When expanding your business into a foreign jurisdiction one of
the first things to consider is whether your overseas activities give rise to a
tax presence in the country you are engaging with. In an environment where
every country is seeking to recover their fair share of tax dollars, the bar
for having tax exposure overseas is pretty low and a small amount of overseas
sales can deem an Australian business to be a taxpayer abroad.

One
of the first markets Australian businesses tend to explore when deciding to
expand overseas is the United States. Our common language, cultural closeness
and the attractiveness of the US leading consumer market make the US a highly
desirable business investment destination for Australians. Furthermore, the US
strongly encourages inbound investment by setting low barriers of entry for
foreign entities wishing to do business, which makes the US market highly
competitive and diverse.  

An
early consideration to make is which entity should you use for the purpose of
expanding into the US. The IRS has far reaching powers for collecting tax from
foreign entities to the point that fairly insignificant economic activities in
the US can deem an Australian entity to be a foreign branch in the US resulting
in severe tax consequences.  To protect from this exposure, many
businesses go through the path of establishing a US subsidiary entity.

Types of Entities

When
it comes to US companies there are several options to choose from:

C CORPORATIONS

C
Corporations are used by larger organisations with many shareholders or by
business looking to raise capital by issuing shares. They are a good vehicle
for active trading businesses and particularly beneficial for employing people.
C Corps have the ability to set up fringe benefits without taxation, thus
allowing for deductions for employee medical costs and other benefits.

S CORPORATIONS

S
Corporations are effectively corporations for carrying out a personal services
business. They are restrictive as they require all shareholders to be US
citizens. This makes them ineligible to use by foreign investors.

LLCS

Limited
Liability Companies (LLCs) are perhaps the most common and offer the most
flexibility to foreign investors. LLCs can choose if they are a look-through
entity, where the tax reporting flows to the owners or in the case of multiple
members LLC are treated as a partnership. Alternatively, LLCs can elect to be
taxed like a C Corporation. This is an election also known as ‘checking the
box’. This election can be a useful tax planning tool, however there are
certain rules and time periods that govern when to ‘check the box’ and how long
the election is valid for. It is something that requires careful consideration
in order to avoid unintended tax consequences.

One
of the limitations of an LLC is that it does not issue shares but can still
have multiple members who share a percentage of the company. Members normally
maintain a capital account. Their capital contribution gives them a share of
the LLC, and the right to a percentage of the profits. Each owner’s share is
set by agreement, usually a formal operating capital contribution agreement. If
an LLC needs to go public or raise capital by becoming widely held, it can be
converted to a C Corporation with relative ease.

After
the type of company to be used is determined, you must decide in which state
the company will be established. The considerations here can be numerous.
Firstly, is the formation of the company a matter of urgency? It takes less
than a week to form a company in Delaware but it can take 3-4 weeks to
establish in California.

Our
office is experienced in providing strategic and practical advice to businesses
seeking to explore opportunities in the US and other foreign jurisdictions. We
can assist you domestically and work with trusted professionals overseas to
provide you with efficient and results-oriented strategies for your overseas
expansion.

https://viccaca.com/australian-business-international-expansion-into-the-us-part-1-structure/