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How can foreign companies enter US Market

How can foreign companies enter US market

Consulting | Mar, 2021

From a business-friendly environment to specific technology and supply chain infrastructure, relative transparency to ease of doing business, United States market has a lot to offer. Regardless of industry, businesses investing in United States automatically gain competitive edge therefore, penetrating the US market is an important part of foreign company’s business strategy. The United States offers the largest consumer market across the globe with a GDP of USD20 trillion, which makes it one of the largest economies in the world. But successful establishment of business in the US market requires choosing a market entry strategy, depending on the product or services, and set objectives.

US Requirements for Registration of Foreign Companies

The foreign companies planning to establish their firm in United States must abide by the following procedures.

·         The foreign subsidiary must register in the state where it has its headquarters or conduct businesses. The subsidiary may raise capital by issuing shares or contracting for loans and need to pay federal and state income taxes on the money it earns.

·         The foreign company may create joint ventures with US-based firms and form a corporation or LLC, subject to state registration requirements.

·         The foreign company may have to register with federal government depending on the nature of business.

·         According to Foreign Account Tax Compliance Act, the foreign financial institutions must register with Internal Revenue Services and report the identity of US account holders. The foreign financial institution can be a bank, hedge fund, mutual fund, or other investment company that offers cash-value annuities.


What are the different ways to enter the US market?

Direct exports

Exporting is the easiest, quickest, and least expensive way to expand business in the US market and seek greater economic opportunities. Eliminating the role of agent or distributor, direct exports will lead to a higher return on investment, enable the company to set lower prices of products to be more competitive as well as build close contact with customers. In the scenario of direct exports, the manufacturer will be responsible for shipping, payment collection, and product servicing unless one chooses to take services of a foreign intermediary.

Indirect Exports

With indirect exporting, the foreign company needs to sell their products to the distributor in US, who will purchase the items at wholesale price and re-sell those for a profit. The distributor carries the responsibility of maintaining adequate facilities and personnel for normal servicing operations and regulating a sufficient supply of additional products. The method might also involve retaining a foreign agent who assumes the responsibility of selling company’s products and has the authority to make commitments on behalf of the organization.

Outsourcing/Offshoring

Outsourcing involves contracting out business process to another party, which may or may not include foreign and domestic contracting, whereas Offshoring refers to the actual relocation of a business process from one country to another. In offshoring scenario, the employees work for the foreign company but instead of working within the US facility, they are based in a foreign country. Offshoring and outsourcing leads to employment generation in the foreign country as well as increase the total no of jobs domestically.

Partnerships/Alliances

The foreign company can establish a well-structured partnership with a company based in United States, where each company can use their ideas and resources to keep pace with change as well as approach several markets simultaneously. One of the easiest ways to form an alliance with an international company that offers the products or services that complements your own. The foreign company can also establish a commercial presence or production hub in US market via a subsidiary of the existing enterprises.

Joint Ventures

Joint venture involves agreement in which a domestic organization purchases a part of foreign company or joins with a foreign company to establish a new separate entity. Joint ventures help to reduce risks by sharing costs and technology and are relatively an inexpensive way to enter the international market.

Direct Foreign Investment

Foreign direct investment is an investment made by an organization to establish foreign business operations or control ownership in a business enterprise based in another country with either greenfield ventures or mergers/acquisitions. In greenfield ventures, the foreign company entering a new market establishes a new subsidiary as a start-up busines. Another way to expand global reach is merger (combining forces with another firm), acquisition (taking over one entity by another).

Licensing and Franchising

Selling a license to manufacture products to a firm in the US market is an effective way to make a way into the global arena. Licensing is a legal process in which the licensor agrees to let licensee use a trademark, patent, trade secret, or other proprietary knowledge in exchange for the royalty fee. Franchising is a type of licensing that allows foreign companies to run their franchise in the international market.

What all options does the foreign companies have to enter the US market?

Here are the several corporate entities that exist in US which the foreign companies can use to register their organization in the country.

·         Limited Liability Company (LLC)

·         S-Corporation

·         C-Corporation

·         Free-Zone Companies

·         Foreign Branch Office

·         Representative Office

·         Partnerships

Limited Liability Company (LLC)

LLC is the most flexible business structure under US corporate law that require only one shareholder, who is typically the manager of the company. Due to its simple and flexible structure, LLCs are highly recommended for conducting business in United States as there are no restriction on the type of business activity that a US LLC can pursue. There is no minimum paid up share capital requirements for incorporation that makes it highly suitable option. Prior to incorporation, LLC requires to

·         Appoint one director and shareholder member

·         Open a US corporate bank account with minimum $1 balance

·         Appoint a registered agent in the state of incorporation

·         Address of the legal registered office in the country

S-Corporation

An S-Corp is ideal for small businesses as it does not require owners to file corporate taxes and eliminated the double taxation on profits and dividends. S-Corp cannot not have more than 100 shareholders however all shareholders must be US citizens. An S-Corp has generally more regulations than the LLC, that normally runs on the basis on shareholder agreement.

C-Corporation

C-Corp is ideal for those who are looking to sell shares to the public or get outside venture funding. The main kind of corporation used by US companies with medium to large operation involves a large sum of investment or raising capital. C-Corporations need to pay tax at the corporate level and shareholders pay additional tax on their dividend income.

Free Zone Companies

The United States free zones are best for trading firms, mainly because these zones offer great transportation infrastructure, limit customs clearance time, and eliminate state or local taxes. In US, there are 293 free zones and foreign companies can determine their optimum zone as per business requirements.

Foreign Branch Office

A foreign company can open branch office in US instead of conducting business through an established US firm. Although a foreign branch office represents an entire organization operating in the US and is thus liable for taxation.

