With well over 300 million potential consumers and numerous global companies, it is no wonder that companies operating outside the US are eager to enter US markets. Following are five good reasons to make the creation of a US subsidiary your company’s first step.
One of the biggest reasons to form a US subsidiary is to ensure limited liability for employees and executives. In general, when a US company takes on debts, its creditors only have access to company assets to cover those debts. The individual assets of employees or executives cannot be reached by company creditors. Because US companies may be unwilling to enter into contracts with foreign entities, absent a US entity, your corporate executives may be forced to sign contracts (such as office leases) in their individual capacity. What that means, is that should the company be unable to pay its bills, creditors could attempt to recover from the personal assets of the individual who signed the agreement.
The United States currently has the dubious distinction of having the highest tax rate of all major economies and the third highest general top marginal corporate income tax rate in the world (exceeded only by Chad and the United Arab Emirates). For a US subsidiary of a foreign parent, proper tax planning could result in some portion of the company’s revenues being allocated to the home country. Depending on factors that will include the tax rate of the home country and the amount of revenue generated by the business, this could result in dramatic savings.
Resolution of Shareholder Relationships
In some instances, the entity that will be doing the expansion in the U.S. may be partially owned by your company, and partially owned by a third party. In other instances, it may be desirable for the internal governance and senior management of the U.S. subsidiary, such as its board of directors and officers, to resemble those of the parent company. A key part of corporate formation is the creation of an agreement among the owners (a shareholders agreement in the case of a corporation). This agreement clarifies how conflicts will be resolved. It is always best to make these kinds of decisions before a dispute arises. When businesses have a clear roadmap toward conflict resolution, it becomes less likely that disagreements and litigation will destroy an otherwise successful business.
Part of creating a US subsidiary is clearing the company name for corporate law and trademark purposes. If a company begins operations without taking this critical step, it runs the risk of investing in the goodwill of a name only to find out (usually through an angry letter from the rightful owner of the name in the US) that they may no longer use it. This potential cost of having to either license your company’s name from the rightful owner or start your marketing efforts over again from scratch is significant.
If you want your company to open a bank account in the United States, a U.S. Tax ID (a number issued by the U.S. tax authority, the IRS, to business entities) may be needed. Without this number, along with other U.S. corporate documentation, opening a business account in the U.S. will be a significant challenge. If your company intends to seek funding the US Investors will also insist on corporate formalities as well.
Opportunity certainly awaits for foreign businesses ready to enter US markets. We have found that our clients who initially focus on corporate structure have smoother sailing as they grow and expand in the United States.
We recently conducted a webinar for WEConnect International on this topic. You can listen to the seminar and view our presentation below