founders, the decision tree is more complicated because every structure option intersects with different pieces of the U.S. tax code that specifically target non-resident individuals and foreign-owned entities.
A California LLC that’s perfectly tax-efficient for a U.S. citizen becomes a compliance nightmare for a non-resident alien, because the LLC’s pass-through income is effectively connected income that requires the foreign member to file U.S. tax returns and potentially pay self-employment taxes. A California C-corporation avoids that problem by serving as a tax blocker—the corporation pays its own taxes and the foreign shareholder only faces withholding when dividends are distributed—but you’re accepting double taxation (corporate income tax plus dividend withholding) in exchange for that simplicity.
Meanwhile, if you form your company abroad and register it as a foreign corporation doing business in California, you’ve potentially triggered California franchise tax obligations while still dealing with federal branch profits tax and complex Form 1120-F filings. And throughout all of this, you’re navigating beneficial ownership reporting requirements that treat domestic corporations differently from foreign corporations registered in the U.S., plus banking compliance procedures that make account opening significantly harder for non-resident owners regardless of your entity structure.

California Corporation vs LLC vs Foreign Corporation: The Core Trade-offs

Domestic California Corporation

A California corporation formed by filing Articles of Incorporation with the California Secretary of State is a domestic corporation for both federal tax purposes and California state purposes. This is the cleanest structure for most foreign founders because:
The corporation is a separate taxpayer that files Form 1120 federally and Form 100 with the California Franchise Tax Board. Corporate income is taxed at the corporate level—currently a flat 21% federal rate plus California’s graduated rates that reach 8.84% for income over $1 million. You’re paying corporate-level tax, but your foreign shareholders aren’t directly engaged in a U.S. trade or business merely by owning stock.
When the corporation distributes dividends to foreign shareholders, those dividends face 30% federal withholding under IRC sections 871(a) and 881(a), unless reduced by an applicable tax treaty. If your home country has a treaty with the United States that reduces dividend withholding to 15% or 10%, your shareholders can claim that reduced rate by providing Form W-8BEN (individuals) or W-8BEN-E (entities) to the corporation.
This is the most straightforward structure because it keeps foreign owners out of the U.S. tax system unless they’re actually receiving distributions. You’re accepting double taxation in exchange for that separation—corporate tax on the entity’s income, then withholding on dividends when distributed to shareholders—but for many foreign-owned businesses that plan to retain earnings and reinvest in growth, this structure defers the second layer of tax until distributions actually occur.

California LLC (Pass-Through Structure)

A California LLC is generally taxed as a partnership for federal purposes if it has multiple members, or as a disregarded entity if it has a single member. This pass-through taxation means the LLC itself doesn’t pay federal income tax—instead, income flows through to the members who report it on their individual returns.
For a domestic member, this is often the most tax-efficient structure because you avoid double taxation. For a non-resident alien member, this creates significant complications:
The LLC’s U.S.-source income that’s effectively connected with a U.S. trade or business (ECI) flows through to you personally. You’re required to file Form 1040-NR reporting your share of the LLC’s income, and you may owe both federal income tax and California income tax on that income regardless of whether the LLC actually distributed any cash to you.
If the LLC has a U.S. trade or business, the LLC may need to file Form 8804 (partnership withholding return) and issue Form 8805 to foreign partners, withholding tax on the foreign partner’s share of ECI at the highest marginal rate. This creates quarterly estimated tax obligations and annual filing requirements that many foreign founders don’t anticipate.
Additionally, if the LLC is treated as a disregarded entity owned by a foreign person, the LLC must file Form 5472 along with a pro forma Form 1120 if the LLC has reportable transactions with foreign related parties or with its foreign owner. The penalties for failing to file Form 5472 are severe—currently $25,000 per form plus additional penalties for continued failure after IRS notice.
For these reasons, California LLCs are generally not recommended for non-resident alien founders unless you’re specifically trying to achieve pass-through taxation and you have sophisticated tax advisors managing your U.S. and home-country tax compliance. The administrative burden and the risk of unexpected tax liabilities typically outweigh any tax savings compared to a corporate structure.

