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Opening a U.S. Subsidiary Is Still Possible During COVID-19

July 2, 2020 / by Loren Sweigart

Although COVID-19 has created obstacles for overseas companies to set up U.S. subsidiaries, it has also presented possible opportunities to pursue.

Business-laptop-with-world-map-hologramThe coronavirus pandemic has had a catastrophic impact on the world's economy, with some sources forecasting a decline of up to 8.8% in global GDP this year. In addition, ongoing travel restrictions prevent entry to the United States from many countries, which may have disrupted plans at some international companies to open subsidiaries here. (As a general rule, opening a U.S. subsidiary requires obtaining a U.S. bank account, which must be done in person.)

Even so, there are glimmers of optimism amid the gloom. The pandemic has also revealed new opportunities, especially for companies that specialize in technologies that enable e-commerce, telemedicine and remote learning. For international companies in those fields, the U.S. market could be more receptive than ever. Here's what you'll need to know about starting a U.S. subsidiary.

There Are a Lot of Rules to Follow
The first thing an international company needs to understand about establishing a subsidiary in the United States? Although our 50 states are united, they're not all the same. Each already has its own extensive set of rules and regulations, which have become even more extensive since the COVID-19 outbreak. In addition, there are thousands of different laws at the local, county and national levels. Many could have a significant impact on your business.

Determining which rules you do or do not have to follow can be overwhelming. A local advisor can help you navigate the process. Your choice of location is one of many considerations that could either cost or save your company a significant amount of money each year.

A Mentally (and Financially) Taxing Process
Even if your home country has a tax treaty with the United States at the federal level, there are still a lot of factors to consider at the state and local levels when determining where to locate your U.S. subsidiary. Sales tax, for example. While there's no federal sales tax, individual states have sales taxes ranging from 0% (in Alaska, Delaware, Montana, New Hampshire and Oregon) to about 9.74% in Tennessee.

So if, for instance, you have an e-commerce business that sells its taxable products exclusively online, choosing a state with little or no sales tax could be a benefit to your customers and would translate to a competitive advantage in the marketplace. Of course, that would depend on whether the state has an origin sales tax or a destination sales tax and whether or not there's a "tax nexus" between your state and the states where you do business.

See how confusing this process can be?

What Kind of Company Do You Want to Be?
In addition to choosing where to locate your U.S subsidiary (and in case you're wondering, yes, you should almost certainly choose a subsidiary and not a branch office), you have to decide what type of corporate entity you want. In the United States, and in select cases involving foreign companies, a limited liability company (LLC) can offer advantages.

But if 100% of your company is owned by a foreign entity, and if the people running the U.S. entity are here on visas, you shouldn't do an LLC or other "pass-through entity." Why? Because there's no one in the United States to pass the income through to. (The person who receives the pass-through dividends has to be a U.S. citizen who pays federal income tax.)

Once you settle on the type of corporate structure you want, you also need to determine whether to hire full-time employees or use independent contractors. The difference is critical.

Missing the Proper Papers
One of the greatest challenges in establishing a U.S. subsidiary is that the principals often lack the basic documentation that U.S. business owners take for granted, such as Social Security numbers. That makes it difficult to establish relationships with U.S. banks. As a result, local experts with strong banking contacts are helpful in navigating issues like merchant card-processing services for credit card orders in the United States.

And then there are the myriad regulatory issues, such as compliance with the Americans with Disabilities Act (ADA). In addition to accessibility requirements for physical places of business, the ADA has a separate set of regulations that applies to company websites. So even if you're strictly an e-commerce business, you still have to meet ADA requirements or face potential fines and litigation.

Don't Let That Discourage You: Bookkeeping Services Providers Can Help
Our goal is not to scare your company away from setting up a U.S. subsidiary. In fact, many U.S. communities actively court all kinds of new businesses by offering low (or even no) business licenses taxes along with innovative economic development zones. Those communities are likely to be more receptive than ever as the country climbs out of the coronavirus-induced recession. So the discovery process is as much about taking advantage of all the possible opportunities out there as it is avoiding potential pitfalls.

The key to success on both counts is to find trustworthy U.S. professionals in the bookkeeping, accounting and legal sectors to help you navigate the process and successfully establish your business on our shores.

Topics: Santa Monica, Bookkeeping Services, Los Angeles, Ventura County, Business Continuity

Loren Sweigart

Written by Loren Sweigart

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