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Setting up a U.S. subsidiary is a strategic move for EU companies aiming to access the $26 trillion U.S. market. Here's a quick guide to help you navigate the process:
- Choose the Right Structure: Opt for an LLC for flexibility or a C-Corp for easier fundraising and clearer tax frameworks.
- Pick a State: Delaware is the top choice for its business-friendly laws, but Texas, Florida, and California offer unique benefits.
- Legal Steps: File formation documents (e.g., Articles of Incorporation), get an EIN, and draft bylaws or operating agreements.
- Tax Compliance: Register at federal, state, and local levels, and prepare for quarterly estimated tax payments.
- Immigration: Select suitable visas (like L-1A or E-2) for transferring EU staff to the U.S.
- Operational Setup: Open a U.S. business bank account, secure necessary permits, and comply with U.S. employment laws.
Quick Comparison: LLC vs. C-Corp
| Feature | LLC | C-Corp |
|---|---|---|
| Tax Structure | Pass-through taxation | 21% flat federal rate |
| Fundraising | Limited options | Can issue stock |
| Compliance | Fewer requirements | Requires formal governance |
| Foreign Owner Tax | Complex for non-residents | Clearer tax framework |
Key Takeaway: A Delaware C-Corp is often the best option for EU companies seeking long-term growth in the U.S. market. Start by hiring a U.S. tax advisor, securing an EIN, and ensuring compliance with federal and state laws.
How to Start a U.S. Registered Delaware C Corp from Abroad
Choosing Your Business Structure
The structure you choose for your business can have a major impact on its success. For EU companies looking to establish steady operations in the U.S. and pursue growth, C-Corporations are often the go-to option.
Legal Entity Options
When setting up in the U.S., EU companies typically decide between two main structures:
| Feature | LLC | C-Corp |
|---|---|---|
| Tax Structure | Pass-through taxation | 21% flat federal rate |
| Management | Flexible structure | Requires formal board and officers |
| Fundraising | Limited options | Can sell shares to raise capital |
| Compliance | Fewer annual requirements | Requires regular board meetings and filings |
| Foreign Owner Tax | Can create complex tax situations for non-residents | Provides a clearer tax framework |
"Many types of investors will not be interested in (or may be legally barred from) investing in LLCs because of the income and loss pass-through nature."
– Orrick Legal Guide for Stripe Atlas
LLC vs. C-Corp Comparison
C-Corps are often the better choice for companies seeking clear tax structures and investment opportunities.
1. Tax Considerations
C-Corps are taxed at a flat 21% federal corporate rate. While this means double taxation - once at the corporate level and again on shareholder dividends - it can simplify tax management for international operations.
2. Investment Structure
C-Corps can issue multiple stock classes, making it easier to raise capital and expand ownership.
3. Operational Benefits
This structure creates a clear separation from the parent company, offers a standardized governance framework, and is widely recognized by U.S. partners.
For smaller or simpler operations, an LLC might be sufficient. Deciding on the right structure now will make future filings and legal processes much smoother.
Legal Setup Steps
To efficiently establish your U.S. subsidiary, you’ll need to file the right documents and clarify ownership details.
Filing Requirements
The required documents depend on the business structure. For example, C-Corps require filing Articles of Incorporation, while LLCs need Articles of Organization with the state’s Secretary of State office.
| Required Document | Purpose |
|---|---|
| Articles of Incorporation/Organization | Establishes the legal entity |
| Company Bylaws | Defines governance |
| Operating Agreement | Outlines management structure |
| Registered Agent Designation | Identifies who receives legal notices |
After filing, the next step is obtaining an Employer Identification Number (EIN) to formalize your operations.
Getting Your EIN
An EIN is a must for operating in the U.S. The IRS offers several application methods, depending on your location:
| Application Method | Processing Time | Ideal For |
|---|---|---|
| Online (IRS website) | Immediate | U.S.-based companies |
| Fax | About 4 business days | International companies |
| About 4 weeks | Alternative option |
"Use this tool to get an EIN directly from the IRS in minutes for free." - Internal Revenue Service
If your principal operations are outside the U.S., you’ll need to apply by fax or mail. The IRS does not charge for EIN applications, so steer clear of third-party services that require payment.
Once you’ve secured your EIN, focus on establishing your subsidiary’s ownership structure.
Setting Up Company Ownership
Clear ownership is key for control and compliance. Many EU parent companies choose to retain 100% ownership of their U.S. subsidiary to ensure full control.
Here are the main steps to set up ownership:
- Board Resolution: Draft and file a resolution approving the subsidiary’s formation.
- Operating Agreement: Document management details, voting rights, and asset allocation.
- Leadership Appointment: Appoint directors and officers to oversee U.S. operations.