Foreign Corporation Registered in California

If you form your company under the laws of a foreign country and then register it to do business in California, you’re operating as a foreign corporation. Under California Corporations Code section 2105, foreign corporations must obtain a certificate of qualification from the Secretary of State before transacting intrastate business in California, and they must designate a California agent for service of process under section 1505.
This structure creates a split regulatory framework. Your corporate governance—articles of incorporation, bylaws, shareholder rights, director duties—remains governed by the law of your formation jurisdiction. Your California tax obligations and qualification requirements are governed by California law. Your U.S. federal tax treatment is governed by how the IRS classifies your foreign entity, which may not match your treatment under home-country law.
From a federal tax perspective, if your foreign corporation has a U.S. branch or office that conducts a trade or business within the United States, that branch’s income is effectively connected income subject to federal income tax. The foreign corporation files Form 1120-F reporting the branch’s ECI and may also owe branch profits tax—an additional 30% tax designed to approximate the dividend withholding that would apply if the branch were a U.S. subsidiary distributing profits to its foreign parent.
From a California tax perspective, the Franchise Tax Board’s “doing business” standard under Revenue and Taxation Code section 23101 determines whether your foreign corporation owes California franchise tax. The FTB’s thresholds are relatively low—you’re doing business in California if you’re actively engaging in any transaction for financial gain in California, or if you exceed indexed threshold amounts for California sales, property, or payroll. For 2024, those thresholds are approximately $637,000 in sales, $63,000 in property, or $63,000 in payroll.
The foreign corporation structure makes sense in limited circumstances—typically when you have a substantial existing foreign business and you want to open a U.S. branch office rather than creating a separate U.S. subsidiary. For most startups and small businesses, creating a U.S. subsidiary (a domestic California corporation) and keeping it separate from any foreign parent entity provides cleaner legal separation and more straightforward tax treatment.

S-Corporation Election: Not Available for Non-Resident Aliens

One structure you’ll often see discussed in generic U.S. business formation guides is the S-corporation—a special tax election that allows a corporation to be taxed as a pass-through entity while maintaining corporate legal structure. For domestic founders, S-corps can provide significant tax savings by avoiding corporate-level tax while allowing owners to split their income between reasonable salary (subject to employment taxes) and distributions (not subject to self-employment tax).
For non-U.S. founders, S-corporation election is simply not available. Under IRC section 1361(b)(1)(C), S-corporation shareholders must be individuals who are U.S. citizens or resident aliens. Nonresident aliens cannot be S-corporation shareholders under any circumstances. If you’re a foreign founder without U.S. tax residency, your only realistic federal tax classification for a corporation is C-corporation status, regardless of what generic incorporation guides might suggest.

Federal Tax Exposure for Foreign Shareholders

Corporate-Level Taxation: The First Layer

Your California corporation is a domestic corporation for federal tax purposes, meaning it’s taxed on its worldwide income. The corporation files Form 1120 annually and pays tax at the current federal corporate rate of 21% on its taxable income.
If your corporation has foreign operations or earns income from foreign sources, you may be able to claim foreign tax credits under IRC section 901 for foreign income taxes paid to other countries. The foreign tax credit is limited to the U.S. tax that would apply to that same foreign-source income, so if you’re paying higher tax rates in your home country than the U.S. corporate rate, the excess foreign taxes generally don’t generate refundable credits—they may only carry forward as credit carryovers.
This first layer of tax is the same regardless of shareholder nationality. Whether your shareholders are U.S. citizens or non-resident aliens, the corporation pays 21% federal tax plus California franchise tax on its income. The foreign ownership matters at the second layer—when the corporation distributes profits to shareholders or when you eventually sell your stock.

Dividend Withholding: The Second Layer

When your California corporation distributes dividends to foreign shareholders, those dividends are U.S.-source income subject to 30% withholding under IRC section 1441. The corporation must withhold this tax and remit it to the IRS using Form 1042 and provide Form 1042-S to the recipient showing the amount of income and tax withheld.
Many countries have tax treaties with the United States that reduce dividend withholding rates below the statutory 30%. Common treaty rates for dividends are 15% or 10%, with the specific rate depending on the shareholding percentage and the particular treaty provisions. To claim treaty benefits, foreign shareholders must provide the corporation with a properly completed Form W-8BEN (individuals) or Form W-8BEN-E (entities) certifying their foreign status and treaty eligibility.
Important limitations on treaty benefits: Even if your home country has a favorable treaty with the United States, you must satisfy the treaty’s “limitation on benefits” provisions to actually claim reduced withholding rates. These LOB provisions are anti-treaty-shopping rules designed to prevent residents of non-treaty countries from using treaty-country entities to access treaty benefits. Most treaties require that you be a qualified resident of the treaty country—typically meaning you must demonstrate substantial business presence and operations in that country, not merely a mailbox registration.
For founders from countries without U.S. tax treaties, the full 30% withholding applies with no reduction available. This is one of the reasons that C-corporation structures, while simpler from a compliance perspective than LLCs, can be tax-inefficient for foreign founders from non-treaty countries—you’re accepting corporate income tax (21% federal plus California state tax) followed by 30% withholding on distributions, resulting in a combined effective rate that can exceed 45% on distributed profits.

