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April 18, 2017

When should a UK startup establish a US company?

One of the most common questions we field from UK startups and scale-ups building a US business is when to establish a separate US company.

Below are various indicators that it’s time to strongly consider setting up a US entity. Of course, check with your US advisors to confirm what makes the most sense for your business.

Employees

If you’re hiring US-based employees, you’ll generally want to employ them through a US entity.  

US and UK employment laws are very different, and you should avoid uncertainty as to which applies. Employing US hires directly from a UK company also increases the risk of US and UK tax authorities making competing claims on the same US revenue and of the UK company being exposed to US litigation.

Immigration

If you’re planning to send UK employees to work in the States, keep in mind that certain types of US visas require a US entity.

Revenues

If your UK entity is generating revenue from the US, it may be tax-efficient to operate that portion of the business through a US entity and/or allocate to a US entity certain revenues and costs (e.g. through transfer pricing arrangements and tax sharing agreements).

Whether that structure makes sense for your business depends on numerous factors. The key is to recognise that US-sourced revenue means it may be time to have a chat with your tax advisor.  

Commercial contracts

Some US companies simply prefer to transact with other US companies. To be clear, this is usually a commercial consideration rather than a legal imperative. With limited exceptions (e.g., certain contracts with the US Government), there’s generally no legal restriction on a US entity entering into a contract with a UK company.

Bank account

Establishing a US corporate bank account through a US entity typically is easier than through a UK entity.

Litigation risk

If your UK company is doing business with the US and operating in a space where US product liability, patent infringement, or other litigation claims are frequent, it may be worth establishing a US company and structuring the business in a manner that makes it more difficult for US claimants to access the UK entity’s deeper pockets.

Regulatory requirements

Some heavily-regulated industries (e.g., financial services, healthcare) may require certain types of US operations to be run through a US entity.

Crowdfunding

Many US crowdfunding platforms require a US entity through which to raise funds.

Accelerators

Some US accelerator programs require the companies in their cohorts to have a US parent company.

US VC investors

It is unusual for US VC investors to invest early-stage capital into UK companies without a meaningful “US story”, i.e., US operations, US traction, and/or a founder or other senior decision-maker in proximity to the investor. A US entity, without more, typically is insufficient (at least for US-based institutional VC investors; corporate VCs with international operations may take a different view).

If you do in fact receive a term sheet for an early-stage investment from a US VC investor prior to establishing US operations, the US investor may insist you establish a US parent company. That dynamic is discussed further below.

Should your US company be the parent company or a subsidiary of the UK company?

The higher corporate tax rates in the US (up to 35-40% national plus state) compared with the UK (19%) argue in favor of establishing a US subsidiary of a UK parent company.

However, many US VC investors (particularly at the seed and Series A stages) will require a UK company to establish a US parent company before investing (the so-called Delaware Flip). Although that corporate structure potentially subjects a larger share of the startup’s global profit to the higher rate of US tax, it may be necessary to secure the investment.

Whether your UK company should “flip” into a US parent company to take in US VC investment is a question that requires thoughtful consideration of the commercial, legal and tax implications. For more on the pros and cons of the Delaware Flip, see here and here.  

One related question we’re often asked – particularly for corporate structures involving a UK parent and a US subsidiary – is whether US employees should receive options in the shares of the UK parent or the US subsidiary. You should consult your advisors to confirm what’s optimal for your company, but most typically we see the answer being the UK parent. That approach reduces the likelihood of friction resulting from different shareholders seeking to maximize the profits of different entities within the same corporate structure. (For more on extending equity-based compensation to employees of a US subsidiary, see here.)

Logistics: How do I establish a US company?

We most commonly see UK startups and scale-ups establish US subsidiaries that are incorporated in the US state of Delaware and are registered to do business in the US states where the US company has employees and/or offices. For more on setting up US operations, see here and here.

Forming a US entity can be done quickly and is among the least-expensive aspects of US expansion. It typically is included in discounted fixed-fee US establishment packages offered by US law firms that regularly work with emerging companies. For more on ensuring you receive value for this legal spend, see here.

A final question we’re often asked is whether you should bypass outside advisors altogether and use an online incorporation service. A few thoughts on that are here. In short, the potential downsides of a DIY approach to early-stage legal, tax, and compliance matters are more significant in the US than in the UK. Don’t take our word for it – seek out experienced UK founders who have built successful US businesses.

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Post produced in partnership with Daniel Glazer at Wilson Sonsini Goodrich & Rosati.

Dan can be reached at daniel.glazer@wsgr.com. This post does not constitute legal advice and should not relied upon for business or legal decisions.

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