"A subsidiary is a separate legal entity owned by your foreign parent company. The primary benefits of forming a separate legal entity include limiting liability arising through U.S. operations at the subsidiary level (or at least making it more difficult for liabilities to rise to the parent level), noting that the U.S. can be a litigious market, tax efficiency, the ease of moving foreign workers to the United States, and the ease of setting up U.S. bank accounts." - Mintz
To maintain control and ensure smooth operations, focus on creating detailed bylaws. According to Mintz law firm’s August 2024 checklist, these bylaws should outline shareholder meetings, voting processes, and the roles and responsibilities of directors and officers in the U.S. subsidiary.
Tax Requirements
Understanding your tax responsibilities as a U.S. subsidiary is essential to staying compliant and avoiding fines.
U.S. Tax Registration
Your subsidiary in the U.S. needs to register at federal, state, and local levels. Once you have your EIN, you’ll need to register with the appropriate tax authorities.
| Tax Registration Level | Purpose | Typical Timeline |
|---|---|---|
| Federal (IRS) | Income and payroll taxes | Upon formation |
| State | Income and sales taxes | Before starting operations |
| Local | Business and property taxes | Depends on location |
Consider using a payroll service to handle deductions and withholdings efficiently.
International Tax Rules
Cross-border transactions between your EU parent company and U.S. subsidiary require careful tax planning. According to Your Europe, "For parent companies and their subsidiaries, distribution of profits can be exempted from withholding taxes".
Here are some key points for international tax compliance:
| Area | Requirement | Advantage |
|---|---|---|
| Corporate Structure | Form as a U.S. corporation | Qualify for tax treaty benefits |
| Profit Distribution | Apply for EU tax exemption | Prevent double taxation |
If you’re using hybrid loan arrangements, ensure they’re taxed correctly in both the U.S. and EU. The EU parent company must tax any profit distributions it receives to avoid double non-taxation issues. Also, keep track of filing deadlines to remain compliant.
Tax Filing Schedule
| Tax Form | Due Date | Extension Option |
|---|---|---|
| Form 1120 (C-Corps) | April 15 | 6 months (Form 7004) |
| Estimated Tax Payments | April 15, June 15, September 15, December 15 | Not applicable |
| W-2 Forms | January 31 | None |
| State Returns | Varies by state | State-specific |
Corporations are required to make quarterly estimated tax payments. These payments should equal at least 25% of either the current year’s expected tax or the previous year’s liability.
"A corporate taxpayer must file an annual tax return (generally Form 1120) by the 15th day of the fourth month following the close of its tax year".
If your corporation operates on a fiscal year, adjust these deadlines based on your chosen tax period. Keep in mind that while you can request a six-month extension for filing, this does not postpone your tax payment deadlines.
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Immigration Rules
Navigating U.S. immigration requirements is a key step for EU companies setting up subsidiaries. Knowing visa options and meeting compliance obligations will help ensure smooth business operations.
Visa Types and Requirements
The U.S. provides several visa categories designed for international business activities. Here are the main options for EU companies:
| Visa Type | Purpose | Duration | Key Requirements |
|---|---|---|---|
| L-1A | For executives or managers | Up to 7 years | Must have worked for the foreign parent company for at least 1 year |
| L-1B | For employees with specialized knowledge | Up to 5 years | Must have worked for the foreign parent company for at least 1 year |
| E-2 | For treaty investors | 2–5 years | Requires a substantial capital investment |
| H-1B | For specialty occupations | Up to 6 years | Requires a bachelor's degree or equivalent |
H-1B visas are capped at 65,000 annually, with an additional 20,000 reserved for individuals holding U.S. master’s degrees. Applications typically open in April for an October start.
Once you’ve chosen the right visa category, make sure your subsidiary stays compliant with all immigration-related responsibilities.
Company Immigration Duties
When employing foreign workers, your U.S. subsidiary must handle several key responsibilities:
-
Employment Verification
Complete Form I-9 for every hire and keep these records ready for potential inspections. -
Visa Compliance Monitoring
Keep track of each employee’s visa status, expiration dates, job role, work location, salary, and hours worked. -
Reporting Changes
Notify USCIS of any major changes, such as shifts in job duties, location, salary, or company ownership.
Failure to meet these obligations can lead to severe penalties. Conducting regular internal audits of employment records can help avoid compliance issues.
For specialized immigration assistance, consider consulting a subscription-based legal service like Fellow Legal.
Business Setup Tasks
Once you've handled legal and immigration matters, it's time to tackle the operational side of things. Setting up your U.S. subsidiary involves ensuring all essential business operations are in place.