Capital Gains: Generally Not Taxed for Foreign Shareholders

One significant benefit of the C-corporation structure for foreign founders is the treatment of capital gains. Under IRC section 871(a)(2) and section 881(a)(1), nonresident aliens and foreign corporations generally are not subject to U.S. tax on capital gains from the sale of U.S. corporate stock, provided they are not engaged in a U.S. trade or business through the corporation and they meet certain physical presence tests.
This means that if you build your California corporation and eventually sell your shares to an acquirer, you generally won’t owe U.S. federal tax on the gain from that sale. However, there are significant exceptions:
If you were present in the United States for 183 days or more during the taxable year of the sale, your capital gain may be subject to 30% U.S. tax under IRC section 871(a)(2). This rule catches foreign individuals who spend significant time in the United States without becoming tax residents.
If the corporation is a “U.S. real property holding corporation” under IRC section 897(c)(2), meaning that U.S. real property interests constitute 50% or more of its total assets, the gain on sale of your stock is treated as ECI and subject to U.S. tax through the FIRPTA withholding regime. This typically doesn’t apply to operating companies, but it can catch foreign investors in U.S. real estate-heavy businesses.
Your home country will also likely tax the gain from selling your U.S. corporate stock, even if the United States doesn’t. Whether you can claim foreign tax credits in your home country for any U.S. withholding taxes paid during the ownership period depends on your home country’s tax rules and any applicable tax treaty provisions.

Form 5472: Reporting Requirements for Foreign-Owned U.S. Corporations

If your California corporation is 25% or more foreign-owned (measured by voting power or value), the corporation must file Form 5472 annually along with its Form 1120 tax return. Form 5472 is an information return that reports transactions between the U.S. corporation and foreign related parties.
The definition of “reportable transactions” is broad. It includes:
Sales and purchases of inventory or tangible property
Rents and royalties paid or received
Amounts paid or received for services, including technical, managerial, engineering, or similar services
Loans, including revolving credit arrangements
Capital contributions and distributions
Premiums paid or received for insurance or reinsurance
The penalties for failing to file Form 5472 are substantial. The current penalty is $25,000 per form per year, and if you don’t file after receiving IRS notice, the penalty continues to accrue at $25,000 for each 30-day period that the failure continues, up to a maximum penalty amount. For small corporations, these penalties can easily exceed the company’s net income.
Practically speaking, if you’re a non-resident alien founder owning 25% or more of your California corporation, you should assume that Form 5472 filing is required annually. Even if you don’t have traditional transactions like sales or services with foreign related parties, the IRS interprets capital contributions from foreign shareholders and distributions to foreign shareholders as reportable transactions. Your corporation needs to maintain records of these transactions and report them annually, which typically means working with a U.S. tax professional familiar with Form 5472 requirements rather than attempting to file it yourself.

California State Tax Obligations

Franchise Tax and “Doing Business” in California

California imposes an annual franchise tax on corporations that are either incorporated in California or doing business in California. For California corporations, the franchise tax obligation is automatic—your corporation owes California franchise tax from the date of incorporation, regardless of whether you have any California operations or revenue.
The minimum franchise tax for California corporations is $800 per year, due by the 15th day of the 4th month of the corporation’s taxable year. This $800 minimum applies even if your corporation has zero revenue or operates at a loss. For corporations with California-source income above $250,000, California imposes additional graduated corporate income tax rates that reach 8.84% on income over $1 million.
One important detail for new California corporations: the $800 minimum franchise tax is due for your corporation’s first short year if that year is 15 days or longer. There used to be an exemption for the first year (under AB 85, applicable to LLCs and LPs formed between 2021 and 2024), but that exemption has expired and doesn’t apply to corporations formed in 2024 or later. Your corporation owes the $800 minimum tax for its first year, and that payment is due by the 15th day of the 4th month after incorporation.
For foreign corporations, California tax obligations are triggered by “doing business” in California under Revenue and Taxation Code section 23101. You’re doing business in California if you’re actively engaging in any transaction for the purpose of financial gain within California, or if you exceed certain threshold amounts for California sales, property, or payroll. These thresholds are indexed annually; for 2024, you’re doing business in California if your corporation has California sales exceeding approximately $637,000, California property exceeding approximately $63,000, or California payroll exceeding approximately $63,000.

