Key Structural Decisions When Expanding a Foreign Business into the United States

Foreign companies entering the United States face a series of legal decisions that define how the business will operate, where risk resides, how value flows, and how the broader group will be positioned for growth. The choice of entity determines governance, liability, taxation, investor expectations, and the way cross-border activities are organized. This memo outlines the practical differences among common structures and highlights where tax considerations typically arise.

1. Corporation

A corporation provides a clear and predictable framework for operating in the U.S. It creates a separate legal entity with its own governance, financial reporting, and liability structure.

Key characteristics:

• Predictable corporate governance under a mature statutory regime
• Strong liability separation between the foreign parent and U.S. operations
• Well-suited for raising capital, issuing equity compensation, and preparing for a future sale
• Clean economic boundary: the corporation is a standalone taxpayer in the U.S.

Selected tax considerations:

• U.S.-source earnings are taxed at the corporate level
• State corporate tax obligations vary by jurisdiction and depend on where the corporation has nexus (sufficient connection to trigger tax obligations)
• Filing obligations arise once the corporation has sufficient physical or economic presence within a state, whether or not revenue has been generated
• Distributions to the foreign parent may be subject to withholding; treaty rates vary
• Intercompany service fees, royalties, and cost allocations are easier to document and price when the U.S. entity has its own tax profile

2. Limited Liability Company (LLC)

An LLC offers governance flexibility but differs from a corporation in several important respects.

Similarities to a corporation:

• Provides a liability shield for owners
• Can be wholly owned by a foreign parent
• Can be structured with centralized management resembling a corporate board

Differences:

• The LLC's tax classification is not fixed: it may be treated as a disregarded entity, partnership, or corporation, depending on ownership and elections
• Without an election, the LLC may create direct U.S. filing obligations for the foreign parent
• Equity incentives are more complex than in a corporate structure
• Investors typically prefer corporations because valuation, equity issuance, and exit mechanics are simpler

Selected tax considerations:

• Flow-through treatment attributes U.S. income directly to the foreign parent, which may or may not align with the group's broader objectives
• Form 8832 (Entity Classification Election) allows the LLC to elect corporate treatment, aligning its tax profile with a corporation while retaining LLC governance flexibility. This election is generally not easily reversible; once made, it restricts the ability to reclassify the entity for a period of time, so the decision should be made with a clear long-term structural plan in mind
• For these reasons, electing corporate tax status is common for foreign-owned LLCs anticipating U.S. growth
• State-level obligations attach once the LLC has nexus through employees, inventory, or economic activity, even if no federal filing is triggered

3. Operating Through the Foreign Parent

Some companies begin U.S. sales or hiring without forming a separate entity, sometimes referred to as a "branch office." This approach prioritizes speed but lacks structural clarity. Branch structures are generally uncommon for small and mid-sized businesses because they expose the foreign parent directly to U.S. liability and complicate both commercial contracting and economic modeling as operations grow.

Key structural effects:

• The foreign parent becomes the contracting party and employer, exposing it directly to U.S. legal jurisdiction
• Customer contracts, employees, and IP development may all sit within the foreign entity until restructured
• Migrating into a subsidiary later often requires contract novation, asset transfers, and re-papering of commercial relationships

Selected tax considerations:

• Advisors will evaluate whether the foreign company is treated as having a U.S. taxable presence
• State registration ("foreign qualification") may be required based on activity levels, including hiring employees, owning property, or conducting regular business
• Employment-related tax obligations (withholding, unemployment insurance, state payroll taxes) arise as soon as the foreign parent hires U.S.-based staff, regardless of whether a subsidiary has been formed
• Allocating revenue, expenses, payroll, and IP development between jurisdictions is more complex without a separate U.S. taxpayer

4. Structuring Cross-Border Economic Relationships

The anticipated economic relationships should inform entity selection, as different structures support different intercompany arrangements. Before any economic analysis is possible, the underlying legal nature of cross-border payments must be established through contracts. The entity structure determines what types of agreements are appropriate and how value will be transferred between the foreign parent and the U.S. business.

Key considerations:

• Sales revenue versus reseller margins: Whether the U.S. entity sells directly to customers or acts as a distributor affects revenue recognition and commercial risk
• Royalties for intellectual property: If the foreign parent owns core IP, the U.S. entity may enter into licensing arrangements that define how and where value is created and leveraged
• Intercompany service fees: Management, support, and engineering services should be documented to clarify responsibilities and cost allocation
• Cost-sharing and development agreements: When U.S. teams contribute to R&D, clear agreements define ownership, rights, and reimbursement mechanics
• Intercompany financing arrangements: Loans and capital contributions structure how funding flows to and from the U.S. entity

These contractual choices create the economic pattern tax advisers will analyze. Clean, well-defined agreements simplify cross-border planning and reduce later restructuring risk.

5. State of Formation and Timing

Choosing a state of formation involves comparing governance reliability, administrative burden, and the likelihood of operating in multiple jurisdictions. Delaware remains the default for predictable corporate law and investor familiarity. For venture-backed companies, Delaware formation is particularly common because investors expect it and M&A transactions are streamlined when the target company is incorporated there. Forming in an operating state may simplify payroll, tax, and qualification requirements for some businesses, but rarely outweighs these considerations for companies anticipating growth or future fundraising.

Key considerations:

• Nexus thresholds differ by state and may be triggered by employees, contractors, property, or sales
• Foreign qualification is required when operating outside the formation state
• Employment tax obligations begin immediately upon hiring U.S. personnel, regardless of formation state

Timing considerations:

• Entity formation and state registration decisions should be made before signing U.S. customer contracts, hiring employees, or generating first revenue
• Early formation avoids retroactive restructuring, contract migrations, and payroll corrections

6. The Cost of Getting It Wrong

Foreign companies entering the U.S. frequently encounter avoidable problems that become expensive to fix later. Common early-stage mistakes include:

• Hiring U.S. employees before forming a U.S. entity
• Signing customer contracts under the foreign parent
• Using an LLC without understanding default tax classification
• Failing to register in states where economic or physical presence creates nexus
• Operating with undocumented intercompany arrangements

Restructuring after operations have already begun often requires:

• Re-papering customer and vendor contracts
• Migrating employees to a new employer of record
• Assigning or licensing intellectual property
• Re-registering in multiple states and updating payroll accounts
• Addressing tax consequences of entity conversions or asset transfers

These steps disrupt operations, introduce regulatory gaps, and create avoidable compliance exposure. The cost of correcting structural mistakes—in both money and management attention—typically far exceeds the cost of proper initial planning. Addressing structural decisions up front streamlines expansion and positions the business for scalable U.S. operations.

7. Choosing the Right Structure in Context

The optimal entity form depends on:

• Expected U.S. operations and risk profile
• Whether the business anticipates hiring, local contracting, or IP development
• Plans for future fundraising, equity incentives, or acquisition activity
• How cross-border revenues, costs, and rights will be organized

Legal counsel and tax advisers should align early in the process. The legal structure and the tax model should be developed in parallel so that entity form, ownership, and intercompany arrangements support both operational and tax objectives. A well-chosen structure simplifies intercompany arrangements, supports growth, and minimizes friction as the U.S. presence evolves.