Bank Account Setup
Opening a U.S. business bank account requires specific documentation. Here's what you'll need:
| Required Document | Details | Purpose |
|---|---|---|
| Formation Documents | Certificate of Formation (LLC) or Articles of Incorporation | Proves legal establishment |
| EIN Documentation | IRS-issued Employer Identification Number | Tax identification |
| Operating Agreement | Company bylaws and ownership structure | Bank compliance |
| Physical Address | A U.S.-based business or registered agent address | Legal requirement |
| ID Documents | Passports/IDs for officers and major shareholders | Identity verification |
Many EU companies opt for neo-banks due to their remote-friendly account opening processes. These digital banks often have lower deposit requirements and simpler applications, making them a convenient choice.
Next, ensure your subsidiary has all the necessary permits.
Required Permits
Licensing requirements in the U.S. depend on your industry and location. Your subsidiary must meet federal, state, and local regulations. Common permits include:
- General Business License: Required in most cities.
- Industry-Specific Permits: Based on your business type.
- Sales Tax Permit: Needed if you sell physical goods.
- Professional Licenses: For specialized services.
For instance, a technology company in California might need a general business license from its city. A food distributor, on the other hand, could require FDA registrations and state-specific food handling permits.
U.S. Employment Laws
Employment laws in the U.S. differ significantly from those in the EU. Key points to consider:
- At-Will Employment: Employers can generally terminate employment without cause.
- Cost of Employment: Plan for an additional 30% on top of salaries for benefits and payroll.
- Equal Employment: Federal Equal Employment Opportunity (EEO) laws must be followed.
"The globalization of business activity has resulted in employers from around the world assigning increasing numbers of personnel internationally. The following general guidance is intended to help multinational employers determine their obligations under U.S. equal employment opportunity laws (EEO laws)." - U.S. Equal Employment Opportunity Commission
To stay compliant and build a strong workforce, consider these practices:
- Use a payroll service to handle tax withholdings and ensure timely payments.
- Develop employee handbooks that align with state-specific regulations.
- Provide competitive benefits, including health insurance and retirement plans.
- Establish clear anti-discrimination and harassment policies.
Keep in mind, state laws may introduce additional requirements, so it's essential to stay informed.
Regular Legal Requirements
Yearly Filing Requirements
Staying on top of yearly filing obligations is key to keeping your business in good standing:
| Filing Type | Deadline | Details |
|---|---|---|
| Federal Tax Returns | April 15 | Use Form 1120 for C-Corps; remember to make quarterly estimated payments. |
| State Tax Returns | Varies by state | Covers income, sales, and use tax returns. |
| Annual Reports | State-specific | Includes company status updates and officer details. |
| BOI Reports | Within 30 days of changes | File updates on beneficial ownership with FinCEN. |
According to Harbor Compliance, missing annual report deadlines can lead to penalties and even losing your good standing. To avoid these issues, consider working with U.S.-based tax advisors familiar with both domestic and international regulations. Regular filings also support strong internal record-keeping.
Company Records
Keep thorough records, including financial statements, corporate minutes, stock records, transaction documentation, and compliance records. Financial statements should feature both independent subsidiary reports and consolidated statements with the parent company. Well-maintained records are essential for crafting clear contracts between parent and subsidiary companies.
Parent-Subsidiary Contracts
Clear contracts between your parent company and U.S. subsidiary are crucial for smooth operations and legal clarity:
- Supply Agreements: These should reflect fair market terms and, if appropriate, shift certain liabilities to suppliers.
- Service Agreements: Document all intercompany services, such as management fees and technical support, with terms negotiated at arm's length to ensure corporate separation.
- Governance Agreements: Define board composition and control structures to uphold the subsidiary's independence. A subsidiary board should actively participate in governance rather than simply mirroring the parent company's interests.
Include dispute resolution clauses in contracts, specifying arbitration or litigation in favorable U.S. jurisdictions. This approach reduces legal risks and reinforces operational boundaries between the parent and subsidiary.
Conclusion
Main Points
A Delaware C-Corporation provides strong legal protections. Key areas to address during setup include:
| Component | Requirements Checklist |
|---|---|
| Entity Formation | □ Delaware incorporation □ EIN registration |
| Tax Registration | □ Federal tax ID □ State tax ID |
| Banking Setup | □ U.S. business bank account |
| Immigration | □ Employment visas for EU staff |
| Compliance | □ State business registrations |
This table highlights the essential steps to get started. Now is the time to take action.
Getting Started
To establish your U.S. subsidiary, focus on these initial steps:
- Hire a U.S. tax advisor and payroll service to ensure accurate management of tax obligations and payroll.
- Secure business insurance to protect your operations.
- Apply for an EIN immediately to prevent unnecessary delays.
"Legal issues are much more prominent in everyday life in the US than in the UK".
Daniel Glazer, London Office Managing Partner at Wilson Sonsini, points out the importance of starting with strong legal guidance.
"European companies that do business in the U.S. will quickly discover that the U.S. is a litigious society. American employees, consumers and businesses are more likely to resolve disputes by going to court than their European counterparts".
This reality highlights the need for proper preparation and ongoing legal compliance to succeed in the U.S. market.
