Setting up a U.S. Subsidiary of a Foreign Company

The U.S. economy is the largest in the world by a wide margin. In fact, it’s roughly equal to the next three largest economies combined. So it’s easy to see why so many foreign companies want to do business stateside.

But while the rewards of setting up shop in the States are large, so are the penalties for noncompliance with federal tax codes and other regulations. So in this blog, I’ll offer some basic advice for gaining a foothold in the U.S. market while avoiding potential pitfalls. Be advised, though, that expert legal, accounting, and bookkeeping services are virtually a must before proceeding with this critical business decision.

Should I open a U.S. branch or a U.S. subsidiary?
This is not just a semantic distinction. The liabilities and financial ramifications of this choice are enormous. In nearly every instance, it’s better to open an incorporated subsidiary than a branch office. Unlike a branch office, which exposes the company’s entire worldwide earnings to U.S. tax law, an incorporated subsidiary limits exposure to the company’s U.S. earnings.

Sold — I’ll go with a subsidiary. Now, should I incorporate my U.S. subsidiary as an LLC, a C-corp or an S-corp?
Actually, the choice is limited to LLC or C-corp. Foreign companies can’t choose S-corp status. In general, most foreign subsidiaries choose LLC for the same reason a majority of U.S. firms do: It’s relatively easy to set up, and it accomplishes the primary goal of shielding the company’s individual stakeholders from personal exposure (e.g. losing one’s home) in the event of legal issues related to the company.

I’m not sure where in the United States to put the subsidiary. Are the laws the same in every state?
No. There are 50 states and just as many sets of laws, in addition to federal laws. (And while we’re at it, don’t forget International Financial Reporting Standards.)

If you have a connection to a particular state, whether it’s a prospective manufacturing facility or a concentrated market for your particular product or service, it’s probably best to base your U.S. subsidiary there. But if it really doesn’t matter, most signs point to Delaware, Nevada or Wyoming because of their business-friendly laws. Delaware, for example, doesn’t require a foreign subsidiary to have a physical address or bank account in the state; other states do.

If, on the other hand, your goal is to make sales in the United States, as opposed to merely having a presence, then you’ll need both a physical address and a bank account in order to set up a U.S. merchant account. That will enable you to process credit card orders, for example.

Yes, I’m going to need a U.S. bank account. How do I get one?
It’s tricky, because of requirements in the USA Patriot Act established in the wake of the 9/11 attacks. Simply put, the act requires that banks do a background check on the individual starting the account, which includes verifying two forms of photo ID in person. So you’ll probably have to come to the United States to open a subsidiary.

I guess I can handle that. So is that all I need to know?
Actually, we’ve barely scratched the surface. We haven’t even discussed things like an employer identification number, the difference between a business address and a mailing address (and why you’ll need each) or why you ought to consider using a registered agent.

But we hope by now that we’ve convinced you that you’ll need expert legal, accounting, bookkeeping and back-office support before embarking on this important journey.