You’re a foreign company looking to set up shop in the United States. You have weighed the pros and cons of expanding your business into the United States, confirmed the compatibility of any products or services you offer with the US market, and have a team ready to expand your business in the United States. All you need now is to make sure you have checked all the legal and regulatory boxes. We’ll walk you through those boxes, like choosing a business structure, navigating laws and regulations concerning immigration, employment, and taxes, securing funding and real estate, and more. With smart planning and preparation, your company can thrive on this side of the pond.
Note that this checklist (1) is intended only to highlight key topics that should be considered and is not intended to be an exhaustive list, and (2) some of the items below may not apply to, or the approaches described below may not be appropriate for, your business depending on the applicable facts and circumstances.
Selecting the Right US Business Structure
There are two principal ways to expand your business into the United States: setting up a subsidiary or opening a branch office.
Subsidiary
If you want to establish a long-term presence in the US and have separation between the parent entity’s operations and the subsidiary’s US operations, forming a subsidiary is your best bet.
A subsidiary is a separate legal entity owned by your foreign parent company. The primary benefits of forming a separate legal entity include (1) limiting liability arising through US operations at the US subsidiary level (or at least making it more difficult for liabilities to rise to the parent level), noting that the US can be a litigious market, (2) tax-efficiency, (3) the ease of moving foreign workers to the United States, and (4) the ease of setting up US bank accounts. Other reasons to set up a subsidiary might include facilitating your sales effort as the subsidiary and a domestic address show a commitment to the marketplace, regulatory requirements (certain industries require US operations to be conducted through a US entity), and US business partners' requirements.
Forming a subsidiary requires incorporating or forming a business entity with a state and obtaining an Employer Identification Number (EIN) from the US Internal Revenue Service. More on this below.
Branch Office
A branch office is an extension of your foreign company, not a separate legal entity. It is easier to set up but offers less separation from the foreign company. The branch operates under the foreign parent company’s legal name. All profits and losses flow directly to the foreign parent company.
This may mean that the foreign parent company will owe taxes both in the United States and in the country where the parent company is located. Additionally, having a branch office rather than a corporate subsidiary could result in an onerous “branch profits tax” and also prevent you from availing yourself of an applicable tax treaty between the US and your home jurisdiction. A detailed analysis of the tax consequences of setting up a branch office should be conducted.
Forming a US Subsidiary
1. Determine the Type of Entity
There are several kinds of entities to choose from when forming a subsidiary in the United States, but the corporation is most likely the best choice. A corporation will allow the US subsidiary to be taxed as a US corporation, silo your US taxes from the tax obligations of the parent entity, avoid a “branch profits tax,” and allow you to potentially benefit from an applicable tax treaty. A limited liability company or a partnership, on the other hand, is treated as a “pass-through” entity, and the tax obligations and US filing obligations may be passed on to the parent entity, and you may run into the same tax issues as opening a branch office. You can elect to have a limited liability company or a partnership be taxed as a corporation, but this checklist assumes you will be forming a corporation, as establishing a limited liability company requires an additional step in the process, which in turn raises a potential area for due diligence on the part of a future investor or acquirer.
2. File a Certificate of Incorporation
The first step is to file a certificate of incorporation (also known as articles of incorporation in certain jurisdictions) in the state in which you want to form the subsidiary. This establishes your company as a legal entity in the US. Most companies choose to incorporate in Delaware.
3. Establish Bylaws
Bylaws establish the corporate governance rules that will determine how your US subsidiary will operate. They outline things like shareholder meetings, voting procedures, the roles and responsibilities of directors and officers, and more.
4. Appoint a Board of Directors and Officers
Your board of directors will oversee the operations of the US subsidiary. Typically, the size of the board is set at a number lower than the size of the board of the parent entity, as it is a subsidiary. You’ll also need to appoint a president, secretary, and treasurer to handle the day-to-day management of the subsidiary. Typically, the directors and officers are employees of the parent company.
5. Issue Shares to the Parent Company
Once the subsidiary is formed and the board of directors is appointed, the board of directors will need to approve the issuance of shares of stock to the parent company to establish the parent-subsidiary relationship. The parent company usually owns 100% of the shares, giving it complete control over the subsidiary.
6. Obtain an EIN
An EIN is like a Social Security number for your business. You’ll need an EIN for your subsidiary to open a bank account, file taxes, and more.
7. Qualify as a “Foreign” Corporation
If you will be opening a physical office, employing a significant number of workers, or engaging in meaningful business operations in a certain state, other than the state in which you formed the US subsidiary, the subsidiary also will need to qualify as a “foreign” corporation in that state. The word “foreign” in this context means any entity that is formed in a state other than the state in which the company is transacting business (e.g., a corporation formed in Delaware is a “foreign” corporation in Massachusetts). This typically requires filing an application to register or qualify as a foreign corporation with the relevant state and paying a small registration fee in each relevant state. Qualifying allows your subsidiary to legally do business in that state.
