March 6, 2023

How to expand a foreign business to the US

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One of the most crucial decisions business owners will make is deciding when – and how – to expand their company. With remote work being more commonplace, you might have employees from all over the globe, or seek to establish office space in other locations.

For those looking to expand into the US, you might want to simply start a new entity disparate from your current company in your home jurisdiction. You may want to simply open a branch of your company rather than create a new entity in the first place. All of these are viable options for any successful business, but choosing the correct one for your context takes research. That’s what this post is for.

We’ll cover the various types of foreign expansion but focus on the benefits of foreign subsidiaries, as these arguably carry the most benefits (depending on your situation). Let’s dig in. 

Foreign expansion: what are the options?

When it comes to expanding into a new country, every business owner has a wealth of options to choose from. The most common are creating a new entity, establishing a branch of the company, or creating or foreign subsidiary. Let’s look at each in turn. 

Creating a new entity

One of the most straightforward options when expanding into a new country is to establish a new entity that is entirely separate from your home jurisdiction business. Depending on your goals in the new jurisdiction, you might want to open a Sole Proprietorship, LLC, or another type of corporation–each with its own benefits and disadvantages. 

While it may seem odd to create a brand new entity that is separate from the company, and by extension its current work/clients, this can offer flexibility. This allows you to explore a new market, rebrand your business in a different country, and even start fresh. 

Creating a branch

In contrast, a branch is a non-corporate extension of your current home jurisdiction company. It is a way of entering a foreign market without having to incorporate under that jurisdiction’s laws. This means there is no formal registration of the business to create a branch (this is the case in the US). 

Before commencing work in the United States, you will need to register for an EIN (Employee Identification Number) with the IRS on their website. Note that if you choose to operate in multiple states, you will also need to register your branch with each state’s corporate department (or department of revenue). 

If this sounds a bit odd, here’s an example. Let’s say you own a marketing company in Thailand that is looking to open a branch in New York. You register for an EIN and decide to purchase an office building to house either employees from the business, or independent contractors in your local area. Once you’ve done that, you know you have a branch of your company in the US. It’s no more complex than that. 

Creating a foreign subsidiary

Another viable option for foreign expansion into the US is to create a foreign subsidiary or ‘daughter company.’ A foreign subsidiary is a new distinct entity, created in a separate jurisdiction, that is owned by a foreign company. The company that owns the subsidiary is typically called the ‘parent company.’ 

This subsidiary can be classified by the IRS in different ways depending on how its shares are distributed: 

  • Typically, the parent company must hold a minimum of 50% interest to maintain a controlling interest in the subsidiary. 
  • If the parent owns 100% of the issued shares, the subsidiary is ‘wholly owned’ by the parent. 
  • If the parent owns less than 50% of the issued shares, the subsidiary is considered to be an associate or affiliate company. 

For the sake of this article, we will denote foreign subsidiaries to mean a majority-owned company, as affiliate companies come with their complexities which lie outside the scope of this piece.

Why create a foreign subsidiary? 

Before reviewing the reasons why a foreign subsidiary may be a good choice for your business, a quick disclaimer is required. 

Prior to moving forward with incorporating in the US, you should have the approval of all the shareholders/lenders of your parent company. Additionally, you should also ensure that there are no agreements or contracts in place that disallow you from expanding into a foreign jurisdiction. If you have any questions about this step, feel free to reach out to one of the many legal compliance partners we work with in Firstbase Network

With this caveat out of the way, let’s look at some core reasons why subsidiaries are a prudent choice for expanding into the US. 

Maintain a similar structure

Because the subsidiary is owned by your home jurisdiction company, you can keep the same management structure, employees, contractors, and other structures. This allows you to save time (and expenses) rather than reinventing the wheel. 

Lower your tax rate 

One major plus of opening a foreign subsidiary over creating a new entity is that you have access to various tax benefits–such as lower tax rates. Subsidiaries do not have to pay taxes on revenue generated outside its local jurisdiction, only revenue generated in its local country is considered. 

An additional point to consider is how the parent company receives income. If dividends are declared on the parent company’s shares, for example, the parent company would need to pay taxes on that revenue. But, if you choose to reinvest those profits into the subsidiary, this can be avoided.   

Increase company flexibility & diversification 

Somewhat counterintuitively, subsidiaries also allow large companies to adapt to different legal structures and management styles in other countries, depending on the type of work being done.

Subsidiaries also allow for brand/financial diversification. While the subsidiary is owned by the parent, it can choose how to manage its resources and even decide on a niche approach that is separate from the parent company. This opens up more options for you to be creative with your business (and your finances) as needs arise. 

Strengthen company presence 

Lastly, considering the subsidiary is intimately connected to the parent, a subsidiary can also take the approach of strengthening brand awareness on a multi-national level. Rather than starting a fresh idea, owners of the subsidiary can highlight the connection between the parent and their company to highlight corporate growth and presence in a new jurisdiction. Both potential investors and clients may see this as an impressive period of growth for your business.

Summing up

To sum up, foreign expansion may sound highly complex, but it also allows for great flexibility. Here’s an overview of the structures discussed: 

  • New Entity - An entirely new entity is created in the foreign jurisdiction, separate from your previous company. 
  • Branch - Rather than incorporate under foreign laws, your business can decide to register in its country of choice and operate as an extension of your business – with current employees/contractors. 
  • Foreign Subsidiary - An entity owned by your previous company is incorporated under a foreign country’s laws, allowing for brand, financial, and corporate flexibility. 

If you’ve been wondering about incorporating in the US for some time, we think 2023 is your year to grow. Click the button below to start your business journey off on the right foot.

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