The United States is one of the most robust economies and the largest consumer market. The country has vast opportunities for business growth and expansion. Consequently, foreign investors are always looking to invest in startups or established US ventures.
The US is 8th in ease of doing business, which means that the country is a haven for setting up a new business or a subsidiary. The business-friendly policies and a diverse market make it easier for entrepreneurs to enter America. However, you should know the following things while setting up a subsidiary to eliminate legal risks.
What are the Types of Subsidiaries in the US?
From a tax perspective, subsidiaries are called “disregarded entities”. The Internal Revenue System defines a disregarded entity as a legal business structure separate from its single owner. The owner of this entity is recognized only for tax purposes.
There are two classifications of US subsidiaries:
- Qualified subchapter S subsidiary (QSub): A subsidiary that is 100% owned by another company (S corporation).
- Captive real estate investment trust subsidiary (REIT): A Captive REIT is an entity with more than 50% ownership of the parent company.
How to Set Up Subsidiary in the US?
Setting up a subsidiary in the US follows simple methods, as given below:
- Declaration of establishing the subsidiary: Prepare a resolution that mentions the decision and approval to form a subsidiary, signed by the chairman and registered with the relevant authority.
- Choose the type of business structure: Choose the proper business structure for the subsidiary, depending on your needs. Rely on expert advice while deciding as it will have long-term impacts on both the subsidiary and parent company.
- Prepare the documents: After the decision to set up the subsidiary is final, create the necessary documents. These documents are often called Articles of Association or Organization and contain information regarding business location, activities, shareholders, management, voting rights, etc.
- Transfer the assets: Allocate the relevant assets to the subsidiaries according to the formalities.
- Prepare the Operating Agreement: Also known as the Indemnification Agreement, this document is meant only for internal purposes. It outlines the rules and procedures of the subsidiary’s operations. Furthermore, it mentions that any changes in the operation will need approval from the parent company.
- Apply for EIN: An Employer Identification Number (EIN) allows the US subsidiary to pay fees legally.
- Open a bank account: A bank account is vital for any business to conduct all financial transactions.
- Establish a board of managers: The parent company reserves the power to appoint a board of managers and directors to oversee the US subsidiary. They are responsible for steering the subsidiary towards its goals and vision.
Benefits of Setting Up a US Subsidiary
There is a range of benefits to opening a subsidiary in the US, as follows:
Since a subsidiary is a separate legal entity, you are not accountable for any damage or penalty. In other words, the subsidiary will protect you from any additional risks or liabilities.
Subsidiaries in the US have to pay a nominal 21% corporate tax. On the other hand, a branch office of a parent company has to pay an additional 30% US branch profit tax.
Access to a new market
With an easy-to-set-up legal entity in a foreign market, you can conveniently create inroads and establish a brand presence. Eventually, you can diversify your business verticals according to the location and improve profitability.
Availability of skilled professionals
The US has a vast pool of talent you can leverage to expand your business. With a subsidiary, the management of US professionals is much easier as you have to pay minimum taxes and release salaries in US Dollars only.
Documents to Prepare When Opening a Subsidiary in the US
You have to prepare the following documents to open a subsidiary in the US:
- ~Articles of Association, having information about the owners, board of managers, the registered agent, and activities to be performed.
- ~An operating agreement that states the responsibilities of the owners
- ~Member certificate for each member
- ~IRS Form SS4 for Employer Identification Number
What Business Forms can US Subsidiaries Take?
A subsidiary in the US can take either of the following forms:
Limited Liability Company (LLC)
An LLC is a business entity that protects the interests of its parent company from its debts and other possible liabilities. Furthermore, the personal assets of the holding company or the owner are not involved in resolving LLC’s issues.
LLCs are easier to set up and have minimal regulatory requirements. Moreover, the US laws allow pass-through taxation for LLCs, meaning the business’s profits and losses are taxed on the owner’s tax return.
An S corporation also protects the personal assets of its owners from liabilities. This entity generates income for the owners through dividends. Furthermore, owners can avoid paying double corporate and personal taxes by establishing an S corporation.
US Subsidiary Laws
The laws governing US subsidiaries vary from one state to another. Another critical factor is if the subsidiary is an LLC or a corporation. However, all businesses must have a taxpayer identification number generated by the IRS.
Subsidiaries also have to comply with local laws and regulations in some states. Depending on your industry, you might have to apply for a special license.
Post Registration and Compliance
Subsidiaries in the US have to follow the given guidelines after registering with the local and federal authorities:
- ~Prepare an annual report detailing the updates regarding owners, shareholding, addresses, profits, and much more
- ~File all the relevant tax returns - state, federal, and franchise
- ~CEOs and CFOs are accountable for the accuracy of the company information in financial reports submitted to the SEC
- ~Establish policies to protect sensitive company data
Taxes on Subsidiaries in the US
US subsidiaries have to pay the nominal rate for corporate tax, which is 21% of the annual income. Even though a subsidiary is considered a separate legal entity, the parent company can choose to pay the taxes separately or cumulatively.
Tax Incentives for Businesses Setting Up a Subsidiary in the US
Setting up a US subsidiary is a wise strategy if you are looking to save taxes. You can avail the following incentives if you have a subsidiary:
- Section 228 of the Internal Revenue Code allows you to treat a business acquisition as an asset acquisition. If you control 80% of the subsidiary, the tax basis of the purchase is equal to the fair market valuation of the assets. Consequently, you can avail better tax deductions than a stock acquisition.
- Non-profit organizations which cater to charitable activities can open a for-profit subsidiary and stay tax-exempt. While the subsidiary will pay the nominal tax, you will be able to remain tax-free and run a profit-making venture.
- An affiliated group of corporations, including a wholly-owned subsidiary, can file consolidated tax returns. The holding and subsidiary companies can factor in their profits and losses together in one tax filing. However, the parent company must own at least 80% of the subsidiary’s stock and have 80% voting power.
- You can legally create various wholly-owned subsidiaries as different entities. The various companies can cater to different business verticals. Furthermore, you can file consolidated tax returns and manage a subsidiary's loss with another's profit.
Other Important Considerations
Setting up a US subsidiary involves a lot of stages - from the initial registration to setting up a bank account for operations. With the varying rules in each state, you will have to spend a lot of time finding the ideal location for your business. Additionally, you need to deal with different local, state, and federal entities. Each of these steps requires a considerable amount of financial investment and time on your hands, as it could take months to streamline everything.
You cannot begin your work and recruitment without establishing the subsidiary. For this reason, several companies opt for global PEO services that have a local presence in the United States. With Multiplier, you can set up teams in the US without forming a subsidiary.
How Multiplier's Employer of Record Can Help You Hire & Expand in the US?
Setting up a subsidiary in the US requires a lot of preparation and awareness. The stringent rules are often difficult to navigate and demand expert help. It is efficient to partner with a US PEO in such a case.
Multiplier’s PEO services help you in forming global teams across 150+ countries. Our digital platform helps you onboard employees, draft contracts, offer benefits, release payments in local currency, etc. Contact us to know more about our services and offerings.
Frequently Asked Questions
Is a registered agent required to set up a subsidiary in the USA?
A registered agent and a registered physical address in the USA state of formation are required for company registration. An agent acts as a link between your company and the government and assists in creating your company subsidiary.
Which state is suited for forming a corporation?
It is appropriate to have your business in a state where you will be operating the most. But for more business-friendliness, opt for Delaware. It is one of the most popular choices for taxation advantages.