What will it really cost to create a subsidiary of your company in the USA?
For non-US businesses wanting to be part of the American market, the usual route to a US presence is to set up your company as a legal entity in the USA. But the true cost in terms of time, fees and resources is often hidden at the outset. We take a closer look at what’s involved and explain why Foothold America could be the smart alternative.
An Austrian pharma company recently spent more than $50,000 forming a US entity. That’s not exceptional —according to the Wall Street Journal, on average it costs $65,000 to start a business in the USA, and for a European company setting up in the US, international tax complications can make the costs even higher.
Why does it cost so much? Above all because the process is complicated and time-consuming, with many hurdles to clear before you can start hiring US employees. We know because we’ve been through it, in setting up a US subsidiary of our parent company, Alacrita. If you’re thinking of going through the process, it’s worth knowing what lies ahead before you start. Here are some of the questions you’ll need to answer:
What type of US corporation do I need — C or S?
A first step is to decide whether you create an ‘S’ or a ‘C’ corporation:
- S-corporations, or limited liability companies let you operate as a partnership while protecting partners from personal liability for business debts. They’re tax-transparent, which suits companies that generate cash (e.g. service businesses). S-corporations can be set up to replicate the structure of corporations or limited companies – including preference shares, drag-along rights and governance structures.
- C-corporations are taxed separately from their owners and the dividends are taxed again when distributed to shareholders. A C-corporation lets you raise money from venture firms (though many venture investors are now able to invest in S-corporations) and eventually go public (S-corporations cannot list on a stock exchange). C-corporations are more expensive to manage because they have complex tax and legal requirements.
Which US state should I choose?
It makes sense to incorporate in the state where you do most business, and for smaller businesses, where you have a physical base. This minimises hassles such as opening a business bank account, assigning a registered agent, and paying fees for operating as a ‘foreign entity’ in other states. Companies that operate in several states often choose to incorporate in Delaware, which has corporation-friendly laws and a separate Court of Chancery to hear cases involving corporate law.
Which documents do I need?
Be prepared for a mountain of paperwork, and the legal and professional costs associated with getting all papers correctly completed and filed. Key documents include:
- Articles of Incorporation, filed with the Secretary of State office. The fee to incorporate ranges from $100 to $800 depending on the state.
- To form a limited liability company, members must have an operating agreement, which details rights and operating rules.
- Documentation to show you’ve appointed directors, created corporate bylaws, held the first meeting of the board and issued stock certificates to owners.
- A Federal Tax ID (or Employer Identification) Number. Expect to pay legal fees of about $500 to $1,000 to file the paperwork.
You’ll also need all the documentation associated with setting up a US bank account, getting loans or equity investment and hiring employees.
How do I set up a US bank account?
The Patriot Act requires US banks to ‘know’ their clients, so if you’re not a US citizen you’ll probably need to apply in person and travel to the US to open an account in person, having obtained your Federal Tax ID Number first. If you already have an accountant you work with in the US, they may be able to help you open a new US bank account.
What about tax?
Businesses in the US are taxed at three levels: federal, state and local. New US entities tend to work with tax accountants to make sure all required taxes are paid. An annual filing for a new company usually costs at least $5,000.
Do I need insurance?
The US is a litigious country and you’ll need general liability insurance for accidents, injuries and property damage. You may also need professional liability insurance, and product liability insurance if you manufacture, distribute or sell a product.
Who can help me open a US entity?
You’re likely to need specialised lawyers and accountants, since legal and accounting errors can have expensive consequences down the line. You may also need a bookkeeper to manage monthly expenditure and payroll. Expect these services to be billed by the hour — which means costs can grow quickly.
Setting up a US entity is certainly achievable — but you can expect a heavy time commitment, a lot of stress, a bill that could well be in the region of $50,000, and at least three months to wait before you can start hiring employees in the US.
If your goals are to hire a worker in the US and establish your US presence, then Foothold America offers an attractive alternative, born of our own experience in going through the process. By hiring your first US employee through us you can avoid:
- large upfront costs
- hiring US lawyers and accountants
- the hassle and expense of filing federal, state, and local taxes annually
Instead of getting bogged down in bureaucracy you can move quickly to hire talent within days, and focus on expanding your business in the US. The cost savings are likely to remain significant over the long term, and you have the flexibility to make a quick and easy exit from the US market if your plans change.