Qualification Requirements for Foreign Corporations

Under California Corporations Code section 2105, foreign corporations must qualify with the California Secretary of State before transacting intrastate business in California. This qualification requirement is separate from the franchise tax “doing business” test—you can trigger one without triggering the other, or you can trigger both simultaneously.
“Transacting intrastate business” under section 191 is defined broadly to include entering into repeated and successive transactions of business in California, other than in interstate or foreign commerce. The distinction between intrastate business (which requires qualification) and interstate commerce (which doesn’t) turns on where the contracts are negotiated and performed, and whether the business activity is purely local to California or part of interstate transactions.
The penalties for transacting intrastate business without qualification include:
Loss of right to maintain actions in California courts until the foreign corporation cures its failure to qualify (Corporations Code section 2203(b))
Monetary penalties of $20 per day for each day the violation continues, up to a maximum of $10,000 per year
Personal liability for officers and directors who knew or should have known about the qualification requirement
For most foreign-formed companies, the administrative burden and legal risks of qualification, combined with the California franchise tax obligations that typically accompany doing business in California, make it more practical to simply form a California domestic corporation from the start. You avoid the dual regulatory framework, you have certainty about your California obligations, and you don’t face the risk that a California court might refuse to enforce your contracts because you failed to qualify as a foreign corporation.

Beneficial Ownership Reporting: Domestic vs Foreign Reporting Companies

The Corporate Transparency Act Framework

The Corporate Transparency Act, which took effect in 2024, created new beneficial ownership reporting requirements for most U.S. business entities. Under the original framework, both domestic and foreign “reporting companies” were required to file beneficial ownership information reports with FinCEN, disclosing the individuals who ultimately own or control the entity.
A domestic reporting company is an entity created by filing a document with a U.S. state—including California corporations and LLCs. A foreign reporting company is an entity formed under the laws of a foreign country that registers to do business in any U.S. state. Both categories were initially subject to BOI reporting, with different deadlines based on when the entity was formed or registered.
In March 2025, FinCEN issued an interim final rule that temporarily exempts all domestic reporting companies from beneficial ownership reporting requirements while FinCEN reassesses the framework in light of ongoing litigation and regulatory review. This means that California corporations formed under California law are currently exempt from BOI reporting, even though they technically meet the definition of a domestic reporting company under the CTA.

Foreign Reporting Companies Remain Subject to BOI Requirements

The March 2025 interim final rule exempts domestic reporting companies but leaves foreign reporting companies in scope. If you’ve formed an entity under foreign law and registered it to do business in California, that entity is a foreign reporting company and remains subject to BOI reporting requirements unless it qualifies for one of the specific exemptions in the CTA.
The practical implications are significant. If you’ve set up a corporate structure where a foreign parent entity owns a California subsidiary, the California subsidiary currently doesn’t need to file BOI reports (because it’s a domestic corporation exempted by the interim final rule), but the foreign parent entity must file BOI reports if it’s registered to do business in any U.S. state. This creates a split compliance framework where your U.S. subsidiary has no BOI obligation but your foreign parent does.
One important clarification: “registered to do business” means the foreign entity has filed documents with a U.S. state (such as a California certificate of qualification under Corporations Code section 2105) to formally register as a foreign entity authorized to operate in that state. Simply having customers or contracts in the United States doesn’t make you a foreign reporting company—you must have taken the affirmative step of registering with a state to trigger foreign reporting company status.

BOI Reporting vs Bank CDD Requirements

Many clients confuse FinCEN’s beneficial ownership reporting requirements under the CTA with banks’ customer due diligence requirements under 31 CFR section 1010.230. These are separate regulatory frameworks with different purposes and different practical effects.
Bank CDD requirements have been in effect since 2018 and apply to all legal entity customers opening accounts at U.S. financial institutions. Banks must identify and verify the beneficial owners of legal entity customers—defined as each individual who owns 25% or more of the equity interests, plus one individual with significant managerial responsibility (the control person). These CDD requirements apply regardless of whether the entity has a BOI reporting obligation under the CTA.
The key practical point: Even though your California corporation is currently exempt from filing BOI reports with FinCEN under the March 2025 interim final rule, your corporation still must provide beneficial ownership information to banks when opening accounts. The bank will ask you to complete their beneficial ownership certification form identifying all 25% or greater owners and one control person, and they’ll verify the identity of those individuals using documents like passports and driver’s licenses.
For non-resident founders, this means that the temporary BOI reporting exemption for domestic corporations doesn’t eliminate the practical need to disclose beneficial ownership information. You still need to provide that information to banks, and banks still apply enhanced due diligence to accounts with foreign beneficial owners.

