Entering the U.S. Market for Tech Companies - Penetrating the U.S. market is an important part of many emerging technology company’s business strategy. The U.S. market is large, homogeneous, and a traditional leader in technology products. The rewards of a successful U.S. presence can be extremely lucrative.
In addition to the U.S. market opportunity, establishing and maintaining market share in the U.S. can play an important role in maintaining technical advantage and market share in your home market. How should you enter the U.S. market? What rules do you need to be aware of in order to do business in the U.S.? This article is intended to provide technology companies located outside of the U.S. with an overview of key legal issues involved in entering the U.S. market.
Direct U.S. Presence: Subsidiary or Branch Office?
At the far end of the continuum of increasing involvement is establishing a local presence to address the U.S. market. While this can be either a subsidiary or a branch office, a subsidiary has three advantages over a branch office. First, assuming you follow proper formalities, its separate legal existence limits your liability to your investment. Second, there are tax advantages. Branches or local employees authorized to accept orders are treated as creating a permanent establishment for you in the U.S., subjecting you to U.S. income tax on your operations. Since the subsidiary is a separate taxpayer, the parent company has no permanent establishment and its liability for local income taxes is thus limited. Finally, it demonstrates a greater commitment to the U.S. market. As an initial matter, many companies first set up a subsidiary to handle manufacturing and/or customer support and continue to use the distribution channels described above. As they gain more experience in the market, they may start doing their own localizations and marketing as well. If the product justifies it, they may recruit a local sales force to sell direct to U.S. customers.
A branch office puts the assets of the foreign company at risk, but is generally simpler and cheaper to establish and operate than a subsidiary corporation. The branch office must qualify to do business with the state where it is located by a “mini” incorporation process. U.S. tax law is important in deciding between a branch and a subsidiary. The federal “branch profits tax” enacted as part of the Tax Reform Act of 1986 reduces the desirability of branch operations unless a tax treaty provides otherwise. Under the “branch profits tax,” branch office remittances are taxed like dividends paid by a subsidiary. This is in addition to the tax on the income attributable to your branch office. Complex rules govern the “branch profits tax” and the allocation of expenses deductible from such income. Another important factor in favor of a subsidiary is that U.S. Internal Revenue Service (IRS) tax audits are limited primarily to the subsidiary and not the parent, except for Section 482 issues (transfer pricing adjustments for related-party transactions). With a branch office operation, the foreign parent may be subject to a more extensive IRS audit. Use of a branch may also subject you to direct state and local taxation. For all of these reasons, most companies prefer to set up a U.S. subsidiary rather than a branch office.
U.S. customers recognize that setting up a U.S. subsidiary is a commitment to the U.S. market. The cost of this commitment can be substantial, including the costs of hiring people, renting an office and setting up operations, learning how to operate in the U.S., establishing distribution channels, reaching customers, and learning their needs and preferences.
Protecting Your Intellectual Property
High technology products are costly to develop and frequently can be reverse-engineered, manufactured and distributed by competitors at a fraction of your original development cost. The U.S. has been a leader in enacting laws to protect the intellectual property embodied in such technology.
The U.S. is also a member of the major intellectual property conventions: the Berne Convention, the Universal Copyright Convention (UCC), the Paris Convention, and the Buenos Aires Convention. These treaties give nationals of other member countries the same intellectual property rights in the U.S. as U.S. nationals and provide certain timing priorities for patent and trademark applications.
Establishing a U.S. Subsidiary - Locating Your Business
Deciding where to locate your business involves a number of marketing, legal and financial factors, including state property and income tax rates, incentives available for the specific type of business and the skill level needed for your work force. The decision to locate in California, for example, may be driven primarily by the need to be near customers or in the center of a service territory. A common reason for deciding to locate in California is the concentration of high technology companies in Silicon Valley and elsewhere in the state. U.S. subsidiaries initially tend to be sales and marketing or research and development operations rather than assembly or manufacturing operations. Incentives that are applicable to manufacturing operations (such as reduced property taxes) are not relevant to a sales and marketing operation, which will not need a substantial physical facility or equipment. The state unitary tax issue discussed below under “State Taxation” is also important in selecting the location for a subsidiary. If a company operates in California, however, it cannot avoid California taxes.
Picking a Business Name
The name selected must not deceive or mislead the public or already be in use or reserved. “Inc.,” “Corp.” or “Corporation” need not be a part of the name of a California corporation but we recommend that you include one of them in your company name since some states require such a designation. Name availability must be determined on a state-by-state basis through the Secretary of State. Several alternative names should be selected because so many businesses have already been formed. Exclusive state rights in a trade name can also be obtained indefinitely through the creation of a name-holding corporation, a corporation for which articles of incorporation are filed but no further organizational steps are taken. It is wise to do a trademark search before selecting a company, product or domain name. Otherwise, you may find that you cannot use your company name as a trademark because it is confusingly similar to someone else’s trademark. Yondaa, Inc. performs company name searches as part of our offering.
Qualifying to Do Business in Other States
If you intend to rent an office or warehouse in another state, or if you have employees who are authorized to accept orders on your subsidiary’s behalf or who perform services (other than the solicitation of orders) within that state, you may need to “qualify” to do business there. States are becoming more aggressive about requiring qualification even for low levels of business contact because qualification generates revenue. Qualification is a relatively simple “mini” incorporation process. The consequences of failing to qualify, when required to do so, range from fines to not being able to enforce agreements entered into in that state.
Entering the U.S. Market for Tech Companies - The United States is a lucrative market for foreign technology companies. It is relatively free of quotas and non-tariff barriers, is open to imports, and has well developed distribution channels to customers who are accustomed to buying and using technology products. If your looking to expand into the US market, Yondaa, Inc. has an online platform to help you setup a US company in any of the 50 states. Get started today at https://yondaa.com
- Download our US Company Formation Brochure -
Access our 25 page brochure on setting up a company in the United States - A step by step overview of our formation services for non-residents