Does it make business sense to form a US subsidiary in order for your company to expand to the US? Is there enough benefit?
There is an occasional misconception that there is no reason to form a subsidiary to conduct business in the US. This comes up frequently in the early stages. It’s true that use of a subsidiary is not required. But there are several advantages that can be gained from using a subsidiary company for US expansion.
Increase net income with tax efficiencies.
Differences in tax rates can have a substantial impact. If tax rates are lower in your headquarters country than in the US, then there can be a significant financial benefit if a US subsidiary conducts the US portion of your company’s business.
A tax lawyer or tax accountant in the US with relevant experience can help to form the most tax-beneficial strategy. The improved net income, which can last for years, can soon exceed the relatively small investment in advance tax planning.
We can introduce you to several qualified US tax advisors who have helped our clients.
Better contain potential liability for US operations.
Unfortunately, lawsuits against businesses happen relatively more often in the US. Generally, a party who wins can likely recover against the subsidiary but not necessarily against the other members of the company group.
On another note, let’s say the parent company later decides to cease its US business. It should be easier to close and liquidate a US subsidiary than to cease doing business here as a foreign company.
Manage the risk of suits against the parent company in US courts.
As mentioned above, other company group members may be less likely to be included as defendants in a US lawsuit against the subsidiary.
And even if a party sues not only the subsidiary but also the other group members, a dismissal of the claims against the rest of the company group is more likely. This in turn may dishearten the party that is suing, and they may fight less over such a dismissal.
Fence in insolvency risk.
A business does not devote time and resources to build in the US with the plan to ultimately trigger its insolvency. However, if a catastrophic liability occurs, the parent company can decide whether to step in to help the subsidiary meet its obligations, or allow the subsidiary to seek insolvency relief.
Depending upon how little the rest of the corporate group has been involved in direct operation of business in the US, it may be possible for the subsidiary in the US to enter insolvency proceedings without subjecting the other company group members to them. At least in such an instance, the parent company will have preserved the ability to select that option.
Avoid time-consuming, needless disclosure of operations in other countries to the US federal tax agency.
By using a US subsidiary to isolate their US transactions from the rest of their business, multinational companies headquartered outside of the US can often avoid subjecting the books and records of the parent company to potential scrutiny, such as audits, by the US Internal Revenue Service (IRS).
Promote simplicity and efficiency.
Using a subsidiary for substantial US operations can simplify bookkeeping and accounting, and make compliance with US tax laws more efficient and therefore more cost-effective. It can also make it simpler to manage US operations, such as banking and US staffing matters (if and to the extent staffing is relevant).
Facilitate an ultimate sale or joint venture of the US business, or part of it.
The equity of a subsidiary can be transferred to another owner more easily and cleanly than an unincorporated branch, whether by transfer of shares or transfer of assets.
Some Professional Employer Organizations and consultants offer strategies to avoid the tax and labor governmental filings that are associated with employing people in the US. These strategies involve using PEOs and other third parties instead of the company hiring US employees directly. And in their enthusiasm, they sometimes oversimplify and state that their recommended strategies will enable your business to expand to the US without needing a subsidiary. However, there are a number of reasons, unrelated to avoiding the paperwork of tax and labor agencies, that business leaders should consider using a US subsidiary for their US operations.