Banking and KYC Challenges for Non-Resident Founders

Customer Identification Program Requirements

Under the USA PATRIOT Act section 326 and implementing regulations at 31 CFR section 1020.220, U.S. banks must establish customer identification programs that verify the identity of anyone opening an account. For individuals, this means collecting name, date of birth, address, and identification number (SSN or other government-issued identification number).
For U.S. citizens and residents, this is straightforward—you provide a Social Security number, driver’s license, and U.S. address. For non-U.S. persons, the process is more complicated:
Instead of an SSN, non-U.S. persons typically provide a passport number and country of issuance. Some banks also accept other forms of government-issued photo identification, but passport is the most universally accepted document.
For address, U.S. banks’ policies vary. Some banks require a U.S. address for account signers, which creates problems for non-resident founders who don’t have U.S. residency. Other banks accept foreign addresses but require additional documentation or in-person verification.
The legal requirements under CIP regulations technically allow banks to accept foreign identification and foreign addresses for non-U.S. persons, but banks often have internal policies that go beyond the minimum legal requirements. A bank might have a blanket policy requiring U.S. addresses for all business account signers, even though that’s not legally required, because it simplifies their risk assessment and reduces the complexity of verifying foreign addresses.

Customer Due Diligence for Legal Entity Customers

When your California corporation opens a bank account, the bank is required to identify and verify the beneficial owners under the CDD rule at 31 CFR section 1010.230. The bank will ask you to complete a beneficial ownership certification form identifying:
Each individual who owns, directly or indirectly, 25% or more of the equity interests of the corporation
One individual with significant responsibility for managing the corporation (the control person, typically a CEO or president)
For each beneficial owner, the bank must verify identity by collecting name, date of birth, address, and identification number, and by examining documents such as passports or driver’s licenses.
This is where non-resident founders face the most practical difficulties. If you’re a non-resident founder owning 25% or more of your California corporation, you’re a beneficial owner who must be verified by the bank. That means providing your passport, your foreign address, and potentially traveling to a U.S. branch for in-person verification, depending on the bank’s policies.
Some banks have streamlined remote verification procedures that let you complete the entire account opening process online by uploading your passport and using video verification. Other banks require at least one principal or beneficial owner to appear in person at a U.S. branch. There’s no universal rule—each bank sets its own policies within the framework of CIP and CDD requirements.
For foreign founders who cannot easily travel to the United States, this in-person requirement can be a significant practical barrier. Some founders address this by using business formation services that include virtual mail addresses and registered agent services, but these services don’t solve the underlying verification problem—banks still need to verify the actual beneficial owners, not the service provider. The most reliable solution is often to work with banks that specifically support international customers and have streamlined remote verification procedures, even though those banks may charge higher fees or require higher minimum balances.

Enhanced Due Diligence and Risk Assessment

Beyond the baseline CIP and CDD requirements, banks apply risk-based assessment procedures that treat foreign ownership as a higher-risk factor. This isn’t discriminatory or illegal—it’s a practical reality of the anti-money laundering framework that banks operate within.
Banks look at several factors when assessing risk:
Source of funds: If your corporation is being capitalized by foreign transfers, the bank will want to understand where that money is coming from. They may ask for bank statements from the foreign account, documentation of the source of the funds, and explanations of the business purpose.
Beneficial owner nationality: Some countries present higher AML risks than others. If your home country is on FATF lists or subject to U.S. sanctions, expect significantly more scrutiny and possible account rejection.
Business model clarity: Banks want to understand what the corporation actually does and why it needs U.S. banking. Vague business descriptions or business models that involve high volumes of international transfers raise red flags.
Ownership chain complexity: If your California corporation is owned by a foreign holding company, which is owned by another foreign entity, which is ultimately owned by individuals, the bank will want to trace that entire ownership chain to identify the ultimate beneficial owners. Complex structures with multiple layers of entities in different jurisdictions create compliance challenges that many banks simply decline to deal with.
The practical result is that non-resident founders often face account opening rejections or significant delays even when they’ve provided all legally required documentation. This isn’t a problem you can solve by incorporating differently—it’s an inherent friction in the U.S. banking system’s approach to foreign-owned businesses. The best practical approach is to work with banks that explicitly support international clients and to prepare comprehensive documentation up front rather than assuming that simple corporate formation documents will be sufficient.

