Whether you are a foreign national investing in a US franchise or a US franchisor expanding internationally, entity formation is one of the first and most consequential legal steps in the process. The entity structure determines tax treatment, liability protection, ownership disclosure requirements, visa eligibility, and compliance obligations. Getting it wrong is expensive to fix: transferring a franchise agreement from one entity to another requires franchisor approval and can create delays, fees, and complications. This guide covers entity options for foreign nationals investing in US franchises, US reporting requirements for foreign-owned entities, and entity structure considerations for US franchisors expanding internationally.

At Lopes Law LLC, we assist international investors with US entity formation as part of the franchise investment process, and we advise US franchisors on international entity structure for cross-border expansion. Our services are available in English, Portuguese, and Spanish.

What Entity Options Do Foreign Nationals Have for US Franchise Investment?

Foreign nationals investing in US franchises must form a US legal entity in most cases: franchisors require franchisees to be legal entities (not individuals), and the entity structure affects visa eligibility, tax obligations, and liability protection. The right choice depends on the investor’s nationality, visa status, home country, and tax situation.

US LLC: The Most Common Choice

The US Limited Liability Company (LLC) is the most common entity choice for individual foreign franchise investors. The LLC provides: limited liability protection (the investor’s personal assets are shielded from the franchise business’s liabilities), flexible management structure (member-managed or manager-managed), and pass-through taxation (the LLC itself does not pay US federal income tax; the income passes through to the owner and is taxed at the owner level). For E-2 visa investors, the LLC must be structured so that the investor owns at least 50% and exercises operational control.

US C-Corporation

A US C-Corporation is used less commonly for individual franchise investments, but may be relevant when: the foreign investor has a foreign holding company that will own the US entity (C-Corps work better in foreign holding company structures), the investor is pursuing an EB-5 immigrant investor visa (which has specific entity requirements), or treaty benefits between the investor’s home country and the US make the C-Corp structure more tax-efficient. C-Corporations are subject to double taxation at the corporate and shareholder level, which is generally disadvantageous compared to the LLC for small business operations.

US S-Corporation: Not Available to Foreign Nationals

Foreign nationals who are non-resident aliens cannot be shareholders of US S-Corporations. S-Corps are restricted to US citizen and resident alien shareholders. This is a firm rule: any foreign national who owns an S-Corp share as a non-resident alien causes the S-Corp election to terminate, converting the entity to a C-Corp retroactively. At Lopes Law LLC, we advise international clients to confirm their visa and residency status before considering any S-Corp structure.

LLC Owned by a Foreign Holding Company

Some international investors prefer to own their US franchise LLC through a foreign holding company rather than directly. This structure can offer advantages for consolidation of international investments, estate planning, and tax planning under applicable treaties. However, it adds complexity: the franchisor must approve the ownership structure, the foreign holding company creates additional US tax reporting obligations (Form 5472 is required), and bank account opening can be more difficult with a foreign entity in the ownership chain.

What Are the US Reporting Requirements for Foreign-Owned Entities?

Foreign-owned US entities face reporting requirements that do not apply to US-owned entities. Missing these filings can result in penalties that are disproportionately large relative to the size of the business. International investors must understand these requirements before the entity is formed.

IRS Form 5472: The $25,000 Penalty Trap

IRS Form 5472 must be filed by foreign-owned single-member LLCs (and by US corporations with 25% or greater foreign ownership) to report “reportable transactions” with foreign owners. A reportable transaction is broadly defined and includes any transfer of money or property between the LLC and the foreign owner: capital contributions, loans, loan repayments, and distributions all qualify. The penalty for failing to file Form 5472 is $25,000 per year. This filing is commonly missed by foreign investors who form their LLC without comprehensive US tax advice.

At Lopes Law LLC, we advise international franchise investors on their Form 5472 filing obligations as part of the entity formation process and refer them to qualified US tax advisors to ensure ongoing compliance.

FinCEN BOI Report: Beneficial Ownership Disclosure

The FinCEN Beneficial Ownership Information (BOI) report is required for most US legal entities formed on or after January 1, 2024, and for pre-2024 entities by applicable transition deadlines. The BOI report discloses the identity of beneficial owners: persons who own 25% or more of the entity or who exercise substantial control over the entity. For foreign-owned franchise LLCs, the foreign national owner must be disclosed in the BOI report, including passport information and country of citizenship. Entities formed in 2024 or later must file within 90 days of formation. Penalties for non-compliance are significant.

FBAR: Foreign Bank Account Reporting

If the foreign national franchise investor maintains bank accounts in their home country, those accounts may require annual FBAR (Foreign Bank Account Report) filing with FinCEN if the aggregate balance exceeds $10,000 at any point during the year. FBAR applies to US persons, including green card holders and persons who meet the substantial presence test for tax residency. Foreign nationals on E-2 or other nonimmigrant visas who are US tax residents may have FBAR obligations for their home country accounts. This is a matter for a US tax advisor, but franchise investors should be aware of the issue before establishing US tax residency.

ITIN: Individual Taxpayer Identification Number

Foreign national owners of US franchise entities who do not have a US Social Security Number (SSN) need an Individual Taxpayer Identification Number (ITIN) for US tax filing purposes. The ITIN application process (IRS Form W-7) typically takes 7-11 weeks for processing. Planning for the ITIN application well in advance of the expected franchise opening date is important: banks often require an EIN (Employer Identification Number for the entity) and the owner’s ITIN or SSN to open a business account.

How Should US Franchisors Structure Their International Entities?

