Coming to America Pt 4 - Location, Location, Location

Where and How to Set Up a New Business in the USA

With the largest economy in the world, the United States of America offers some of the best possible business opportunities. You have two options when choosing to create a presence for your business in the USA, buy an existing business or start a new one.

This article focuses on the latter and although not fully inclusive, it will give you some understanding of the main challenges. Nearly every decision in the process is connected in some way to the legal structure of the business and the location you choose.

I assume if you are reading this, you have decided that opening an office in the US is the right path. However, if you are still considering reasons to do so, check out this useful guide from HSBC.

Business Structure

The first step in the process is to decide what legal structure to use for the business, e.g., S Corp, C-Corp, LLC. Discussion with a tax specialist is advised before deciding as there are tax implications for each type. This decision should be made early in the process because further steps depend on your choice. This guide uses a C Corp as the chosen structure but much of what is written is applicable to all business types.

State of Incorporation

Decide where to incorporate the business. Each state has its own rules and business considerations, some will be suited to your expansion others will not.

Federal v State taxes - All businesses are subject to federal corporate income tax, and most but not all states charge a corporate income tax on top of federal taxes. State corporate taxes range from 0% to nearly 10% so choose your state of registration wisely.

The corporate income tax only applies to a certain type of business called a C-Corporation. Other types of business, such as S-Corporations, most LLCs, and sole proprietorships, are exempt from corporate taxes and instead are taxed on earnings through the shareholders' personal income taxes.

*Caution, don’t trust a random internet stranger for tax advice, hire a professional. This is a high-level guide only; I am not a tax professional.

The most popular state for registration is Delaware. It has an abundance of legal precedence that tends to side with business owners. However, there may be reasons that require you to consider other states. Some states ask for the disclosure of officer names and maximum shares to be issued; some do not. Many states have a corporate income tax, some do not. Each has its own pros and cons. Registration can typically be done online at the website of the Secretary of State.

Business Name Check

Do a company name check – There is little point in working on the documents only to find the name is already being used. There are legal implications to consider when choosing a name such as a similarity to other businesses in the state or trademark conflicts. There are lots of online resources to guide you but given the potential complications and expenses in getting it wrong, use the services of your legal consultant. Register the business name with your state. Do not risk completing the company set up to discover someone has registered the same name ahead of you.

Website and Domains

Part of the name check process should include an evaluation of available web domain names. You do not want to finalize the company name only to find that you have to settle for a completely unsuitable domain, e.g., www.thisisallicouldfindanditisannoyinglylong.com.

Early in the process set up an email address for your chosen domain and telephone contact, preferably a US number. It is easy to set up a contact number using a service like Google Voice. Several companies allow you to inexpensively buy telephone numbers with your preferred area code and forward them to an existing number both in the US and internationally.

Administration

Apply to the state for incorporation of the business. This can also be done on the Secretary of State's website for the chosen state.

Apply to the Federal government (IRS) for an Employer Identification Number. You cannot hire permanent staff without one

Create company Articles of Incorporation (you can’t open a bank account without them) and Company Byelaws. Both documents can be created by modifying freely available examples found online.

Foreign Businesses

If you intend to have an operational presence in multiple states you are required to register as a foreign business (foreign as in state not as in the country of origin) in each of those states. You will also be subject to payroll and national insurance fees and annual report filing fees. You may be subjected to state income taxes in those states.

In every state where you have a presence, engage a registered agent. This is a legal obligation and is simply a company that is available to receive official/legal mail on your behalf. A registered agent in each state costs a little more than a hundred dollars annually.

Banking

Open a Bank Account. It should be done in person by an official officer of the company and requires a copy of the Articles of Incorporation, notarized. The bank should preferably be in the general location of where you plan to set up the office. It is not a legal requirement but from my experience, it simplifies the process.

Don’t expect your chosen bank to fully understand the regulations for setting up new corporate accounts. Incorporating in Wyoming for example does not require the names of the company officers to be disclosed. The bank may however insist on you producing incorporation paperwork that contains that officer information.

Geography

Decide where to locate the business (does not need to be in the state of incorporation). Consider tax implications for both the company and employees, e.g., some states have no employee state income tax and are more appealing to employees than those with high state income taxes. Some states are “Right to Work”, meaning the business can let employees go without providing a reason (as long as there is no discrimination against protected classes); others are not.

Long-distance business travel by rail for business purposes is impractical, as is driving. Air travel is the only workable solution.

The United States is a significant landmass. While it only takes 3 hours to fly from Miami to New York, a direct flight from Miami to LAX is nearly 6 hours and to Seattle 7 hours. This is the same duration as a flight from New York to London. If you choose to fly from Miami to London, you can add nearly 2 more hours.