Immigration and Work Authorization Limitations

Ownership Does Not Equal Work Authorization

One of the most important points for non-U.S. founders to understand is that incorporating a California corporation does not give you the right to work in the United States. USCIS is clear on this point: non-citizens must have appropriate work authorization to work in the United States, and business ownership alone does not constitute work authorization.
You can own 100% of your California corporation, serve as its CEO and sole director, and manage all of its operations—as long as you’re doing that management work from outside the United States. What you cannot do is show up in California on a tourist visa or visa waiver and start working for your own corporation. “Working” includes providing services to the corporation, meeting with clients or vendors, signing contracts, negotiating deals, and any other activity that could be construed as employment or self-employment.
This creates a practical constraint for many foreign founders. If your business model requires you to be physically present in the United States—for example, if you’re running a restaurant or retail store, or if you need to attend regular in-person meetings with clients or investors—you need to secure appropriate work authorization before you can actually operate the business in the United States.

Common Business Visa Categories

For non-resident founders who need U.S. work authorization, the most relevant visa categories are:
E-2 Treaty Investor visa: Available to nationals of countries that have E-2 treaties with the United States. Requires a substantial investment of capital in a U.S. business that you will develop and direct. The investment must be at-risk capital committed to the business, and you must demonstrate that you intend to depart the United States when your E-2 status ends. E-2 visa is not a direct path to permanent residence, but it can be renewed indefinitely as long as the business continues to operate.
L-1A Intracompany Transferee visa: Available to executives and managers being transferred from a foreign company to a U.S. subsidiary, affiliate, or branch. Requires that you’ve worked for the foreign company for at least one year in the three years preceding the transfer, and that the U.S. entity has a qualifying relationship with the foreign company. L-1A can be a path to green card status through employment-based immigration categories.
These visa categories have specific requirements and limitations that go beyond the scope of this business formation guide. The key point is that you need to address work authorization as a separate regulatory track from your corporate formation, and you should consult with an immigration attorney before making assumptions about your ability to work in the United States based solely on owning a U.S. corporation.

Practical Compliance Checklist for Foreign-Owned California Corporations

If you’re a non-U.S. founder incorporating in California, here’s a practical checklist of the key compliance considerations we’ve discussed:
Entity choice: Have you determined whether a California domestic corporation, foreign corporation qualified in California, or California LLC makes the most sense for your specific fact pattern? Remember that S-corporation election is not available for nonresident alien shareholders, so C-corporation is typically the only realistic corporate structure.
Federal tax compliance: Does your ownership structure trigger Form 5472 filing requirements (25% or more foreign ownership)? Have you considered whether your home country has a tax treaty with the United States that could reduce dividend withholding below 30%, and have you prepared the necessary W-8 forms to claim treaty benefits?
California tax and qualification: Does your corporation meet the thresholds for “doing business” in California under Revenue and Taxation Code section 23101? If you’ve formed a foreign corporation, have you determined whether you need to qualify under Corporations Code section 2105? Have you accounted for the $800 annual minimum franchise tax, which is due in your first year?
Beneficial ownership reporting: Is your entity a domestic corporation (currently BOI-exempt under the March 2025 interim final rule) or a foreign reporting company (still required to file BOI reports)? Even if your domestic corporation is BOI-exempt, have you prepared the beneficial ownership information you’ll need to provide to banks under CDD requirements?
Banking and KYC preparation: Do you have CIP-compliant documentation ready (passport, proof of address, EIN, formation documents)? Have you mapped out your beneficial owners (individuals owning 25% or more) and identified your control person for bank certification forms? If you’re using a multi-layer structure with foreign holding companies, can you provide documentation tracing the ownership chain to ultimate beneficial owners?
Work authorization: If any founder plans to work in the United States for the corporation, have you identified an appropriate visa path (E-2, L-1A, or other category) and consulted with an immigration attorney? Are you clear on the distinction between owning the corporation remotely and actually working for it within the United States?
This checklist isn’t comprehensive—your specific circumstances might raise additional issues around state registration, local business licenses, sales tax obligations, or industry-specific regulations. But addressing these core federal tax, California tax, beneficial ownership reporting, banking compliance, and immigration questions up front will help you avoid the most common pitfalls that foreign founders encounter when incorporating in California.

