Many UK businesses target USA as the ideal expansion opportunity, with the common language, culture and huge market opportunity and this is particularly the case for UK recruitment business owners.
Research conducted by USA relocation consultancy ‘Newable’ found that for approximately half of UK business who planned overseas expansion, the USA was the main target. However, over 40% admitted to a general lack confidence in how to go about it and 68% expressed a concern over an unfamiliar regulatory framework.
For those at the early stages of considering a start up in the USA, here are some considerations about company set-up.
Where to register your business
Each state has its own registry of businesses, and its cheaper to register in some states than others, plus some have more business friendly laws e.g. Delaware state actively markets itself as a leading state for business incorporation, with business friendly legislation for example. You can of course trade across the USA from any state of registration.
Different types of business registration
For commercial (profit making) organisations there are three main types to consider:
This is often not favoured by UK business owners as it may have significant personal tax implications for owners.
Limited Liability Company (LLC)
LLCs can opt to have the tax treatment of a partnership, or a corporation. But LLCs may have a limited life in some states so when a member joins or leaves an LLC, it need to dissolved and re-formed with new membership. LLCs can be a good choice for medium or higher-risk businesses, where owners want their personal assets to be protected, and they want to pay a lower tax rate than they would with a corporation.
There are two main sub-categories to consider:
- C corp: similar to the limited liability protection offered to UK Company Directors, C corps offer the strongest protection to its owners from personal liability, but the cost to form a one is higher than other structures and they require more extensive record-keeping, operational processes, and reporting. C corps are better suited when it comes to raising capital through the sale of shares, and this can also be a benefit in attracting employees (stock incentive packages). Non-USA nationals can own all of the shares of a C corp and there is no requirement for there one to sit on the Board of Directors.
- S corp: these allow profits, and some losses, to be passed through directly to owners’ personal income without being subject to corporate tax rates, so avoiding the double taxation drawback of C Corps. However, all shareholders of S Corps need to be US citizens, so they be of limited interest to UK business owners.
The US Small Business Administration website provides more information on registered business structures.
The US tax system is famously complex. The national government, each state, and the local governments within each state make their own laws and have their own courts. Each government has its own tax administration, its own tax laws, and its own tax forms. At the national level, there is income tax, including corporate and personal income tax, capital gains tax, income tax on dividends, interest and royalties, and on partnership profits; and employee payroll taxes. At the state level, there are often similar taxes as the national ones, plus a local sales tax. Even some cities have their own tax regimes (income, business and property taxes).
Subsidiary or separate business?
General advice is not to set-up a subsidiary, but instead an entirely separate legal body (corporation etc). Incorporating a subsidiary within a n overseas group may result in the USA tax authority (IRS) being able to assess tax on operations in other countries as well as the USA!
Advance planning is essential. Despite the reputation of the USA as business friendly, there is also red tape to be dealt with. Know Your Client (KYC) requirements for opening bank accounts are more complex in the USA and they can take 2 to 3 months to set-up.
Always establish a business entity before undertaking any trading, otherwise you may not be able to rely on limited liability for Directors for example, if disputes with clients subsequently arise.
A common practice is to engage with a local provider in a co-employment agreement to remove the administrative burden of payroll, employment taxes and medical insurance. This is similar to Joint Employment model used in the UK.
Businesses need more extensive cover than that seen in the UK. For example:
- general liability
- product liability (which may or may not be part of the general liability insurance)
- business property
- directors and officers liability
- employer’s practices liability
- intellectual property infringement
- professional liability (errors and omissions)
- workers compensation
The UK Department for International Trade provides a guide for further information and contacts for American attorneys based in the UK etc.
PGC Group provide support for recruiters starting up in the USA.