(2 min read)
Recent policies in the USA are increasing the costs for all imports in an attempt to create and expand business in the USA. For foreign companies exporting to and doing business within the United States, establishing a U.S. subsidiary may be the next logical step. The magnitude of positive impact for each company depends on the industry and country of origin, but the process in which to achieve this remains fairly standard. In the following, we explore the necessary initial steps involved in the establishment of a U.S. subsidiary, from operational, legal, and financial standpoints.
Create a Business Plan!
Avoid the age-old adage ‘fail to plan and plan to fail’ by creating a document that charts the course of your business’s operations in the United States. EMW always supports this as a first step for any company looking to enter a foreign market (and especially for the domestic market). The probability of success depends on how definitively the following questions can be answered: What is the product or service being sold? What is the path of the supply chain and how can it be adjusted to save on costs in the new market? What is the organizational structure? What are the sales terms or processes for hitting targets? Who are the local competitors and how will the firm position itself against them? What is the unique value proposition and how must it be communicated to customers? How can the appropriate local workforce be accessed and what are the labor laws in that area? Visas? What insurance policies are required? Creating a business plan requires an extensive amount of research, planning and decision making.
Lock in With the Law
While some particularly savvy companies may elect to undertake legal matters themselves, many companies opt to work with an attorney and tax accountants with international business expertise. The United States is one of the few countries where the determination of the legal entity may determine how the entity and shareholders are taxed. In line with American culture, choosing a business structure also means a choosing between a plethora of options. C-corporations, LLCs, partnerships, and sole proprietorships have varying degrees of ownership, management, and tax liability. Your attorneys, tax accountants and advisors working together will suggest which of these makes most sense for the individual situation, from both a legal liability perspective and minimizing federal and local taxes. In this stage, the entity is incorporated in the state of choosing. Once the Employer Identification Number (EIN) is obtained from the Internal Revenue Service a bank account can be opened and the company funded. (It’s important to note that some financial institutions require the presence of the signers at the account opening, rather than allowing a stand-in.) Following this, the subsidiary should research and register any trademarks to ensure maximum legal IP protection. Finally, if operating in states outside the state of incorporation/organization, it’s required to register as a foreign entity in each state of operation. And don’t forget sales (consumption) taxes if the entity is selling to end-users.
Understand Your Finances and Obligations
The United States accounting and tax standards, already different from that of the country of origin, will be more complex by varying further in each of the 50 states. Retaining an accounting firm knowledgeable in tracking each of these laws, at least in the beginning, is crucial to avoid any ramifications of non-compliance down the road. It is important to understand and track things such as de minimis thresholds for sales and income taxes, payroll taxes, state and local sales tax, etc. for which each state and locality are different. Furthermore, if assets must switch hands from the parent to the subsidiary company (or vice versa), how can the costs of the home and foreign markets strike a delicate balance with remaining competitively priced and profitable. This is called transfer pricing, and specialty firms can help to calculate compliant methods to avoid problems down the line. Finally, it is important to calculate profit and loss (P&L) statements, cash flow projections, and balance sheets to assure that the venture meets expectations. Always know where the money is going, when, and why.
Although this article is certainly not an exhaustive to-do list for setting up a U.S. subsidiary, it is a great first look at what occurs behind the scenes of international expansion. For practical answers to your specific, international business expansion questions, or for support in developing your unique business plan, contact the experts at EMW today!
