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Entering the US market can often be a big step towards executing on the global growth strategy of a non-US company.
US expansion often comes with great benefits. A highly developed infrastructure and distribution channels, a large consumer base, the US is relatively stable with a well-defined legal framework to operate within and a highly skilled labor force to draw upon, to name a few.
However, expanding into the US for the first time is not without some risk. Identifying the real risks and coming up with a flexible game plan by using the right advisors, business contacts, chambers of commerce (like the EACC for example), and other organizations on the ground who can bring available resources to the table at the front end of such an expansion can make the difference between launching a revenue-generating success, and experiencing bumps in the road which can hurt your business.
There is no one size fits all approach to properly plan for launching your business in the US. But management can plan ahead for a US launch by asking some fundamental questions designed to identify issues that are regularly encountered by businesses entering the US for the first time. A little planning up front, and a practical game plan, can help you anticipate bumps in the road, and provide flexibility to address unforeseen issues when they arise.
Does my company’s product or service fulfill an identified need for U.S. consumers, and what channels do we have available to us to exploit that market?
Sometimes a product or a service sells itself. More often, a company needs to focus on local trends and distribution channels, particular segments of the market, or align with a U.S.-based business through a joint venture or acquisition in order to exploit existing sales and commercial channels. A company entering new territory should keep in mind that yesterday’s competitors can often be transformed into tomorrow’s joint ventures when it comes to taking advantage of customer bases, distribution channels and other existing infrastructure.
What legal form will my business take in the U.S.?
Whether a non-U.S. company operates a branch in the U.S., establishes a subsidiary, or enters into a joint venture with an already existing U.S.-operating business, there are tax, transfer pricing, legal, regulatory, cyber and other requirements and consequences that must be vetted and considered. The desire to quickly establish a legal entity for little cost must be offset by thoughtful consideration of these issues, and a specific business’ goals and objectives. These considerations can include the likelihood of bringing in investors, plans for an IPO and other exit plans down the road.
Operating a branch office in the US without forming a legal entity is as if the foreign parent corporation is operating in the US, and can expose the foreign parent corporation to tax, liability, and other reporting and regulatory requirements. Forming some sort of US subsidiary can be advantageous for managing containing risk within the US entity.
A subsidiary can be formed as any type of separate legal entity, but some of the most common forms are corporations and limited liability companies (LLCs).
S corporations are “pass-through” tax entities, but an unlikely candidate for a non-US company expanding into the US, as they do not permit non-resident aliens as shareholders. The more likely corporate entity to be used is known as a C corporation, which limits liability as long as corporate formalities are respected, and are taxed as separate legal entities than their parent companies and shareholders. A C corporation is subject to “double taxation” paying tax on their profits first at the entity level and then owners pay taxes at the on profits received as dividends, resulting in the double tax.
LLCs are a relatively new form of doing business in the US, which protect business owners from liability, much like corporations, but are pass-through entities for tax purposes. With an LLC, income/loss would be reported on the owners’ tax returns, skipping tax at the entity level. While C corporations have a formal management structure, LLCs do not require the same formal management structure.
Keep in mind when entering into a joint venture, your joint venture partners may have a view as to the type of entity they prefer to do business with.
Having attorneys and advisors in place to analyze these issues up-front with practical and comparative thoughts on approach, will be exponentially more valuable (and in the long run, more cost-effective) than bringing them in later to fix a poorly planned U.S. launch. There are also many tax planning techniques and future elections to be made as the business grows and expands in the US that if anticipated can create opportunities, rather than unforeseen headaches.
Where should we be conducting business?
When launching a US business, foreign companies need to keep in mind there are often different Federal, State and local legal and regulatory regimes that must be complied with, independent of each other. While these requirements can seem complex at first, they can also provide strategic opportunities for new businesses.
For example, in the US, taxes are imposed on a federal, State and sometimes local level. This may provide an opportunity for a business to not only compare and contrast the tax burden associated with doing business in a particular jurisdiction, but also provide an opportunity to take advantage of and even negotiate tax incentives in different locations competing for businesses and the jobs they create.
