If there is talk of expanding the business into the US, a good understanding of the unique requirements of a foreign-owned US entity is essential. Here are some guidelines to help get things started:
Getting started
The most popular option when moving to the country is to set up a US subsidiary. This means establishing a legal entity that can operate in the local market without exposing its parent company to more risk than is necessary.
But a key decision here is which state to base your subsidiary in. Tax levels vary because each of the 50 states has the power to decide their own rate of taxation.
Incentives also differ according to the type of industry in which you operate and the number of potential new jobs you intend to create. Many state incentives require you to apply before you move to the country so consulting local experts early on in your business planning is essential.
What kind of entity structure you opt for will also determine how your company is taxed, so this is another crucial decision to get right. The most common entity types are corporations and limited liability companies, each of which has different tax rules.
But if businesses fail to file the proper paperwork when selecting their favoured entity type, default regulations may be applied, which could have costly tax implications and reporting requirements.
- Corporations
The Internal Revenue Services (IRS), which is the nation's tax collection agency, must be informed if you intend to file tax as a corporation. The corporation’s income is taxed on a separate basis to its owners, while dividend recipients are taxed based on any dividends they receive once they have been distributed.
Corporations are often quite expensive to run as they have complex tax and legal requirements. For example, it is necessary to pay fees to the state in which you do business and there is much governmental oversight.
But this approach has advantages too. These include the fact that the liability of directors, shareholders, officers and employees is limited, while the corporation has unlimited potential for growth.
Corporations are taxed on the profits they make, which means it is necessary to file a corporate return every year. Owners are also taxed on the income they take out of the company.
- Limited liability companies
Establishing a limited liability company (LLC), on the other hand, limits your liability in terms of legal and tax matters as well as costs. 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. This means that all profits and losses pass through the business to each member of the LLC.
As a result, members of the business report any profits and losses that are made by the company on their own personal federal tax returns. Some US states also impose an annual tax on LLCs so it is important to take this matter into consideration when deciding what legal form your subsidiary should take.
Payroll and tax considerations
Once a legal entity is established in the US, it is necessary to obtain an Employer Identification Number (EIN), which is sometimes referred to as a Federal Tax IT number, from the IRS. An EIN is required to open a US bank account and to set up a US payroll.
Once staff members have been hired, payroll taxes must be paid and specific employer responsibilities will need to be met. To manage US payroll requirements, it is usual to employ a third-party provider to undertake processing, withholding and remitting taxes, and to prepare the quarterly and annual payroll tax returns.
Both employers and employees pay equal amounts of social security contributions and taxes. But if an employee is sent from a foreign parent company to work in the country, they may be able to opt out of the US social tax system as long as they have documentary proof that they are still covered in the foreign country.
Registrations
As registration at both the state and local level may be required, it is important to seek advice on what the requirements are for the locations in which your business will operate. Typical registrations include:
- Applying for the authority to do business in a state in which you are not incorporated;
- Undertaking payroll in the states in which your employees are located;
- Paying taxes such as income, franchise or gross receipts tax, which are imposed in the state in which you do business;
- Collecting and remitting sales tax from customers in the state in which you do business – whether you do so will depend on the type of business you run.
Reporting requirements
There are unique reporting requirements for US entities owned by foreign parents and failure to comply can result in sizeable penalties. But it is worth bearing in mind that corporate tax rates have recently been dramatically reduced from 35% to 21%, and taxes are now also lower on overseas profits.
Jason Gerlis ia regional director of North America & Caribbean at TMF Group. He advises US and Canadian businesses looking to expand abroad, as well as foreign companies and individuals coming to North America and the Caribbean. Jason has been with TMF Group for five years, but previously worked at Deloitte Consulting and supermarket chain Tesco, specialising in strategy, change management and operating model development.
If there is talk of expanding the business into the US, a good understanding of the unique requirements of a foreign-owned US entity is essential. Here are some guidelines to help get things started:
Getting started
The most popular option when moving to the country is to set up a US subsidiary. This means establishing a legal entity that can operate in the local market without exposing its parent company to more risk than is necessary.
But a key decision here is which state to base your subsidiary in. Tax levels vary because each of the 50 states has the power to decide their own rate of taxation.
Incentives also differ according to the type of industry in which you operate and the number of potential new jobs you intend to create. Many state incentives require you to apply before you move to the country so consulting local experts early on in your business planning is essential.
What kind of entity structure you opt for will also determine how your company is taxed, so this is another crucial decision to get right. The most common entity types are corporations and limited liability companies, each of which has different tax rules.
But if businesses fail to file the proper paperwork when selecting their favoured entity type, default regulations may be applied, which could have costly tax implications and reporting requirements.
- Corporations
The Internal Revenue Services (IRS), which is the nation's tax collection agency, must be informed if you intend to file tax as a corporation. The corporation’s income is taxed on a separate basis to its owners, while dividend recipients are taxed based on any dividends they receive once they have been distributed.
Corporations are often quite expensive to run as they have complex tax and legal requirements. For example, it is necessary to pay fees to the state in which you do business and there is much governmental oversight.
But this approach has advantages too. These include the fact that the liability of directors, shareholders, officers and employees is limited, while the corporation has unlimited potential for growth.
Corporations are taxed on the profits they make, which means it is necessary to file a corporate return every year. Owners are also taxed on the income they take out of the company.
- Limited liability companies
Establishing a limited liability company (LLC), on the other hand, limits your liability in terms of legal and tax matters as well as costs. 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. This means that all profits and losses pass through the business to each member of the LLC.
As a result, members of the business report any profits and losses that are made by the company on their own personal federal tax returns. Some US states also impose an annual tax on LLCs so it is important to take this matter into consideration when deciding what legal form your subsidiary should take.
Payroll and tax considerations
Once a legal entity is established in the US, it is necessary to obtain an Employer Identification Number (EIN), which is sometimes referred to as a Federal Tax IT number, from the IRS. An EIN is required to open a US bank account and to set up a US payroll.
Once staff members have been hired, payroll taxes must be paid and specific employer responsibilities will need to be met. To manage US payroll requirements, it is usual to employ a third-party provider to undertake processing, withholding and remitting taxes, and to prepare the quarterly and annual payroll tax returns.
Both employers and employees pay equal amounts of social security contributions and taxes. But if an employee is sent from a foreign parent company to work in the country, they may be able to opt out of the US social tax system as long as they have documentary proof that they are still covered in the foreign country.
Registrations
As registration at both the state and local level may be required, it is important to seek advice on what the requirements are for the locations in which your business will operate. Typical registrations include:
- Applying for the authority to do business in a state in which you are not incorporated;
- Undertaking payroll in the states in which your employees are located;
- Paying taxes such as income, franchise or gross receipts tax, which are imposed in the state in which you do business;
- Collecting and remitting sales tax from customers in the state in which you do business – whether you do so will depend on the type of business you run.
Reporting requirements
There are unique reporting requirements for US entities owned by foreign parents and failure to comply can result in sizeable penalties. But it is worth bearing in mind that corporate tax rates have recently been dramatically reduced from 35% to 21%, and taxes are now also lower on overseas profits.
Jason Gerlis ia regional director of North America & Caribbean at TMF Group. He advises US and Canadian businesses looking to expand abroad, as well as foreign companies and individuals coming to North America and the Caribbean. Jason has been with TMF Group for five years, but previously worked at Deloitte Consulting and supermarket chain Tesco, specialising in strategy, change management and operating model development.
