Forming a New U.S.-Based Company: Key Considerations to Support Your Future Success
Do you know what all businesses have in common? All of them were someone’s epiphany, someone’s brainstorm, someone’s dream, someone’s vision.
Some business owners want to serve only their local community or a very local market. Still, others want to leverage the global economy’s benefits and establish operations in multiple countries for strategic business purposes.
In all cases, the process of building any business is not easy. However, if you think doing business in your country is complicated, adding overseas subsidiaries to your organization or bringing your product to the U.S. market can add new complication layers. Whether doing it to access new funding sources, to protect intellectual property, or expand into new markets, there are several considerations you will want to consider.
How can startups avoid key mistakes in international expansion and make their business growth dreams come true? One key to success is to ensure you set your venture on a strong foundation that anticipates future needs.
Forming a new legal entity in the U.S. sounds like a relatively simple undertaking. Managers and directors frequently have their own understanding of the process, often informed by some previous experience. That said, different types of business ventures and investor scenarios can require different entity structures to accomplish a new venture’s financial and operational goals. Be sure to do your homework to fully understand the important consequences of selecting various structures and jurisdictions. The selection and completion of the company formation process is a strategically important decision. Don’t oversimplify this important step, which will have lasting financial and risk management repercussions for the company’s life.
Five Strategic Considerations When Setting Up U.S. Operations
During this stage of the process, legal counsel will help the client to identify five strategic areas:
- Identify the purpose. What is the purpose of setting up the company in the U.S.? This may seem obvious to the owners but needs to be crystal clear from the onset to the full advisory team, including legal and financial advisors working in close communication. Goals might include expanding the geographic market for goods and services, mitigating various risks, sharing ownership of assets, or raising capital. Each of these desired goals might influence which entity structure will support the best strategic outcome for tax consequences, legal or operational authority, and regulatory requirements.
- Create a business development map. The vision for the business development process will greatly impact the type of corporation formed. Is the U.S. just a starting point for the global expansion of the business? Is the company looking for an ultimate U.S.-exit strategy? You’ll avoid costly wrong turns if you plan from the beginning with your anticipated final destination in mind.
- Identify the beneficiaries. Who are the ultimate beneficiary owners? In which countries do they reside or operate? How do they hold their interests? The answers to these questions will have taxation implications.
- Foreign employment. How will the business owners build the management team? Will they send key employees to or from a foreign jurisdiction? Will they build a team comprised of U.S. citizens? What are the implications?
- Corporate governance. How many investors/stakeholders will reside in the jurisdiction of origin? What will the business’s corporate governance look like? The international differences in responsibilities and liabilities of corporate boards can be significant, so a clear understanding and corporate governance documentation are critical.
Scenario One: Expanding Sales in the United States
Take the example of a company interested in expanding sales of goods in the U.S. market.
Does this business need to form an entity in the U.S. to start sales? Not necessarily. A foreign company is not required to conduct business in the U.S. through a U.S. entity and could instead open a branch office. It would significantly reduce the initial investments and provide flexibility; however, the foreign company may expose all company revenue to U.S. taxation. Furthermore, the foreign company’s liability would not be limited to liability incurred at the branch level. Accordingly, foreign businesses coming to the U.S. do not generally elect to open a branch office unless specifically advised by a U.S. attorney.
Scenario Two: Leveraging U.S.-Based Resources
Another common scenario involves a technology company establishing operations to leverage the human and financial resources available in U.S.-based technology hubs, such as California’s Silicon Valley; Austin, Texas; New York; Boston, and other high-growth regions. In this case, the strategy might be completely different. Such a company may decide to relocate the corporate headquarters to the U.S. or set up a subsidiary. To make the strategic decision, the stakeholders should analyze several key factors, including:
- company parenting style and legacy;
- importance of clustering resources;
- the quality and standard of living in target locations;
- corporate governance;
- the regulatory environment, and
- the expectations of the prospective investors.
Where to Register Your Business
Businesses can be headquartered anywhere in the U.S. There may be specific reasons to locate a business in a particular state. And even if the main office or manufacturing operations might be set up in California or Texas, the corporate registration might be in a different state. For example, many investors prefer to deal with companies registered in Delaware. Doing so may make the process of raising capital smother than if the company is registered in another jurisdiction.
Selecting Your Form of Entity
Once the need for a U.S.-based entity and its jurisdiction is established, it is time to select the most strategic entity to achieve corporate goals. The most common domestic business entities are corporations, limited liability companies (LLCs), and partnerships. Each business form has its own benefits—and risks. The ultimate selection of entity form depends on case-specific legal and business factors.
Many foreign companies do business in the U.S. as corporations. Corporations are organized under state law, and each state has its own rules for creating and operating corporations. As mentioned above, in the U.S., a corporation may be created under one state’s laws and have its principal place of business in a different state.
Another choice of entity is a Limited Liability Company (LLC). Like a corporation, an LLC is formed by registering with the Secretary of State in the state in which the company is to be created. As with a corporation, an LLC is governed by the state’s laws in which the LLC is formed. An LLC must have at least one member, and members do not need to be natural persons, meaning another company can be a member.
LLCs offer flexibility with respect to company financing and management. Unlike corporations, LLCs can elect to be taxed as a corporation or to have income “pass-through” to members and be taxed at the individual member level. Many foreign companies prefer to be taxed at the corporate level to avoid having distributions to members reflected on their personal tax returns.
What if you choose the wrong form of entity in the beginning? It is possible to convert between entity types and shift jurisdictions down the road, but doing so will create an additional expense and result in lost opportunities. Taking the time to thoughtfully plan your corporate structure in the beginning based on your specific goals will give your business a solid foundation for future success.
Svetlana Kamyshanskaya is an accomplished and resourceful professional with two decades of successful legal practice and business experience. Primum Law Group is the synthesis of Ms. Kamyshanskaya’s journey as a professional. With Primum Law, she assembles nineteen years of bilingual, multi-cultural legal and business experience to help businesses expand their horizons and succeed in foreign markets. She likes her clients to think of Primum as their partner for business, creating the legal framework for their businesses’ growth and success. Primum Law Group implements its founder’s motto “It’s all about action and reaction, anticipating the move before the move.”
As our world becomes more globalized, Svetlana foresees greater business opportunities and is very excited to provide legal support to them.