US entity selection overview
Formation of a business entity in the US is done at the state rather than the national level. Thus, the parent company chooses its state of incorporation and the type of entity. US subsidiaries tend to be incorporated as corporations or limited liability companies. If there is no state where the operations of the subsidiary have a physical presence, then Delaware is a commonly used. It offers ease of formation, favorable tax treatment and a business-friendly environment. If most of the business activities of the US entity will be centered in one state, it is often desirable to just establish the US business entity in that state.
Branch v subsidiary
A branch office is not a separate legal entity and occurs when a foreign corporation is merely operating in the US. This is may not an ideal arrangement because:
- This structure does not shield the foreign corporation from liability incurred at the branch level.
- A foreign corporation with a US branch will be required to file a US tax return reflecting its worldwide income and subject to tax at graduated tax rates on income effectively connected with the US activity.
- Unless reduced or exempted by an applicable tax treaty, a 30% branch profits tax is imposed on after-tax effectively connected earnings and profits that are deemed to be distributed by the branch out of the United States
Forming a US subsidiary
A subsidiary is a separate legal entity which is usually wholly owned by the parent corporation.
The directors of the subsidiary could be in the parent’s home country. There is no requirement that a director or officer of a US entity be a US citizen or resident. However, it may be prudent to ensure the subsidiary maintains a level of management control to ensure an arms-length relationship.
Taxation of the subsidiary is on the subsidiary’s income alone, and when properly structured and operated, the liabilities of the subsidiary are not attributable to the parent corporation. If persons from the parent company are going to come to the US to work for the subsidiary and they are not US citizens or residents, they will need proper work visas that allow them to be employed for their tasks in the US.
It is important to engage US based legal and accounting professionals to navigate the formation of your entity and provide support as your business becomes established in the US.