Establishing an international presence is an essential step for many companies as it can open doors to new markets, investors and local know-how. Expansion into a global market sends a message that your company is growing in scope and relevance. Whether setting up an office in the U.S. is your first foray into international expansion or a single aspect of your globalization plan, the complexities of U.S. business regulations require careful planning and meticulous attention to detail. This blog deals with some of the questions you need to take into consideration when deciding to expand and set up a division in the U.S.
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ESTABLISHING PRESENCE IN THE U.S.
- When does it make sense to set up a subsidiary or affiliated company in the U.S.?
For technology companies based outside of the United States, it usually makes sense to incorporate a U.S. legal entity before your business activity in the U.S. moves beyond isolated or occasional contact. Often the main driver of decision making on this question is tax planning, so consulting a U.S. and home-country tax advisor earlier on is key to making this decision. If the company is planning to open an office in the U.S. or to hire U.S. employees, it is almost always advantageous to do through a U.S. legal entity.
- What form of entity should be created and how much does it cost?
Legal entities in the United States can take many forms, including partnerships, limited liability companies (LLCs), and corporations. For most overseas companies establishing U.S. presence, a corporation is the legal entity of choice. Incorporating a wholly-owned subsidiary is not expensive, typically around US $2,000-$3,000 for legal fees and filing costs assuming a typical structure. In which state should we incorporate our U.S. entity? U.S. corporations can be incorporated in one of the 50 states or District of Columbia. Once incorporated in one state, the corporation can do business in any other U.S. state by registering and qualifying to do business as a “foreign corporation” in that state. If the U.S. entity will be primarily based in one state (such as California), the simplest approach is usually to incorporate in that state. However, if the U.S. corporation will become a holding company or plans to take on outside investment, it can be advantageous to incorporate in a state like Delaware, which is the standard place of incorporation for venture capital or private equity backed startups in the U.S.
- How can stock options or other equity in a Swedish entity be offered to U.S. employees?
Technology companies headquartered outside the United States often want to grant equity to their U.S. employees and other service providers. This is certainly possible, but it can create significant tax and securities law problems if the home country equity agreements are not modified to conform to U.S. tax and securities laws and regulations. With help from U.S. legal counsel and tax advisors, a Swedish or other overseas employee equity plan usually can be modified to meet U.S. requirements, or a U.S. “sub-plan” can be established for U.S. employees.
- What taxes will the U.S. entity need to pay and how should those be handled?
A U.S. entity or other entity engaged in a U.S. trade or business should expect to pay on a number of different levels. The U.S. federal government, as well as most U.S. states, impose taxes on U.S. business activity. The taxes can include corporate income tax, sales and use taxes, employment taxes, and (potentially) U.S. customs duties. Tax planning is a big part of creating a multinational business structure, so a tax advisor should always be consulted as part of the process of establishing a presence in the U.S.
- What team of local advisors should be engaged to help the U.S. entity?
Legal and tax advisors should be consulted before establishing a U.S. presence. Corporate and transactional lawyers at a law firm can take the lead on legal matters. Tax structuring advice is typically provided by accounting firms that specialize in international tax planning. In addition to tax structuring, any U.S. corporation will need a local accounting firm to help prepare and file the various tax returns that are required at the U.S. federal and state level. Rounding out the team of advisors with a good corporate banker, liability insurance broker, and payroll/employee benefits provider is advisable as your company gets started in the U.S.
- What is the best way to hire people to start our U.S. operation?
If your company (or its U.S. affiliated company) will be employing people in the U.S., the company will be required to comply with numerous U.S. employment laws, payroll and health insurance benefits requirements, and tax withholding. Keep in mind that for the most part U.S. employees depend on health and welfare insurance plans sponsored by their employers, which adds to the responsibility. Many of our overseas clients find it convenient to contract with a Professional Employer Organization (PEO) such as TriNet or ADP to help them navigate U.S. laws and onboard employees, at least to start. HR management software providers such as Zenefits also can help employers navigate all of the requirements.
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Take-aways for Establishing a presence in the United States:
Incorporate a U.S. legal entity before your business activity in the U.S. moves beyond isolated or occasional contact.
Consult with a tax lawyer to find out what corporate entity would be best for you.
Consult with a tax lawyer if you want to set up a stock option plan for the US employees.
Consult with a tax lawyer to set up tax planning and tax structure advise as taxes are paid in number of levels.
Connect with a corporate and transaction lawyer at a law firm to take the lead on legal matters.
Contract with a Professional Employer Organization (PEO) to navigate U.S. laws and on board employees, at least to start.
And finally, consult with a tax lawyer. Did we already mention that?