What if any is the time and cost impact of travel? The US operates a hub and spoke air system. It may be appealing to set up in a small city vibrant and beautiful city like Austin but if you do, direct flights to your business meeting in another small town might be limited and you can expect to make one or more connections through a major airport hub, often not a pleasant experience.

If you have the option of choosing the location for your offices, a central hub like Dallas might suit those that frequently travel to both coasts. If you choose LA and plan to make regular trips back to the UK, anticipate ten and a half hours of flight time on the way there and an additional hour on the way back (courtesy of the Jetstream).

Oh, and what about the impact of weather, the US has most weather extremes. Florida provides all-year-round warmth (and extreme heat) and the occasional hurricane. Establishing in a northern state trades the heat and high insurance for cold and the impact of major snowstorms. These considerations are important to business operations. Will a heavy snowstorm impact your revenue generation if roads are inaccessible for long periods and flights are delayed or canceled? How devastating would it be if you were to suffer lengthy power and internet outages typical after the hurricane has passed?

Building Lease

Early in the process, engage an agent to search for suitable office space. Finding a suitable premise should not be rushed. It is easy to be persuaded by attractive lease rates but examine the lease conditions carefully. It might be appealing to lease a large building because it is cheap but if the contract assigns the responsibility of maintaining the building, combined with the added utility costs, the savings may be short-lived. Repeating my advice, if you have no experience with lease negotiations in the US, get help.

HUBZone

If you plan to do business with the US Government and are a business that is 51% owned and controlled by US Citizens, consider locating in a HUB (Historically Underutilized Business) Zone. The government limits competition for certain contracts to businesses in historically underutilized business zones. It also gives preferential consideration to those businesses in full and open competition. At least 3% of federal contract dollars are awarded to companies that are HUBZone certified.

Joining the HUBZone program makes your business eligible to compete for the program’s set aside contracts. HUBZone-certified businesses but importantly also get a 10% price evaluation preference in full and open contract competitions.

HUBZone-certified businesses can still compete for contract awards under other socio-economic programs they qualify for.

You can find the full qualification criteria in Title 13 Part 126 Subpart B of the Code of Federal Regulations (CFR). You can also get a preliminary assessment of whether you qualify at the SBA’s Certify website.

For a map of certified HUBZones check this map HUBZone Map (sba.gov)

Employee Benefits

Most Americans rely on their employment to provide healthcare and dental insurance for themselves and their families. You can avoid providing benefits as a small business of less than 50 full-time equivalent employees. You are exempt from the law to provide healthcare benefits. If you have more than 50 employees, you can also elect not to provide healthcare insurance but you will be subject to a tax penalty. In 2020 the penalty was $2750 for each employee excluding the first 30.

While many employers offer a 401(k) plan to their employees, they are not required to by law. According to the U.S. Bureau of Labor Statistics, 67% of private industry workers had access to a 401(k) or other defined contribution retirement plan in 2020.

Even if you’re not required to provide health coverage and retirement plans, you may want to offer it on a voluntary basis. A Competitive Benefits Package In today’s tight labor market means prospective employees will be looking at other jobs and will want to see how your benefits stack up. Just because you can avoid benefit costs it would be a mistake to assume you should.

Additional Considerations

This article has given you a basic outline for setting up a new US entity but there is so much more. Some additional subjects to consider are:

Analyze salary surveys to determine the expected salary costs for the budget. You can buy this information relatively cheaply.

Comprehensive business insurance that includes legal protections. Owning a business means that you will be subject to a lawsuit, it is just a matter of when.

Do a patent check to ensure you are not infringing US-registered patents. Apply to the trademark office for trademarks on any essential logos or marketing information such as slogans and catchphrases.

Who should be on the board of the US entity? If you plan to do business with the US government, this will be an important decision. Nationality may come into play and the correct choice of directors can pay dividends in securing new contracts.

Summary

Expanding your business in the US is an exciting prospect but it requires careful planning and expert help. There are many competing and conflicting decisions to be made. If you are a European organization interested in opportunities in the United States, invest in professional help. You will need the services of lawyers (I can recommend Adam Kemper for all things employment law), accountants, contract specialists, real estate agents, tax specialists, and more. 

This article is not intended to be comprehensive. It should give you a sense of the tasks ahead of you if you plan to establish your business in the USA. Completing the necessary paperwork is not difficult and it does not take long. However, if you do not have experience in living and managing a company in the US, it might add a little more complexity. Good luck with your new venture and check out other articles in the series "Coming to America", particularly if federal contracting is part of your growth strategy.