US franchisors expanding internationally face a different set of entity formation questions. The goal is to establish a legal presence in the target country that allows the franchise system to operate while minimizing tax exposure, protecting intellectual property, and maintaining operational control.

Foreign Subsidiary Formation

The most common approach for US franchisors with significant international operations is to establish a foreign subsidiary in the target country. This subsidiary enters into the franchise relationship with local franchisees directly, employs local staff, and holds local regulatory licenses. The foreign subsidiary is a separate legal entity from the US parent, which provides some insulation of US assets from local liabilities. Common foreign subsidiary types: Private Limited Company (Lda. in Portugal/Brazil; S. de R.L. de C.V. in Mexico; SAS in Colombia).

Intellectual Property Holding Structure

Trademark and franchise system intellectual property may be held in the US parent company or in a separate IP holding entity. The choice of IP holding jurisdiction affects the withholding tax on royalties paid from foreign subsidiaries to the IP holder. Some US franchisors use a treaty-advantaged intermediate holding company (for example, in the Netherlands or Luxembourg for European franchising) to reduce withholding taxes on royalty flows from European subsidiaries. This is a sophisticated tax planning decision that requires specialized international tax advice.

Permanent Establishment Risk

If a US franchisor has employees or significant operations in a foreign country, it may create a “permanent establishment” (PE) that is taxable in that country under local tax law and applicable tax treaties. Common PE triggers in the franchise context include: employees based in the foreign country, an office or place of business in the foreign country, or authority to conclude contracts on behalf of the US franchisor. A PE determination can create retroactive tax liability for years of operations in the foreign country. International franchisors should conduct a PE risk analysis before establishing any in-country operations.

What Entity Formation Steps Are Required for a US Franchise Investment?

The entity formation process for a foreign national investing in a US franchise involves several sequential steps, each of which takes time. Planning well in advance of the target franchise opening date is essential.

Step 1: Choose the State of Formation

Delaware and Wyoming are the most common choices for foreign investors forming US LLCs for franchise investment. Delaware offers a sophisticated business law framework and a specialized Court of Chancery that hears business disputes efficiently. Wyoming offers lower annual fees, strong privacy protections (Wyoming LLC members are not disclosed in public filings), and no state income tax for LLCs that do not operate in Wyoming. The LLC will also need to register as a foreign LLC in the state where the franchise will operate, which involves an additional registration fee and registered agent requirement.

Step 2: Register with the Secretary of State

LLC formation requires filing Articles of Organization (or Certificate of Formation in some states) with the Secretary of State of the formation state, paying the state filing fee (typically $50-$200), and designating a registered agent with a physical address in the formation state. Formation typically takes 1-5 business days for standard processing, or can often be expedited for an additional fee.

Step 3: Obtain an EIN

The IRS issues an Employer Identification Number (EIN) for the entity, which is used for US tax filings, bank account opening, and payroll purposes. Foreign nationals without a US SSN can apply for an EIN by filing IRS Form SS-4 by fax or mail (the online application requires a US SSN or ITIN). EIN issuance typically takes 4-6 weeks for foreign applicants using the fax method.

Step 4: File the FinCEN BOI Report

For entities formed on or after January 1, 2024, the FinCEN BOI report must be filed within 90 days of formation. The report requires disclosure of the beneficial owner’s full legal name, date of birth, address, and identification document (passport or US driver’s license). Filing is done through the FinCEN online portal at fincen.gov. At Lopes Law LLC, we advise clients on the BOI report as part of the entity formation process.

Step 5: Open a US Business Bank Account

A US business bank account is required before the franchise can open. Some banks require in-person verification for foreign-owned entities. Planning ahead for the bank account opening is important: it can take 4-6 weeks from the time of application to account opening, and the franchisor may require proof of a funded bank account before approving the franchise location.

A Real Scenario: The Wrong State, the Wrong Entity

A Portuguese national invested in a US retail franchise and, acting on advice from a non-attorney, formed the LLC in Florida because the franchise location was there. Six months after the franchise agreement was signed, his immigration attorney advised that a Wyoming LLC would have been more advantageous for the E-2 visa application: Wyoming’s non-disclosure of member information in public records is better for privacy, and Wyoming’s entity law has some advantages for E-2 investors. Additionally, because the investor had formed the LLC without understanding the Form 5472 requirement, he had missed the first annual filing, triggering a potential $25,000 IRS penalty for the first year.

Reforming the entity required transferring the franchise agreement, which requires franchisor approval and can involve a transfer fee. The Form 5472 penalty required a reasonable cause abatement request filed with the IRS. At Lopes Law LLC, we advise international franchise investors on the right entity formation approach from the beginning, so that these corrective steps are not necessary. The total cost of the corrections exceeded $8,000 in legal fees and IRS penalty abatement work, all of which would have been avoided with proper advice at the formation stage.

Entity formation counsel at Lopes Law LLC starts at $1,500 and includes state of formation selection, Articles of Organization filing, operating agreement drafting, EIN application, FinCEN BOI report guidance, and coordination with the investor’s immigration and tax advisors. For investors purchasing multiple franchise units, we structure the holding company and operating company entities as a unified engagement to ensure consistency across all units.

For investors interested in the E-2 visa franchise investment process specifically, see our guide on International Franchise Investment: A Complete Legal Guide. For EB-5 investors considering franchise investments, see our post on EB-5 Visa and Franchise Investment. For guidance on the FDD review process before committing to a franchise, see What Does an FDD Review Include?

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