How to Expand a Foreign Business to the US

Expanding to the US offers a variety of critical benefits for business owners from around the globe. You might want to set up a US office, connect with American investors, hire US employees, or simply sell to American customers.

Unfortunately, the process of registering your business in the US can be confusing. For example, you may be unsure whether to open a US branch of your existing company or create an entirely new entity for your US operations.

Both of these choices are viable, and there are many other decisions that you'll need to make in order to successfully operate in the US. Ultimately, the important thing is to understand your options and make the right choices for your business. In this article, we’ll explain the US incorporation options for international business owners and help you navigate through each step of the process.

Steps You Must Follow to Expand Your Business in the US

Step 1. Market validation

The first and most important thing before stepping into the US market is to talk to your customers in the US. Run surveys, test pricing, and get feedback on your product in whatever way you can. That’s because it’s not always the case that what works for your back in your home country might work in the US

Step 2. 3 ways to start a business in the US

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 a foreign subsidiary.

Creating a new entity

Arguably, the most straightforward option is to establish a new entity that is entirely separate from the original business. While it may seem odd to create a separate company, this can offer flexibility. You can explore a new market, rebrand your business, and generally start fresh without being tied to an existing brand.

Depending on your goals in the new jurisdiction, you might want to open an LLC or a C-Corp. Each of these structures comes with its own benefits and drawbacks. Most generally, LLCs are cheaper and simpler to set up and operate, and they aren't responsible for corporate tax.

On the other hand, C-Corps have more operating costs and compliance requirements, and they are also responsible for corporate tax on profits. However, C-Corps can also issue equity to stakeholders, which makes them ideal for founders who plan to seek outside funding. Not sure which one is right for you? Take our LLC vs. C-Corp quiz for a personalized recommendation.

Creating a branch

In contrast, a branch is a non-corporate extension of your current 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). 

Even if you're creating a branch, you will need to register for an EIN (Employer Identification Number) through the IRS website.

Note: 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). 

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. That's all you need to do to run a compliant branch; however, the US branch will not have a separate corporate existence from your home business.

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.’

Subsidiaries are classified differently by the IRS depending on how their 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. 

Reason 1. Maintain your structure

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

Reason 2. Lower your tax rate 

One major plus of opening a foreign subsidiary is access to lower tax rates and other tax benefits. Subsidiaries do not have to pay taxes on revenue generated outside their local jurisdiction; only revenue generated in their 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. That said, this tax can be avoided by reinvesting dividends back into the subsidiary.

Reason 3. Stay flexible

It may sound counterintuitive, but 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.

Reason 4. Strengthen your presence 

Lastly, a subsidiary can help strengthen brand awareness by maintaining a consistent brand identity in different locations. 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. Clients and investors will also consider the parent company's credibility when working with the subsidiary.

Top Challenges You Might Face In the Business Expansion Process

Here are the top 3 challenges you will potentially face when you plan on expanding your business in the US

Understanding the US market is tough

From my experience, one of the most significant hurdles is understanding the diverse US market. The US isn't a monolith; it's a collection of regions, each with its own consumer preferences and behaviors. 

Understand this - What resonates in California might not in Texas. This regional diversity means that a one-size-fits-all approach often falls flat. It's crucial to conduct thorough market research and perhaps even tailor your offerings to specific regions. 

Navigating the complex legal and regulatory landscape

Each state in the US has its own set of laws, taxes, and compliance requirements. For instance, employment laws vary significantly from one state to another, affecting how you hire and manage your team. Additionally, understanding and complying with federal regulations, like those enforced by the Committee on Foreign Investment in the United States (CFIUS), is essential, especially if your business involves sensitive technologies or data. 

Cultural differences

Cultural differences can also pose challenges. Business practices, communication styles, and consumer expectations in the US might differ from what you're accustomed to. For example, US consumers often expect prompt customer service and clear return policies. Adapting to these expectations is vital for building trust and credibility in the new market.

Expenses Associated with Expanding Business to the US

Expanding your business to the US requires a clear understanding of the associated costs. Initial setup expenses can be substantial. For instance, establishing a legal entity, like a Limited Liability Company (LLC) or Corporation, involves registration fees, legal consultations, and potential licensing costs. These can amount to several thousand dollars, depending on the state and complexity of your business structure. 

Operational costs are another significant expense you must account for. Renting office space, especially in major cities, can be expensive. What’s more, hiring local staff means you have to pay them not just salaries but also benefits, taxes, and insurance. 

Lastly, regularly updating legal documents, adhering to tax obligations, and ensuring compliance with both federal and state regulations require continuous attention and resources. The costs of legal processes are often high.

Takeaways

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, we think this year is your year to grow. Click the button below to start your business journey off on the right foot.