Why you shouldn’t just set up a branch office in the US of your existing company

23/01/2017 | Posted by:

 

Setting up a branch office in the USA is not a good idea.
Are you considering expanding your business to America? If so, you may be wondering how best to go about it. Your first instinct may be to simply set up a branch office in the US of your existing company: after all, this route seems relatively straightforward and means you can start selling your goods or services to the US market right away.


However, this is rarely a good idea. In fact, many businesses expanding to the USA frequently choose not to simply set up a branch office. 
But, what’s so wrong with just setting up a branch office of your existing company? Well, there are a number of reasons you shouldn’t head down this route…

Taxation

Firstly, a branch office is not a separate legal entity of the parent corporation. Instead, a branch office simply means that a foreign parent corporation is operating in the USA. As a result, setting up a branch office in the US is likely subject your parent company to taxation on its entire corporate income – rather than just the branch’s income earned in the USA.

This could have huge implications for your bottom line, and means you may have to pay far more tax than you otherwise would if you’d instead set up a subsidiary company, for instance.

Liability

Secondly, it’s a bad idea because it means that your wider business is not shielded from liability incurred at the branch level. Instead, your entire business is exposed to liability in the US. This could result in lawsuits you’d otherwise be able to avoid if you’d set up a subsidiary company.

Investment

Finally, opting to simply open a branch office could be bad news for your business’s future, too. Many investors prefer to do business with US subsidiaries, rather than US branches, and so simply opening a branch office in the America could mean you miss out on capital, partnerships and other lucrative offerings for your business.

What should you do instead?

So, instead of simply opening a branch office the US, the preferable route to go down is to set up a subsidiary company. While setting up a subsidiary can be a time-consuming and expensive, many businesses that are committed to establishing a permanent presence in the US opt to establish a subsidiary.

Most subsidiaries are formed as limited liability companies or corporations and, unlike simply opening a branch office of your existing company, US taxation is paid on the subsidiary’s income alone. Also, provided you’ve established a subsidiary with the correct structure, any liabilities incurred by the subsidiary are not attributable to your parent company.

Of course, if you’re not quite ready to make the leap towards setting up a subsidiary company in the USA, but don’t want to risk taxation, liability and lost opportunities by setting up a branch office, why not consider letting us help you at Foothold America? Contact us to find out about the alternative way we can help you test the the US market.