The research provides a high-level summary of approaches and requirements for a foreign-based business to operate in the US. There are both direct and indirect approaches to expanding the business to the US, where the latter does not require a US business entity or branch office to be established and involves less cost and risk than the former. As to a direct approach, the US business entity is favored.
Direct Approaches and Requirements of Operating in the U.S.
- For a foreign-based company entering the US market, there are generally two options: one is the establishment of a US business entity, which requires the filing of a certificate of incorporation with the Secretary of State where the foreign-based company wishes to register its subsidiary, for example, Oklahoma Secretary of State; the other option is to open a branch office (foreign company). The two options are the direct approaches to operating in the US market.
- There are three common forms of US business entities, namely corporations, limited liability companies, and partnerships. Each state has different legal requirements for registering a US business entity or a foreign branch office.
- Once the company registration is filed with the state, it could obtain an Employer Identification Number (EIN) issued by the Internal Revenue Service (IRS) and used for tax-filing, company identification, and business licensing purposes. The EIN is also called the tax ID number for various federal, state and municipal taxes. However, there is no value-added tax (VAT) in the US but sales tax collected by each state and local jurisdiction. For more tax information, please refer to the US Federation of Tax Administrators.
- For each US state where it wishes to operate, the business entity must register separately through a foreign qualification process. Nevada or Delaware are known to be low-cost states in comparison to California.
- From a tax perspective, a US business entity (subsidiary) limits the tax obligation and risk of the parent firm to its subsidiary, whereas a branch office exposes the parent firm to more liabilities and a higher branch profits tax (similar to dividend tax) than subsidiaries; the tax on revenues could extend to the parent firm. Despite branch offices are required to go through only a mini incorporation process with the Business Division of the Secretary of State, they are generally not a favored form of operating in the US.
Indirect Approaches and Requirements of Operating in the US
- Take a technology business as an example, the foreign company could choose an indirect approach to do business with the US. It could hire a sales representative, partner with a product distributor, or license a manufacturer, who is based in the US.
- This way, the foreign business is not required to establish a US business entity and present in the country, which incurs less cost, risk and tax liabilities than the direct approach. There is generally no tax on sales revenues earned through the indirect approach.
Some Important Legal Considerations
- There is no US residency or citizenship requirement imposed on the person who applies to found a business entity in the US, but the person must be a natural person rather than a business entity. As a non-US resident, the detailed guidance for registering a business is available here.
- The US government has many treaties with other countries, regarding tax, which must be dealt with care and requires expert guidance. For example, if the home country where a foreign-based business resides has a double-taxation treaty with the US, dividends associated with its foreign branch office are exempt from US taxes.
- Moreover, non-profit organizations (501(c)) could apply for various tax benefits from IRS, such as tax exemptions. The incorporation process of a non-profit organization is very similar to registering a regular company in the US.