Frequently Asked Questions

Can I open a U.S. bank account for my California corporation without an SSN or ITIN?

Yes, legally you can open a U.S. bank account using foreign identification such as a passport and passport number rather than an SSN or ITIN. The Customer Identification Program regulations at 31 CFR 1020.220 explicitly allow banks to accept alternative forms of government-issued identification for non-U.S. persons. However, individual banks may have internal policies that require U.S. tax identification numbers or U.S. addresses for account signers. If one bank rejects your application based on lack of SSN/ITIN, try other banks that specifically support international clients. Some banks that commonly work with foreign business owners include HSBC, Silicon Valley Bank (now part of First Citizens Bank), and certain credit unions that focus on immigrant communities.

If I form a Delaware corporation instead of a California corporation, can I avoid California franchise tax?

No, not if you’re actually doing business in California. The Franchise Tax Board doesn’t care where your corporation is formed—what matters is whether you’re doing business in California under Revenue and Taxation Code section 23101. If you form a Delaware corporation but your operations, employees, office, or revenue sources are in California, you’re doing business in California and you owe California franchise tax. You’ll also need to register your Delaware corporation as a foreign corporation doing business in California under Corporations Code section 2105, which means filing a Statement of Information and appointing a California registered agent. The only advantage to Delaware incorporation for a California-based business is Delaware’s corporate law framework, which some investors and attorneys prefer for its well-developed case law and business-friendly provisions. But Delaware incorporation doesn’t reduce your California tax obligations if you’re actually operating in California.

Do I need to file a U.S. tax return as an individual if I’m a non-resident shareholder of a California corporation?

Generally no, if you’re merely a shareholder of a C-corporation. The corporation is a separate taxpayer that files its own returns, and your income as a shareholder is limited to dividends (subject to 30% withholding) and capital gains from selling stock (generally not taxed if you’re not engaged in a U.S. trade or business and don’t exceed the 183-day presence test). However, if you’re also an employee of the corporation earning wages, or if you’re providing services to the corporation as an independent contractor, you likely have U.S.-source income that requires you to file Form 1040-NR reporting that income. Additionally, if the corporation is an LLC taxed as a partnership rather than a C-corporation, you’ll have pass-through income that requires Form 1040-NR filing regardless of whether you received distributions. The distinction between C-corporation structure (no individual filing required for passive shareholders) and pass-through structures (individual filing required) is one of the key reasons that C-corporations are generally recommended for non-resident founders.

Can I use a U.S. mailing address service to satisfy banks’ address requirements even though I live abroad?

Using a U.S. mailing address service might help you receive mail and satisfy some administrative requirements, but it generally won’t solve the underlying bank verification problem. Banks are required to verify the identity of beneficial owners under CDD regulations, and that verification includes confirming your actual residential address. If you provide a virtual mailbox address in the United States but you actually live abroad, the bank’s verification procedures may catch the discrepancy—for example, when they request utility bills or other proof of address documentation that you can’t provide for that U.S. address. Some banks explicitly prohibit the use of mail forwarding services or virtual office addresses for CDD purposes. Rather than trying to work around foreign address limitations with mail forwarding services, it’s generally more effective to work with banks that explicitly support foreign business owners and have procedures for verifying foreign residential addresses.

What happens if I incorporate my California corporation and then never actually operate the business or earn any revenue?

You’ll still owe the $800 minimum annual franchise tax to California, even if your corporation never earns a dollar of revenue. California’s franchise tax is an annual tax for the privilege of being a California corporation or doing business in California—it’s not based on profit or revenue. You owe the $800 minimum even if you have zero operations, and you owe it every year until you formally dissolve the corporation by filing a Certificate of Dissolution with the Secretary of State and obtaining tax clearance from the Franchise Tax Board. Many foreign founders incorporate California entities with the best intentions but then don’t actually launch the business, and they end up with multiple years of unpaid $800 franchise taxes plus penalties and interest accumulating. If you incorporate and then decide not to proceed with the business, dissolve the corporation formally to stop the annual tax obligations.

Can I structure my California corporation to avoid dividend withholding by having the corporation loan money to me instead of paying dividends?

