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Growing Into the U.S.? Consider These Tips on Choice of Entity

By William Iannarelli on December, 30 2014
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William Iannarelli

4 Reasons Why You Should Consider a “C” Corporation

The United States economy represents the pot of gold at the end of the rainbow for many businesses around the world. Its citizens and businesses consume trillions of dollars in products and services.

If you’re planning for growth into the U.S. or you’re already operating there, you should consider whether an American subsidiary makes sense for your business. When U.S. operations have grown to a point that justifies creating a subsidiary in-country, there are four good reasons why most businesses choose to form a type of entity known as the Subchapter “C” corporation.

  • Protection from liability. One downside of operating in the U.S. is the litigious nature of its residents. The creation of a corporate entity in the States helps to protect the foreign parent from many of the “slings and arrows” directed at commercial enterprises in the country.
  • Financing. If your plans include getting loans from a U.S. bank, you will almost certainly need a U.S. subsidiary. Financial institutions in the states rarely lend to foreign businesses. Formalizing your presence in the country opens doors to financing options not available to businesses based outside its borders. As noted above, forming your U.S. business as a corporation also provides protection for your non-U.S. interests if the business has difficulty repaying the loans.
  • Returning capital to the foreign parent. Some argue that forming a pass-through entity in the U.S. avoids the double taxation that occurs when corporations are taxed once on earnings and shareholders are taxed again on distributed earnings. A corporation can manage this obligation through careful planning. The parent can provide loans to the subsidiary or perform back office support and other business functions. Payments made for such things serve the dual purpose of returning money to the parent and reducing the subsidiary’s taxable income.
  • Tax impact to the parent. Multinational businesses are required to create transfer-pricing plans that set prices for inter-company transactions. Those transactions must be made “at arm’s length” to comply with the various countries’ transfer-pricing laws, and the more formal structure of a corporate subsidiary makes that standard easier to achieve.

While planning to create a U.S. subsidiary, seek out business advisors in your home country and in the states who are familiar with creating multi-national parent/subsidiary relationships.

Review of US and state tax structuringThey need to coordinate on the project to make sure that the new organization is structured in a way that maximizes efficiency, observes the rules of both countries, and makes every legal effort to minimize taxes and fees.  

Once you’ve determined what type of subsidiary to form, the next question to answer is, “Where in the U.S. should you form it?” We’ll look at some of the considerations at the U.S. state and local level in a future post.  

Top 100 CPA firm Freed Maxick can help you navigate the complexity of doing business in the U.S. Learn more here.

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