Some states and localities have offices of economic development and other programs in place to encourage the formation of businesses within their borders. Often, their maybe opportunities to discuss your company’s operational and other goals and needs in a particular state with these governmental and quasi-governmental agencies to secure assistance with the building of roads and infrastructure, reductions in tax, and access to government resources to help with the establishment of your business.
An understanding of the pros and cons of establishing physical presence in particular cities or states can be accompanied by various benefits and burdens. Often, understanding the availability of free trade zones, state and local tax incentives available for new businesses, proximity to suppliers, availability of a qualified workforce, trends in real estate for both the business site as well as proximity to affordable housing for employees are all important considerations when launching your US business.
What are the real tax, legal, federal, and state regulatory and other exposures to my business (both within the U.S. and internationally)?
Engaging the right advisors to provide you valuable insights on the real risks confronting the establishment of your business in the U.S. is critical. It is crucial to identify experienced and seasoned advisors who can differentiate between the concrete risks that can be anticipated, dealt with and planned around through the implementation of practical strategies addressing these risks. Conducting business in a new jurisdiction can always result in surprises, and your team of advisors on the ground should be able to minimize the likelihood of these surprises with thoughtful forward-thinking planning, and be poised to address them with practical responses. It is also key that your advisors in the US do not operate in a vacuum, and have proper visibility and channels of communication open with advisors and management in other jurisdictions to ensure a highly integrated coordinated global approach.
Who are my strategic partners, and do I know them well enough to be in business with them?
Having a local team on the ground, well versed at evaluating the local nuances of US businesses, that can perform financial, operational, and tax due diligence as well as provide objective valuation analysis of joint ventures, acquisition targets, and other strategic partners can be key in ensuring your company’s growth, and eliminating surprises about the state of affairs of those you will be in business with far from home.
What should my global IP footprint look like?
An important issue for global companies is where they intend to hold intellectual property and other intangible assets (IP) created in the US. Thoughtful planning of a company’s global IP footprint up front, before your US enterprise grows, can generate valuable opportunities down the road for your global organization.
The U.S. has one of the highest corporate tax rates in the developed world. A global organization already doing business outside of the US in jurisdictions with low effective tax rates on intangible profits may have a strategic opportunity to locate this IP outside of the US tax net from the beginning, or migrate it there when its value is low in the early stages of a business launch where there may be losses available to cover the tax costs of any such migration. An additional benefit to housing IP offshore is that royalty payments received from related parties that use the IP and are located in high-taxed jurisdictions may be deductible against these high rates of tax and further reduce a company’s effective tax rate in the US.
These considerations require consultation with local country legal and tax counsel, as there is no one size fits all approach to IP planning. Any global strategy must be closely tailored to the business’ operational realities.
I will be hiring U.S. employees, but how do I handle our non-US team’s entry into the U.S.?
While the United States currently admits thousands of foreign workers each year, these workers must obtain permission to work legally in the United States. Multiple employment categories exist for admission to the US, and each has specific requirements, conditions and periods of stay associated with them. It is important that those coming to work in the US follow the terms of their application or petition for admission and visa.
Additionally, these workers, and the companies they work for, must comply with Federal, state and local tax laws, as well as other laws. Having a designated resource or resources within the US company responsible for managing these issues is key, as is close coordination with immigration, tax, and other counsel as a necessary step to ensure immigration and other local employment laws are complied with and tax risks are managed.
This can go a long way towards ensuring valued employees and managers and their families don’t experience unexpected surprises when relocating in furtherance of the company’s growth plans.
Some Closing Thoughts
Entering the US market is a big step, and comes with great benefits, but identifying the real risks and coming up with a flexible game plan up front that anticipates possible bumps in the road is important. Establishing the right relationships, and having a trusted advisor in place to help you make and manage those relationships from the beginning, especially when they are half way around the world from your corporate headquarters, can make all the difference.
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Adelson Strategies www.adelsonstrategies.com is a global business advisory and strategy firm that helps organizations grow. For more information, contact Jonathan Adelson at jonathan@adelsonstrategies.com or (212) 226-1746.