Should you do business in the US through a subsidiary?
When deciding the best way to enter or expand your presence in the US market, one option is to do business through a US subsidiary or other affiliated entity. Operating in the US through a separate US entity can be – but is not always – the best choice. How do you know if it is right for your business?
- Do your US customers (or potential customers) prefer to do business with a US company? Establishing a US company, with a US mailing address and phone number (even one which rings abroad), can bring comfort to US customers who often are not as comfortable with cross-border transactions as are UK customers. In fact, even receiving a request from their credit card company for approval of a foreign transaction will prompt some US customers to cancel the transaction.
- Will you rely on US vendors or suppliers to sell to, or service, your US customers? If US customers are paying in dollars, then establishing a US company will eliminate foreign exchange fees and currency exchange rate risks, by facilitating the establishment of a US bank account and allowing you to deal only in dollars. Receiving payments in dollars, converting them to pounds sterling, and then reconverting pounds to dollars to pay vendors and suppliers can be costly and risky.
- Do you offer a product or service for which there is potential legal exposure? Americans have an unfortunate reputation for litigiousness. By operating through a US company (and following certain corporate formalities), you best insulate your UK company from liability in the US courts.
- Does your business engage in activities that might subject it to US tax jurisdiction? If you are a UK company, you are generally not subject to US tax on your US business activities if you don’t have a “permanent establishment” in the US (as defined by the US-UK tax treaty). Unfortunately, it is not always clear whether a “permanent establishment” exists. If it does, your UK company must file a US tax return and apportion its income and expenses to the US market, which means that US taxing authorities could audit your books globally. By isolating your US business activities to a separate US company, you better insulate your UK company from the probing eyes of US tax authorities.
- Do you need to send your UK employees to the US for extended periods of time to help establish or run your US enterprise? UK companies most commonly send employees to the US to further their US business activities through E-1, E-2, or L-1 visas. E-1 and E-2 visas are treaty-trader and treaty-investor visas available only to residents of certain countries, including the UK. L-1 visas are intracompany transfer visas, permitting certain qualified employees of a UK entity to send its employees to work for its US affiliate. Forming a US company will facilitate opportunities under each of these visa categories.
- Are there tax advantages associated with operating through a US company? Under the US-UK tax treaty, most payments made from the US company to its UK parent are free from US withholding tax. In addition, because of different marginal tax rates, different tax accounting years, and different methods of calculating taxable income, there may be ways to legally reduce total global tax liability.
- What do you envision for the future? What is your expansion path? Do you envision opening a physical facility in the US and hiring employees? Do you anticipate contracting with sales representatives, distributors, or other agents? If so, creating a US subsidiary or affiliate is a logical and important first step to achieving these goals.
If establishing a US subsidiary or affiliate makes sense for you, Bouwen is here to help. Because we work only for UK companies, we have a keen appreciation for the legal, tax, and business factors that UK companies must consider when establishing their US market presence. We leverage this experience to help each new client enter the US market optimally and efficiently.
Founded by a US business and tax lawyer, Bouwen assists UK companies by creating and managing US subsidiaries and affiliates that are supported by independent warehousing, logistics, marketing, sales, and other support. We provide the business, legal, and tax expertise necessary to succeed in the US market, with minimal cost and no long-term commitment.