Guide on How to Successfully Expand Your Business to the United States
Learn All the Necessary Steps for the Internationalization of Your Company
The internationalization of a business is not only a symptom of growth, but also a powerful catalyst for the strengthening of a product or service in the market. For this reason, at Gowper we continuously encourage our clients to consider internationalization as a necessary step in the growth of their business, and not as an operation to be postponed indefinitely due to its supposedly high costs and complex execution.
When it comes to expanding a business internationally, the main question that can arise is to determine the ideal place to start this international adventure. In this article we will focus on how to expand your business to the United States and why this country is one of the preferred destinations.
The US market offers one of the greatest opportunities for growth in the world, while at the same time offering the legal certainty typical of a country with one of the most consolidated democratic systems and best developed legal framework, especially in the field of business, despite the obvious complexities of its system of federal, state and local laws. Forming a partnership in the United States will open up great opportunities for the future of any business.
Is it very difficult or expensive to expand to the United States?
Contrary to the majority perception, at least in Spain, that incorporating a company in the United States is either highly expensive or difficult, this is a country that encourages entrepreneurship and the creation of companies, both in terms of taxation and through bureaucratic facilities that are key to the speed of the procedure.
The costs of expansion and incorporation will depend fundamentally on the type of business and authorizations that it may require to carry out its activity, the type of company or tax structure that is sought to be adopted, the State or territory where it seeks to establish its domicile, the size and composition of the company and the facilities that the future company will need, etc. Yet, in general, we are not talking about significant or even high costs, especially if we compare them with many European countries or those of most of the world's most thriving economies.
On the other hand, the procedures for the incorporation and operation of a company in such country do not involve great complexity, being characterized by its speed of execution and simplicity, although the specific requirements and execution time vary from State to State. The level of difficulty is therefore virtually non-existent or very low. However, as with all internationalization, it is clear that professional advice, including from lawyers, will always be necessary so that the success of the expansion operation is assured.
What would be the steps to be taken?
The first two steps are intertwined, because they make each other dependent to some extent, especially if we look at the tax advantages. It consists, on the one hand, of deciding on the State in which to set up the company and, on the other hand, selecting the most suitable type of company for the business.
Once these first two steps, which are the most critical, have been accomplished, the rest consists of drawing up the necessary corporate documentation, hiring a Registered Agent, obtaining a tax identification number (EIN), opening a bank account, etc.
Which is the best State to incorporate in the United States?
There is no single best State, there are at least 10 States to be considered as the best options within the country. But there are clearly less good choices: New York, New Jersey and California could be at the top of such a list, from a fiscal and bureaucratic point of view, to incorporate a company in them.
But it is not only necessary to look at the issue of taxation; when evaluating the best States to set up, it is advisable to weigh up between taxation, ease of procedures and the efficiency of the institutions.
There are many States that, with a very favorable tax system, have slow and complex procedures for the incorporation of companies, especially for foreign partners, such as Wyoming and Nebraska. Or, on the other hand, despite having a very beneficial tax system, others have very aggressive administrations, such as South Dakota.
At Gowper we usually manage internationalizations to the United States with our Top 5 States: Delaware, Texas, Florida, Utah and Montana.
At the incorporation level, it is the lowest cost state in the entire United States ($90.00 LLC, $89.00 Corporation).
Businesses that do not operate in Delaware are exempt from paying most taxes.
Actually operating in Delaware is not cheap. Income taxes, personal or corporate, are quite high (up to 8.7%).
The franchise tax for LLCs is somewhat expensive ($300.00), but it is even more expensive for corporations (up to $200,000.00).
There are no statewide taxes on personal or business income.
Most Intellectual Property taxes are exempt.
Incorporation costs are higher than the average in the United States ($310.00 Incorporation Fee).
The annual franchise, which is mandatory for LLCs and Corporations, is not a flat fee, but is calculated based on profits. Although in practice the first million dollars of profits are always exempt.
There is no personal income tax.
There are exemptions for Annual Accounts and Annual Franchise obligations.
It is one of the states with the highest penalties for failure to file taxes on time.
Corporations do not have as many benefits as LLCs.
The benefits for LLCs and Corporations are very balanced.
It is among the top taxation regimes in the United States.
The administration tends to manage everything through the Registered Agent, which makes it necessary to hire more expensive services.
Trade opportunities are not as high as in other states.
The public administrations carry out a very agile and efficient processing.
It is among the top taxation regimes in the United States.
Trade opportunities are not as high as in other states.
Utah and Montana are the perfect example of ideal States to incorporate, but where it must be weighed against the real business opportunities that will arise. On the other hand, Delaware is the dormitory state, and if the objective is to incorporate there, but operate in another state or country, it is the winning option. Finally, Texas is the big winner for small businesses if they are going to operate in the state, and Florida offers many business opportunities so it is among the best options, and has the advantage of being more connected to the Hispanic world.
Do I choose an LLC or a Corporation for my business?
In fact, it is a question that requires a detailed response. But, in general terms, both corporate forms allow limiting the patrimonial liability of the partners, the incorporation requires a very similar documentary burden, and they establish very similar obligations before the State institutions.
The main differences are in tax matters and organizational structure. Corporations can give rise to double taxation in the United States: on the one hand, corporate income tax is levied on the profits of the corporation and, on the other hand, when dividends are distributed, the partners will be taxed on personal income tax. LLCs can choose to always be taxed on the income of their partners, and therefore, not to be taxed twice.