Representative Office

A representative office can engage only in activities such as promoting business of the parent company and market research. United States representative office is not permitted to make direct sales in US.

Partnerships

Foreign companies can form an alliance with US-based companies to do business together in the country. The partnership can be formed by oral agreement or by conduct without any documentation or filing with the state however written agreement is suggested.

Every newly established entity in US requires to have an Employer Identification Number from Internal Revenue Service, mandatory for filing taxes and company identification.

Procedures to Set Up Corporation or LLC in the United States

·         Choose a company name

·         Provide a registered agent that must have a physical address in the state of formation

·         Provide names and addresses of people or organization involves with the foreign company

·         Issue Federal Employer Identification Number (FEIN) or simply Tax ID number from Internal Revenue Service (IRS)

·         Arrange a US physical business address or virtual office to receive business mail, client mail, etc. and facilitate bank communication

·         Open a US merchant account to accept US payments. Make sure to select a bank that also has a branch in your home country

·         Get a US phone number

·         Build a website and company and company logo

·         To maintain your corporation, file an annual report online. Failure to filing the report can lead to company becoming inactive

·         Make sure to pay US taxes

·         Be compliant with any city, country, state, and federal requirements

What factors to considers while setting up US business?

Choosing location is one of the most crucial steps for setting up a foreign company in US. Some of the factors to consider are as follows.

·         Demographics

·         Understanding local competition

·         Finding the supply chain

·         Identifying state laws and tax regulation

Since each business is different, one needs to consider other important factors for business such as transportation, accessibility to skilled labours, transportation, etc.

Why choose United States for doing business?

The USA is referred to as “the land of opportunity” as the country offers immense advantages for foreign companies planning to establish their foothold in the US market. Here are the top five reasons for doing business in United States.

Flourishing economy

America is offering foreign investors with lucrative opportunities such as real estate at lower prices than what their home country could offer. Home to 320 million people who are active shoppers, US market has a lot of diversity in terms of income and interest levels, that could help in success of the business.

Incentives offered by federal, state, and local governments

Many US states and cities are offering financial incentives to foreign companies planning to establish business in US. Incentives can be in the form of tax credits or lowered commercial real estate taxes for foreign companies. The US government also aids foreign investors in setting up businesses.

Access to new markets

The foreign companies have unlimited choices for where to set up their business and choose a geographical terrain and climate zone that suits them as every state is interested in expanding their business environment. US has trade agreements with 20 nations, which can increase your market by 425 million people in addition with approx. 320 million people in the US, which can add up in your business being successful.

Availability of skilled workers

High quality education and advanced technical infrastructure provided to students results in highly skilled labour. No matter what type of business you start to set up, there are hundreds of people waiting for the right opportunity and you can start your business by hiring the people with right skillsets.

Technological advancements

USA is known for its advanced technological infrastructure, which increases the desirability of US as a place to set up business. Many foreign companies can get access to some of the most advanced technological innovations, that can enhance the business production and global communication.

Protection of Intellectual Property

The US patent office stringently enforces law and provide protection against infringement which protects your intellectual property rights.

US Taxation of Foreign Corporations with Business Activities in the United States

Foreign companies engaged in trade or business in US at any time during the year are required to file a return on Form 1120-F, even if the foreign corporation had no effectively connected income or were exempt from US tax under a tax treaty. If the foreign company is classified as Controlled Foreign Corporation (CFC) or Passive Foreign Investment Company (PFIC), then the income tax rules change.

If the US shareholders own more than 50% of its voting power stock or more than 50% of corporation’s total value in a foreign company, then the entity becomes CFC. A foreign organization is PFIC when more than 75% of company’s income comes from passive activities or more than 50% of the fair market value of all corporate assets generate passive income.

·         A foreign company is charged corporate tax only on income that is effectively connected to US for that business. The foreign entity is taxed at regular US corporate tax rates.

·         The US source income that is not derived from assets used in US trade or business of a foreign company or attributable to foreign company’s permanent establishment in US is subject to 30% corporate tax rate.

·         Some states and municipalities generally impose corporate income tax at rates varying between 1-12% and are levied on US and foreign corporations conducting business in that particular state.

·         Sales tax is imposed at state and local levels in respect of products or certain services sold within at the rate in effect at the shipping point. The applicable rates of sales taxes can very from state to state and locality to locality at rates between 2.9% and 9.98%. Sales tax is not levied on intangible property as compared to VAT system in EU countries.

·         The Internal Revenue Code imposes a withholding tax on non-residents who receive income from activities that are not effectively connected to US. The non-resident recipient may also require filing certain US income tax returns in connection with receipt of such incomes as well.

·         The extensive tax treaty network of US may reduce or eliminate the withholding tax rate on all or certain types of incomes.

·         The foreign corporation is not subject to value-added tax on the final and domestic consumption of most goods and services supplied in US.


What are the key businesses related legislations in USA?

Fair Packaging and Labeling Act 1966

In compliance with the Federal Trade Commission, that works to protect consumers with enhanced transparency about the products, the companies need to include information about the product size, nutritional value, distribution, and manufacturing information.

Immigration and Nationality Act

Under this law, companies can hire only US citizens and individuals with work visas and that every business must keep on file I-9 eligibility forms for applicable employees.

Environmental Protection Act

The law enforces environmental laws passed by federal government to minimize the carbon footprint from various business activities.

Occupational Safety and Health Act 1970

The law enforces business organizations to ensure that employees are protected from hazards that can compromise their safety and health.

Securities Act of 1933

The objective of the law is to ensure more transparency in financial statements so that the investors could make informed decisions and protect against misrepresentation and fraudulent activities in securities market.

To get more such latest industry insights, get in touch with United States Market Entry Strategy Consultant at sales@techsciresearch.com.

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