If you are an Irish company setting up in the United States, taking time to organise operations properly is essential.
Going Global USA: Learn your Legals is a concise and yet comprehensive guide to the most important elements you should consider, covering how to manage taxation, visas and immigration, and trade and customs. In this deep dive, learn how best to approach establishing a US business entity.
How to establish a US business entity
Setting up in the US without adequate research and planning exposes your company to the risks of litigation and state and federal taxation penalties.
To qualify to do business in the United States, you must, at the very least, have a registered branch office in the country. Choosing the branch office option can, however, make the parent company in Ireland a more visible target for lawsuits and legal claims, and liable for US federal, state, and local income taxes.
Form a distinct US legal entity
It is more prudent, and in the long run more cost-effective, to form a distinct US legal entity, be it either a US business corporation, known as a C-Corp, or a US limited liability company (LLC).
A C-Corp is similar in structure to an Irish limited company and is usually a better option than an LLC for overseas businesses. While there are tax advantages to forming an LLC, they apply to individual shareholders rather than shareholding parent companies. As C-Corp shareholders are perceived to be more ‘separate’ from the everyday activities of the company, C-Corp owners tend to be less exposed to litigation, and to have more limited liability.
Remember, however, that C-Corp profits can be taxed twice, under the US ‘double taxation’ system. Firstly, at federal and at state level, a C-Corp is assessed for corporate income tax on profits. Then, if the company chooses to distribute earnings, shareholders will pay capital gains tax on dividend income.
On the plus side, C-Corps are familiar entities to both customers and institutional investors, are scalable, and can be made public. And as most early stage companies reinvest profits to fund growth, when dividends are not issued, double taxation is not a major concern.
US location, location, location
Wherever you plan to do business in the United States, it is probably best to set up in the State of Delaware, where legislature deservedly enjoys a reputation for having America’s most business-friendly laws.
Delaware is one of only five US states with a separate non-jury Court of Chancery, with judges focused solely on business law. The Chancery Court is also unlikely to interfere in arrangements where signed corporate agreements are already in place.
Unlike in other states, shareholders and directors of Delaware-registered corporations do not have to be Delaware residents. In addition, Delaware corporate law applies to Delaware corporations no matter where they actually operate, or where their physical headquarters are located.
Delaware also offers favourable taxation laws. The state does not tax royalty payments and non-residents are not liable for personal income tax, including capital gains tax on dividend income.
While it may cost less to register a business in other states, potential short-term savings should be off-set against the long-term legal certainties that the Delaware legislature provides.
As easy as ABC Delaware: How to form a C-Corp or LLC
There are four steps to forming a C-Corp or an LLC in Delaware.
- Firstly, check online that your preferred choice is available and decide on a business name for your corporation or LLC.
- Secondly, appoint a registered agent to receive service of process and other correspondence on behalf of your company. If you have a Delaware address (which must be more than a PO box number), you can do it yourself. Otherwise, you can appoint an attorney or an accountant as a registered agent, or you can use a registered agent service company, which will charge you as little as $50 for their services.
- Thirdly, file a Delaware Certificate of Corporation that includes the name of the corporation, the name and address of its registered agent, the purpose of the corporation, and the total number of shares that the corporation is authorised to issue. The fee for filing this documentation is $89 (at time of writing), if all your information is contained on one page. Otherwise, an extra $9 is charged for each additional page.
- Lastly, you must remain ‘in good standing’, which requires you to file an annual report and pay a franchise tax. That part is crucial. If a Delaware corporation loses its good standing, it loses its limited liability shield, and the corporation’s creditors can make claims on shareholders’ personal assets.
Franchise tax is not based on income. It is based on overall share value and is assessed using two methods: the authorised share capital method and assumed par value capital method.
It is important to take professional advice to avoid paying more franchise tax than is necessary. If you authorise a large number of shares but only issue a small portion of them, or if the shares have no par value, you could end up with a franchise tax bill for tens of thousands of dollars. A corporation with 5,000 or fewer authorised shares, will pay at least the minimum franchise tax fee of $175 annually.
If your US company is conducting business in any state other than the state in which it is incorporated (for example, outside Delaware), it will most likely also need to register in each additional state, in a process known as ‘foreign qualification’.
As the rules for foreign qualification vary from state to state, consult with a business lawyer or, at the very least, conduct some research on the state’s Department of State website. Foreign qualification involves additional paperwork and expense. A Delaware corporation applying to do business in New York will spend at least $334 to obtain all required certification.
Note that, whether you file a foreign qualification or not, a company deemed to be doing business in a particular state will be subject to state income taxes in that state. However, there are states, such as Texas, where generous tax-free allowances mean that most small businesses pay little or no state income tax.
Talk to your Enterprise Ireland advisor to get advice on setting up your company’s presence in the United States or read more in Going Global USA: Learn your Legals