As regards the organizational structure, Corporations have stricter formal requirements, more similar to those established in European corporate law, such as the holding of Meetings of Shareholders for the approval of decisions and management by a board of directors or individual managers, as opposed to the greater organizational and management facilities of LLCs, which usually have an Operating Agreement establishing the functioning of the Company and designating its governing body.
The choice will therefore depend on the business vision you have. There is no right or wrong choice, it is about different ways of operating the company. LLCs are usually chosen for reasons of simplification of taxation and simpler and more functional structure in businesses that do not usually contemplate large investments or financing needs in their development. While Corporations are chosen by large businesses, whose expansion involves the search for investors and more complex and balanced organizational and decision-making structures.
Will I need a Registered Agent?
The Registered Agent is the person who will receive the notifications addressed to society, both from administrations and from private individuals. It is mandatory for both LLCs and Corporations, and it basically would be like appointing a representative for notification purposes.
This is a system designed to avoid difficulties when notifying the company of judicial, administrative, etc., matters (which in the United States is identified as Services of Process). Difficulties that can occur, for example, in Spain, when a notification of a lawsuit to a company is not served due to a change of registered office, which forces the investigation of the newly registered office.
In most States they are known by this name, although they may have other names such as Statutory Agent (Arizona and Ohio), Resident Agent (Kansas, Maryland, Massachusetts, Michigan and Rhode Island), Agent for Services of Process (California, Louisiana, New York and West Virginia), Commercial Clerk (Maine), or Registered Office Provider (Pennsylvania).
Both natural and legal persons can be Registered Agents. They simply must comply with the requirement of residence in the State where the company will be incorporated, or, in its absence, authorization from the State to carry out this activity, capacity to receive notifications from Services of Process, and consent from both parties (company and Registered Agent).
These services are usually contracted out to Registered Agents agencies that exist at both the state and federal level. Although a company can be its own Registered Agent if it meets the residency requirements.
What corporate documentation will we need in the United States?
As in Spain, or any other country, companies will be governed by their bylaws and by the law. In Spain, the articles of incorporation themselves contain the bylaws, but in the United States they are separate documents.
On the one hand, we would have the Articles of Incorporation, in which is included the name of the company, its directors or managers, the share capital and the amount and distribution of the shares or holdings, express powers of attorney, corporate purpose, duration and appointment of the Registered Agent.
On the other hand, we have the Bylaws. This document is the most similar to the corporate bylaws in Spain because it will contain all the rules for the internal functioning of the company: voting rights of the partners, calling and holding meetings, appointment, duration, termination and remuneration of positions, distribution of dividends, etc.
In the case of LLCs, both documents are replaced by the so-called Articles of Organizations and Operating Agreement. This is, broadly speaking, a change in format, since, in essence, both will continue to regulate the same issues.
Is there a tax identification number in the United States?
Of course. In the United States, companies can apply to the Internal Revenue Service (IRS) for a tax identification number, called the Employer Identification Number (EIN), which would be the equivalent of the CIF or NIF in Spain. There is no obligation to apply for it, but it will usually be necessary for the most common operations of any company. The opening of bank accounts, obtaining business licenses, access to subsidies, hiring employees, all these actions require an EIN.
It is quite easy to obtain them, through the IRS' own website. However, there are complications when you lack a Social Security Number (SSN). All U.S. citizens have their own Social Security Number, which is the primary means of tax identification for U.S. citizens. Unlike in the European Union countries, or many other countries in the world, the personal identification number (ID card, etc.) is not the main means of identification in the United States.
Typically, foreign partners seeking to expand their business to the United States will not be assigned an SSN, which precludes obtaining the EIN via telematics through the IRS website. The way to obtain the EIN in this case will be by filling out form SS-4, which is provided by the IRS itself on its website along with instructions for use. This form must be submitted in person at the IRS offices, or sent by mail or fax.
Will I need business licenses?
It is practically impossible to give general guidelines on this point, since each State has the capacity to regulate this in a completely different way. There are States that require a license for almost every type of business, and others that limit themselves to regulating business types that affect essential services (medical services, pharmaceuticals, etc.).
The need to obtain licenses and permits is usually clearly identified on the Secretary of State's website, and is usually relatively simple and subject to very low fees.
How can we help you at Gowper?
At Gowper we have lawyers who specialize in the internationalization of companies. This is one of our main activities, and especially in the United States we have wide experience advising companies that want to set up there, and assisting and guiding them throughout the process.
We take care of absolutely everything: from providing Registered Agents, to obtaining EINs and licenses, to drafting all necessary or recommended corporate documents, as well as supporting in the opening of bank accounts.
We have a presence in Miami, from where we can accomplish any incorporation in Florida, as well as trusted partners in Texas, Delaware and many other states.
Our assistance is not limited to specialized advice on the incorporation of companies, but we strive to provide a comprehensive service to our clients, including the protection of their trademarks, domains, patents, know-how and trade secrets, advice on the conclusion of commercial contracts, and assistance in any dispute or difficulty that may arise. Also, through our network of fiscal, tax and accounting professionals, we help clients to execute the most appropriate business strategy and obtain the highest possible return on their international expansion, ensuring compliance with tax regulations.