Thinking of expanding your business into the United States? A good understanding of the unique needs and requirements of a foreign-owned US entity is essential.
Utilising the right accounting and tax expertise from the start can help you to develop a realistic business plan, including the tax and employment costs of doing business in the US, as well as provide a local partner to help guide you through the required process and registrations effectively.
Typically, creating a US subsidiary is the most popular option, establishing a legal entity that can operate in the US market without exposing the parent company to more risk than is necessary. But a key decision is which state to site your subsidiary in. Tax levels in the US vary because each of the 50 states has the power to decide their own rate of taxation, and incentives will differ according to the type of industry and number of potential new jobs. Many state incentives require application prior to expansion, so consulting local experts early on in your business planning is essential.
The choice of entity structure in the US determines how your company will be taxed, so this is another crucial decision to get right. The most common entity types are corporations and limited liability companies – each of which is taxed differently. If a business doesn't file the proper paperwork to select the entity type for US tax purposes, default regulations may apply. This may have costly tax implications and reporting requirements.
Income from a corporation is taxed separately to its owners. Any dividends are taxed again to the recipient once they have been distributed. Corporations are often quite expensive to manage because they have complex tax and legal requirements – including fees payable to the state in which you're doing business in, plus a lot of governmental oversight. But advantages include limited liability to directors, shareholders, officers and employees, and unlimited potential for growth. Corporations are taxed on the profits they make, and you'll need to file a corporate return every year. Owners will also be taxed on the income they take out of the company.
Establishing a Limited liability company (LLC) limits your liability for legal, tax and costs affairs. An LLC is a legal entity, but for tax purposes, it can be taxed as a corporation, as a partnership, or as a disregarded entity, which means that all profits and losses pass through the business to each member of the LLC. So, members of the business report profits and losses on their personal federal tax returns. The choice of filing as a corporation needs to be made using an appropriate communication to the IRS. In addition, some US states impose an annual tax on LLCs, so it's essential to take that into consideration when deciding what legal form your subsidiary will take.
Once you establish a legal entity in the US, you need to obtain an Employer Identification Number (EIN), sometimes referred to as a Federal Tax IT number, from the Internal Revenue Service, the nation's tax collection agency. An EIN is needed to open a US bank account and to set up a US payroll.
When your US company has employees, it will be required to pay payroll taxes and meet specific employer responsibilities. To manage US payroll requirements, it is usual to use a third-party expert to process payroll, withhold and remit taxes, and to prepare the quarterly and annual payroll tax returns. Social security and Medicare taxes are paid, equally, by both the employer and the employee. However, if an employee is sent from the foreign parent company to work in the US, the employee may be able to opt out of the US social tax system, provided they have documentary proof of continued coverage in the foreign country.
Both state and local registrations may be required, so it is important to seek advice on the requirements applicable to the locations in which your business will operate. Typical registrations include applying for authority to do business in a state in which are you not incorporated; payroll registration in the states in which your employees are located, and registrations for the types of taxes imposed in a state in which you do business, such as income tax, franchise tax or gross receipts tax. Depending on the type of business, a registration to collect and remit sales tax from customers in the state in which you're doing business may be required.
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There are unique reporting requirements applicable to US entities with foreign ownership, and failure to comply could result in sizeable penalties. Corporate tax has recently been dramatically reduced from 35% to 21%, and there are lower taxes on overseas profits. Clear insight and expert knowledge is needed more than ever before to guide business expansion in the US. TMF Group in the US has in-depth local knowledge and a team of experienced HR, Accounting, Taxation and Legal professionals to support companies that are looking to expand, consolidate or acquire businesses in the US.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.