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Entering U.S. Markets with High Street Partners
As a large, economically vibrant and fairly homogenous market, the United States has long had strong appeal for foreign companies...
It has well developed distribution channels, a consumer-minded public, and an openness to imports. The barriers to entry are relatively low, but successful U.S. launches require both due diligence at headquarters and an understanding of some key issues.
Do your research:
Determining a location for your business is an important first step. This decision typically involves a number of marketing and operational factors that are unique to your business. In addition, legal and financial factors also come into play, including a review of applicable taxes, knowledge of the types of incentives available for your specific industry, and an understanding of your labor-related requirements. You will also need to determine the proper entity structure for your business needs. There are various entity types; however most companies prefer to set up a U.S. subsidiary in the form of a C -Corporation because it limits the foreign company’s tax and legal exposure. A subsidiary also demonstrates a stronger commitment to the U.S. market. U.S. subsidiaries initially tend to be sales and marketing or research and development operations rather than assembly or manufacturing operations.
The remarks below pertain to the establishment of a subsidiary as a CCorporation, though much of the information applies to the formation of a limited liability corporation (LLC) as well. A C-Corp, as the first is commonly called, is taxed under statutes of the Internal Revenue Code, whereas an LLC is not taxed at the company level, but rather the income is passed through to its shareholders instead.
Create a U.S. Subsidiary:
Forming a C-Corp is straightforward. You file articles of incorporation with the Secretary of State in the chosen State (Delaware is often selected for its business-friendly climate), then you pay registration and filing fees, and produce the appropriate shareholder agreements. Typically, the foreign company owns all or a majority of the shares in this new corporation, thus making it a subsidiary. Only one shareholder is required in the U.S. The shareholder(s) own the new C-Corp and elect a Board of Directors who govern the corporation and appoint company officers. U.S. law requires three officers: a president, a treasurer and a secretary, but all three positions may be filled by the same person. U.S. residency isn’t required for the directors or officers.
Part of the incorporation process is the selection of a company name. It’s a good idea to do a name search before registering a company, product, trademark or domain name for your new U.S. entity, to avoid any possible infringement or name confusion. You’ll need to set up a local bank account under this new company name, and then fund the entity. There are no minimum capital requirements.
Qualify and register to do business in other states:
In the U.S., companies must register to do business with the Secretary of State’s office in every state where they perform any level of business activity. For example, if you rent an office or warehouse facility, or you have even a single employee working in a state other than the one in which you are incorporated, you must file to do business in that other state. It may be helpful to think of the additional state-by-state filing requirement as mini-incorporations. In the current economic climate, individual state governments are increasingly – and aggressively - pursuing this qualification and registration because it generates revenue. Failure to register may result in fines or an inability to enforce contracts or agreements in the state.
Take care of Accounting/Bookkeeping/Payroll:
In tandem with incorporation and registration, you must set up accounting and payroll processes, records and systems. You’ll need to get your employees paid, keep the new subsidiary’s books, reimburse expenses, make vendor payments (commonly done by check in the U.S.), manage your cash, and keep track of Federal and local state, county and municipal compliance requirements. You’ll also have to manage employee expectations regarding benefits, including insurance, pension plans and stock options. The cost and administration of business and employee insurance programs (including Workers’ Compensation Property & Casualty, Directors & Officers, and Errors & Omissions on the business side; health, dental, disability, life etc. for employees) often come as a surprise to UK/EU based companies, so it’s wise to be prepared. Other differences include programs like 401K retirement plans which, while not required, are commonly expected by U.S. employees. Nearly all employees in the U.S. are “at will”, and offer letters are commonly used instead of employment contracts. Employees are typically paid twice per month or every other week (24 or 26 payments a year) rather than the once per month typical of the UK and elsewhere. You may require assistance in other human resources-related areas as well, including compliance programs, handbooks and employee recruitment.
Know your tax obligations:
As you launch your new U.S. entity, you’ll need to gain an understanding of the U.S. tax system, as you’ll have Federal and state income and payroll tax filing and reporting obligations, along with state, county, and municipal sales and use tax filings. The new U.S. subsidiary is taxed as a separate legal entity from the foreign parent, and their legal identities must be kept separate. This is where written transfer pricing* and inter-company service agreements often come into play, as the business relationship between the parent and U.S. subsidiary must be clearly defined and documented to avoid unnecessary tax and liability.
Depending on your business structure and industry, issues involving copyrights, patents, trademarks, intellectual property, leases, and customs and tariff issues may be part of your overseas expansion experience, and you may require assistance with immigration issues (i.e. visas, if you intend to transfer employees to the your U.S. operation).
Experienced assistance is available for all of these inter-related needs and, with support, the headquarters team shouldn’t be overwhelmed. Take your time, do your due diligence and seek out proper advice. The benefits of diversifying your risk and expanding your client base in markets abroad usually outweigh the challenges
*Related to the pricing of internal transactions between related companies or branches, transfer pricing covers a wide range of issues – such as the provision of services, the cross-border use of information technology systems, or financial transactions involving more than one country. Companies address this by the use of intercompany service agreements and various types of transfer pricing documentation. The tax guidelines for transfer pricing are outlined by the Organization for Economic Co-operation and Development (OECD), which requires that internal pricing policies are consistent with the pricing of comparable transactions between unrelated parties. This is referred to as the “arms length” principle. U.S. Internal Revenue Service Section 482 applies to the OECD guidelines for U.S. taxpayers. Transactions between related parties like your new U.S. subsidiary and the foreign parent must reflect arm’s length pricing, or risk a possible reallocation of income by the IRS. Many companies address this by putting in place relatively simple intercompany revenue models such as cost + arrangements, where the mark-up percent can range anywhere between 5% - 15% (as standard), depending on the specific services being rendered and industry norms, etc. All companies operating overseas should know that the arm’s length policy also applies for non-routine, value-added services as well, and higher markups may be necessary.