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 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 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.
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.
Date of Issue: 15 April 2019
Disclaimer: The contents herein are intended for general information only and should not be construed as legal or accounting advice. Vicca Chartered Accountants Brisbane bears no responsibility for any loss that might occur from reliance on information contained in this publication. Please do not reproduce, transmit or distribute the contents herein in any form without prior permission from Vicca Chartered Accountants, Taxation Accountants Brisbane Australia.