Due to increasing tariffs on foreign nations, many companies are considering expanding their operations into the US. Having a U.S. based company as a source of operations comes with many advantages, including, but not limited to, avoiding tariffs. By having operations in the United States, businesses have better access to funding and the consumer market in the United States, some of which may only be tapped if you are operated within the country. However, expanding into the United States may not be right for every company. It is essential for businesses looking to expand operations to complete the appropriate cost-benefit analysis and market research, to make a well-informed decision. If expanding is the right choice for the company, they should consider the industry and how best to navigate the U.S. markets, beginning with the following factors:
- Expanding through setting up a subsidiary, domesticating a foreign entity, purchasing a franchise, starting a joint venture, or merging with an existing entity;
- Insurance:
- Employment laws;
- Taxation;
- Privacy laws;
- Laws specific to your industry;
- Joining local business organizations.
Forming an Entity
The first step when expanding to the United States is deciding what type of corporate entity is best for the business. Depending on the industry, there are different things a company will need, and different regulations they must comply with.
In the U.S., you are considered ‘domestic’ in the state of formation and ‘foreign’ in all other states. Therefore, the state in which a business entity is created is very important. Many companies used to prefer forming in Delaware, irrespective of the State of operations. However, that is slowly fading out in favor of other options. It’s more popular for venture capitalists who are looking for funding but if you want to start operations in the US, I highly recommend start operations in the State where head office will be located. This is typically where they have the market for their product or service. By forming in the State they primarily conduct business in, companies avoid the need to register twice; one in State of preference and another time as foreign entity in the State of operation.
However, there are other factors to consider, such as which states are more business friendly. Some states, like Texas, have more pro-business laws and taxation requirements, and therefore offer more advantages for companies.
When expanding into the U.S., companies can decide whether a limited liability company (LLC) or a corporation is the right structure for their needs. Both options have unique strengths, and companies should dissect internal factors to decide which structure is best for them.
Merging with an Existing Entity
If a company is looking to venture into the U.S. market, but does not want to form a new entity in the United States, they may do so by acquiring an existing business. and merging with an entity that already exists in the United States. Once the combined business is formed, they can secure an Employer identification number (EIN) with IRS. If the company is opening a branch in the US, the foreign company can get a taxpayer identification number (TIN).
Insurance
Depending on the industry and exposure, companies must consider how much insurance is needed. This may include coverage for errors and omissions (E&O), workers’ compensation (most states require you to have but Texas is one of the States that does not require), and general liability insurance any states will require insurance to cover certain potential lawsuits; it is essential for a business to meet their state’s individual insurance requirements.
Employment laws
There are federal employment laws applicable to all businesses operating in the United States. Additionally, businesses must follow all applicable state and local laws. If a business is considering hiring a remote employee, they must follow the laws pertaining to the employee’s home state. You must be familiar with federal, state and local laws here and at least have a cursory understanding of the laws of the state where you will have your operations and where you will have employees as you need to comply with federal, state, and local laws where you are and where your employees will be primarily working from as laws are very different. For instance, you can have a non-compete provision in Texas but not In California. You may be based in Texas but if your employee is working remotely from California you must be compliant with California laws.
Taxation
Taxation of a domestic or foreign entity typically depends on the type of entity structure and state of formation. Businesses should retain a CPA for filing taxes, annual reports, franchise taxes, personal property taxes, and rendition reports.
Privacy laws
Unlike the European GDPR policy, in the United States companies must ensure compliance with regulations and laws outlined by each state. For example, California has one of the strongest privacy laws in the nation, therefore companies that are compliant with California laws will likely be compliant with the requirements outlined by other states and at the federal level. Companies should also be aware of the Corporate Transparency Act (CTA), which requires disclosure of certain entities' beneficial ownership information.
Laws specific to your industry
Some industries are more regulated than others. Before beginning operations in the United States, businesses should make sure they meet any licensing requirements and have any applicable permits. Each state or local authority should have a division for licenses and permits, that can help guide businesses.
Office of Foreign Assets Control (OFAC) and Committee on Foreign Investment in the United States (CFIUS)
Since certain foreign investment is regulated, business should consult OFAC and CFIUS to confirm requirements, especially in industries of strategic importance and investment from certain nations and individuals.
Conclusion
Expanding operations to the United States can be tricky for a business, there are many laws, regulations, and compliance requirements a company must follow to legally do business in the country. For assistance in expanding to the United States, questions about legal compliance, or additional information, please contact the trusted Chugh, LLP corporate accountants and attorneys.
