Expanding your business to the US comes with many benefits and challenges, and while some aspects are universal, many are specific to location and can be costly if they aren’t carefully navigated.
There are several reasons why setting up a subsidiary in the US might be the best choice for your company. Beyond expanding your brand recognition–which is undeniably important–it gives you access to the largest economy in the world and all the potential revenue gained through that access. Additionally, if you are planning on hiring employees within the States, importing goods, or contracting with US companies, a subsidiary creates the necessary infrastructure to manage an expanding operation and is also required to be compliant with tax laws.
Steps to Create a Subsidiary in the United States
1. Choose an entity type: Subsidiaries are usually either an LLC or a C-Corp. Both options come with legal statuses that establish governance and ownership structure. An LLC is the least complex business structure and comes with the benefits of pass-through taxes, legal protection for your personal assets, and it provides you with protection from liability the business may bear along the way.
While these are all great benefits, an LLC does have its pitfalls. This structure can limit growth as venture investors don’t tend to invest in these entities. Earnings under this structure may be subject to self-employment tax, and if you convert an existing business to an LLC you may incur additional taxation.
A C-Corp usually offers improved growth potential. Investors can be enticed through the sale of stock and there is no limit to the number of shareholders allowed. A couple of setbacks associated with going the route of setting up C-Corp include that the upfront costs are higher, this structure experiences more government oversight, and you have to pay corporate taxes on profits.
2. Choose a state of incorporation: There are 50 states, each with its own set of laws. It’s important to note that your business operation location does not need to be the same as your state of incorporation.
For example, most new companies created in the US incorporate in Delaware. In Delaware, companies don’t need a physical address and is often called a tax haven, as it doesn’t collect corporate taxes from Delaware corporations that don’t do business within the state. Wherever you are physically located you will have to register in that state at least and bear the costs of maintaining that registration. There are many options –50 to be exact!– to choose from, each with its own set of advantages and disadvantages.
3. Set up a US bank account: In order to do business in the United States, you must first set up a US bank account. In fact, foreign businesses will find it next to impossible to open US bank accounts and online accounts with Amazon, Stripe, or other online businesses, courtesy of the Patriot Act laws introduced post 9/11. By establishing a US subsidiary, foreign businesses find setting up US bank accounts easier, though there are still factors to consider when choosing a bank to work with.
Take your time and do your research. Choose a bank that fits your business’s unique needs. Your account will allow you to pay your employees, trade with US customers, buy supplies efficiently, and, in the future, raise funds or venture capital. Therefore, it’s important that the bank you settle on is familiar with your specific market and can meet your unique business need. Consider your bank a growth partner, not just a money funnel, since your business will not be successful without a solid banking foundation.
4. Hire an accountant: In the US, accounting and tax laws are complicated, easily misinterpreted and always changing (like the 2017 Tax Cuts and Jobs Act). An accountant, ideally with expertise in your industry, can help make sure that you’re set up for success.
At tempCFO, we dedicate a team that specializes in supporting startups and companies in the early growth stages to established, high-growth organizations. We believe that your accountant’s responsibility isn’t just to ensure you maintain impeccable accounting records, but also to maximize your tax savings and to file your federal and state tax returns on time. Missing a filing deadline comes with steep penalties that can cost your business upwards of $25,000.
5. Find an alternative to banks for overseas transfers: You’ll most likely be transferring money back and forth overseas. While it may be your first instinct to do all of your transfer transactions through your bank, this type of service is typically more expensive through your bank than a transfer service such as TransferWise or Payoneer. Faster than a bank wire, these services offer lower exchange rates and secure money transfers. Your business can pay or get paid quickly through easy-to-use online portals connected to your bank accounts.
While these steps will streamline setting up a subsidiary in the US, we’ve barely scratched the surface of everything that goes into the process from beginning to end. Hiring an expert financial partner, like tempCFO, to guide you through this pivotal journey, will help you make key decisions along the way with confidence.
Interested in setting up a US subsidiary, but unsure where to start in the process? tempCFO is here to help! Schedule some time today to discuss your options with one of our financial experts.