This strategy—using shareholder loans to extract funds from the corporation without triggering dividend withholding—is a common tax planning idea, but it’s also closely scrutinized by the IRS. If you’re borrowing money from your corporation, the loan must have genuine debt characteristics: a written promissory note, a reasonable interest rate, a fixed repayment schedule, and actual repayment over time. If the “loan” has no repayment schedule, no interest, and no intention of repayment, the IRS can recharacterize it as a constructive dividend, which triggers the 30% withholding you were trying to avoid plus penalties for failing to withhold properly. Additionally, if the corporation is thinly capitalized—meaning it has very little equity capital relative to debt owed to shareholders—the IRS can recharacterize shareholder loans as equity contributions, which again triggers dividend treatment when the corporation makes payments. Shareholder loans can be a legitimate tax planning tool when structured properly with real debt characteristics, but simply calling a distribution a “loan” without proper documentation and repayment intent won’t protect you from IRS recharacterization.

Do I need a U.S. tax identification number (EIN) for my corporation even if I’m operating entirely from outside the United States?

Yes, absolutely. Every California corporation needs a federal Employer Identification Number (EIN) from the IRS, regardless of where the corporation operates or whether it has any employees. The EIN is required for opening bank accounts, filing tax returns (Form 1120), and reporting to the California Franchise Tax Board. Non-resident founders can apply for an EIN online through the IRS website or by submitting Form SS-4 by mail or fax. The online application is fastest—you’ll receive your EIN immediately upon completion—but it’s only available during certain hours and may have technical issues for foreign applicants. Many foreign founders find it easier to work with a U.S. tax professional or business formation service that can obtain the EIN on the corporation’s behalf. The EIN is different from an individual tax identification number (ITIN)—the corporation needs an EIN, and you as an individual generally don’t need an ITIN unless you have U.S.-source income that requires you to file Form 1040-NR.

If California offers no advantage for my business, why would I incorporate here instead of in a different state?

If you’re actually operating your business in California—meaning your customers are here, your employees are here, or you’re physically located here—then incorporating in a different state doesn’t avoid California tax or regulatory obligations. Under Revenue and Taxation Code section 23101, foreign corporations doing business in California owe California franchise tax just like domestic California corporations. And under Corporations Code section 2105, foreign corporations transacting intrastate business in California must qualify as foreign corporations, which creates additional compliance obligations. So if your business is California-based, you don’t gain anything tax-wise by incorporating in Delaware, Nevada, Wyoming, or any other state—you’ll still owe California taxes and you’ll add the complexity of maintaining dual state compliance. The only situation where incorporating outside California makes sense for a California-based business is when you specifically want Delaware corporate law for its well-developed case law and business-friendly provisions, or when you’re raising institutional venture capital and your investors have a strong preference for Delaware incorporation. But those are governance and investor preference reasons, not tax avoidance reasons.

What if my home country doesn’t have a tax treaty with the United States? Am I stuck with 30% dividend withholding?

Yes, absent a tax treaty, the default federal withholding rate on dividends paid to non-resident aliens and foreign corporations is 30%, and there’s no way to reduce that rate below 30% for countries without U.S. tax treaties. This is one of the significant disadvantages of the C-corporation structure for founders from non-treaty countries. You’re paying 21% federal corporate tax plus California state tax on the corporation’s income, and then another 30% withholding when you distribute profits as dividends. The combined effective rate on distributed profits can exceed 45%, which is higher than the top individual federal tax rate for U.S. residents. The only way to defer that second layer of withholding is to retain earnings in the corporation rather than distributing them, and eventually exit through a stock sale (which generally isn’t subject to U.S. capital gains tax for non-residents who don’t meet the 183-day presence test and aren’t selling USRPHC stock).

If I’m a non-resident founder with no U.S. tax residency, do I need to worry about California’s “worldwide income” taxation that I’ve read about?

California’s worldwide income taxation applies to California residents—individuals who are domiciled in California or who spend more than nine months in California during a taxable year. If you’re a non-resident alien living outside the United States and you’re not spending significant time in California, you’re not a California resident for tax purposes and California cannot tax your worldwide income. California can only tax your California-source income, which includes income from California real estate, income from a California business or trade, and wages earned for services performed in California. As a shareholder of a California corporation, your dividend income is California-source income subject to California withholding if you’re a non-resident, but California doesn’t have jurisdiction to tax your non-California income merely because you own a California corporation. The concern about California’s aggressive residency rules is real, but it applies to individuals who might be classified as California residents—not to non-residents who are clearly living and operating outside California.