Moving Workers to and Hiring in the US
Establishing a subsidiary in the United States might mean you have a sufficient number of workers residing in the US to justify the creation of a US subsidiary or that you’ll be moving employees to the United States or hiring US employees. Here are a few things to keep in mind when navigating the labor, employment, and immigration laws and regulations that would be involved:
1. Visas
Each worker who is not a US citizen, a US Permanent Resident, or a US worker will need work authorization to work in the United States. Hiring a US immigration lawyer can help you navigate the process of getting employment visas for your workers. Some of the options are:
- H-1B visas for specialized, skilled workers. New H-1B visas for individuals who do not already hold H-1B status are capped at 85,000 visas per year as of the writing of this article.
- L-1 visas for intracompany transfers of executives, managers, or employees with specialized knowledge who have at least one year of experience with the parent company (or affiliate company) outside the US
- E-3 visas for Australian nationals in specialized occupations.
- TN visas for Canadian or Mexican nationals in certain listed occupations.
Should employees wish to permanently remain in the US, you may be able to obtain permanent residence (green cards) for those employees.
2. Payroll and Taxes
As a US employer, you’ll need to withhold taxes from employees’ paychecks. Engaging a payroll management services provider is a good way to ensure that you are calculating deductions and withholdings accurately and paying taxes in a timely manner to avoid penalties.
3. Benefits
To attract top talent, you should offer a competitive benefits package. This typically includes health insurance, retirement plans like 401(k)s, paid time off, life insurance, disability insurance, and other perks. The costs of benefits and payroll administration in the United States can be surprising. Make sure to budget at least 30% on top of base salaries to account for these necessary expenses. The US has a very fluid labor market, and offering competitive packages is necessary to obtain strong talent.
4. Labor and Employment Regulations
As a US employer, you must make sure you understand both federal regulations (e.g., the Fair Labor Standards Act (FLSA) and Americans with Disabilities Act (ADA)) and state regulations, which vary in each state. Work with a labor and employment lawyer to help you understand the relevant federal and state regulations and to prepare appropriate employee handbooks.
In the US, employment documentation tends to be much shorter and more employer-friendly than most jurisdictions. These consist primarily of an offer letter and an assignment of inventions and NDA rather than a comprehensive employment agreement.
Following all laws and regulations around hiring, payroll, taxes, and benefits in the US may seem daunting. However, with thorough research and by enlisting expert help as needed, you can ensure your subsidiary’s employees feel supported while staying compliant. Happy, loyal employees will be key to your success in America!
Understanding US Tax Obligations
In addition to the payroll tax obligations discussed above, US subsidiaries are subject to federal income tax as well as state income taxes where they operate. Depending on the nature of the business, they may also be subject to state sales and use tax, which can apply even if a company has no physical presence in a state, and potentially withholding taxes with respect to the repatriation of funds back to the foreign parent.
The US subsidiary must obtain an EIN (as mentioned above), register with the tax authorities in the relevant states, file annual federal and state tax returns, and pay estimated quarterly taxes. Hiring a US-based tax advisor or accountant is highly recommended to help you understand your tax obligations and file all necessary returns, including certain information returns. They can also help structure your subsidiary in the most tax-efficient way possible.
Other Considerations
1. Opening a US Business Bank Account
Opening a bank account in the US for your new subsidiary is a crucial step. You’ll want to find a bank that specifically caters to businesses and can handle international funds. Shop around at a few different banks to compare fees and services. Some of the biggest are Bank of America, Chase, Citibank, Citizens, and Wells Fargo.
2. Patents in the US
If your company has registered patents in other jurisdictions but has not applied for patent protection with the US Patent and Trademark Office (USPTO), that should be high on the list of action items when expanding operations in the US An experienced US patent prosecutor should be retained to navigate you through this process.
3. Trademarks / Service marks in the US
Your company’s trade name, logo, or any other trademarks or service marks you want to use should be registered with the USPTO. Trademarks oftentimes provide the best return on investment: it is possible that only a relatively low cost is incurred, and it avoids a company having to change the name of the company or its offering in the future after value has been created in that name or mark.
4. Product Safety and Compliance
If the US subsidiary will manufacture or distribute products in the United States, those products must meet safety standards. Requirements vary based on the type of product but may include testing, certification, labeling, and recall procedures.
5. US Office and Alternatives
When first entering the US market, you can opt to start with a virtual office or coworking space instead of a traditional long-term office lease. This allows you to establish a US presence at a lower cost while you build up your operations. You can always sign an office lease down the road once you have an established customer base.
Conclusion
So, there you have it, an essential checklist to guide your company’s initial expansion into the US market. With the right research, planning, and expert help, your subsidiary can thrive on American soil.
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