On-hold: Expanding to the U.S.A. – Overview

The U.S. market offers nearly 340 million potential customers and a thriving business ecosystem. But is your company ready to take the leap?

In our new series, we are delving deeper into expanding your horizon to the United States of America! We will explore different business structures, highlight attractive states for expansion, and, in future articles, take a closer look at some of the most popular locations.

In this article, we won’t focus on visas. However, businesses should be aware that to open a hub in the U.S.A., they must apply for an E-visa. More information about visas can be found here.

Key Takeaways

• Expanding or relocating your business to the USA presents a great growth opportunity. However, choosing the right location requires careful consideration.
• The federal republic system complicates tax regulations by distributing authority across federal, state, and local levels. These variations can significantly impact your business and influence where you should establish operations.
• A well-structured Go/No-Go roadmap helps determine if your business is truly ready to expand into the USA. Only a clear “Go” should lead to the next step.

Who Are You?

For many startups and scaleups, the USA is an attractive market for expansion. With nearly 340 million residents, crossing the Atlantic can significantly increase your total addressable market (TAM). For some businesses, expansion may even be essential if their product or service is more aligned with the American ecosystem.

To determine whether you can—and should—broaden your horizon, it is crucial to clearly define your business and understand how a U.S. presence would benefit you. To assist in this process, ask yourself the following questions and provide as specific answers as possible:

• Who are our customers, and what profiles do they have? Are we B2B or B2C? Do we serve a niche industry or a broad customer base? If B2B, what job titles or responsibilities do our customers hold?
• What does the existing competition look like? Is it emerging or well-established? Nationwide or state-specific?
• What does our value chain look like?
• What would our Go-to-Market strategy be?
• What key assets—such as property, talent, or skills—would our business need?

It quickly becomes clear that expanding is no simple task. Even after defining who you are as a company, you’ll still need to decide on the right business structure, location, and operational setup. In the following section, we’ll explore some of the most common business structures.

Business Structures

Upon arrival, the first step is registering your business. Typically, you may choose from the following business structures:

• Sole Proprietorship: This structure applies only to individuals working for their own account and is not considered a corporation. Taxes and obligations are handled at the individual level. However, it offers no protection against liabilities and debt.
• Partnership: When two or more members operate within an organisational structure, they are generally considered a partnership. Partnerships are classified as pass-through entities, meaning earnings are taxed on the partners’ personal income tax returns. Partners must share both profits and expenses—only sharing one is not sufficient.
• Corporation: There are two types, but only C Corporations (C Corps) are relevant for foreign entities. A corporation is considered a separate legal entity, distinguishing ownership from management and shielding individual owners from liabilities and debt. Corporations are heavily regulated and require a Board of Directors to oversee management. They are subject to double taxation: once on profits and again on shareholder dividends, which are paid with after-tax income (NOPAT). Choosing a C Corp is usually ideal for larger SMEs looking to attract significant capital from shareholders or aiming to go public.
• Limited Liability Company (LLC): Owners of LLCs, called “members,” can be individuals, LLCs, or foreign entities. This structure is somewhat similar to the Belgian “Besloten Vennootschap”. LLCs are regulated by state law, so choosing this structure requires comparing state regulations to determine the best fit. LLCs also have the flexibility to elect their federal tax treatment using the “check-the-box” regulation, each option having its own advantages and disadvantages:
  • Disregarded Entity: Functions similarly to a sole proprietorship but with liability protection. Income is taxed once on the owner’s personal income tax return, but there is no distinction between earnings retained in the business and those taken as personal income.
  • Partnership: Automatically applies when an LLC has two or more members. Similar to a disregarded entity, profits are taxed on members’ personal income tax returns without distinction between retained and distributed earnings.
  • Corporation: This option becomes relevant for tax optimisation, as we will discuss later. In some cases, businesses may benefit from specific corporate tax deductions.

Choosing the right structure will determine your first steps upon arrival. Generally, LLCs are preferred over C Corps due to fewer formalities, lower compliance requirements, and reduced setup and maintenance costs. However, in some cases, LLCs may be taxed more heavily than C Corps.

Tax Systems in Different States: An Overview

Alongside basketball, baseball, and football, choosing the most tax-friendly state is practically a national sport in the land of the free. Taxation occurs at multiple levels, best categorised as federal, state, and local. Federal taxes apply nationwide and operate independently of state taxes. The five major tax categories are:

• Corporate Tax: This encompasses various taxes on general business activities, with two key categories at the state level: corporate income tax on profits and gross receipts tax on total revenue. Unlike corporate income tax, gross receipts tax generally allows for less deductions. State corporate tax rates range from 11.5% in New Jersey to 0% in Wyoming and South Dakota, making the impact significant.
  
  Both tax types have pros and cons. Corporate income tax allows deductions and reinvestments before taxation, but states may impose bracketsTax rates that increase as profits rise., meaning higher-profit businesses pay more. Gross receipts tax can be advantageous for businesses with short production chains, as their expenses are lower. However, states like Delaware and Nevada provide minimal deductions for gross receipts tax. At the federal level, corporate income tax is a flat 21% on profits.
  
• Individual Income Tax: This is relevant if you choose a sole proprietorship or a partnership within an LLC. The federal income tax system uses brackets, meaning higher income results in higher tax rates. If an individual reports over $100,000 in earnings, their federal tax rate rises significantly compared to the federal corporate tax rate. Additionally, states impose their own income taxes, ranging from 13.3% in California to 0% in Alaska, Florida, South Dakota, and Wyoming.

  CFOrent Tip: Tennessee and Texas do not have personal income tax, but they do impose a gross receipts tax on LLCs, eliminating their pass-through tax advantage. Here, the “check-the-box” regulation becomes crucial: should the tax burden be carried by an individual or a corporation?Theoretically, in a state with no corporate income tax but high personal income tax, an LLC might prefer to be taxed as a corporation rather than on personal income.However, in Texas, this difference is minor, as the gross receipts tax is set at just 0.75% in most cases.

• Sales, Use, and Excise Tax: These taxes cover a broad range of sales transactions, including business-to-business (B2B) input tax and point-of-sale (B2C) tax. Rates vary across states, counties, and municipalities, with 38 states allowing local governments to impose additional sales taxes—sometimes reaching nearly 10%.
  
  Expanding businesses should pay attention to sales taxes, as they often apply to a variety of B2B transactions, including legal services, SaaS, PaaS, payroll services, and manufacturing equipment. The impact of these taxes depends on the business model. If your product or service is in high demand, shifting the tax burden to customers may not be an issue. However, in highly competitive industries, these taxes can put businesses at a disadvantage.
  
  Excise taxes, on the other hand, typically apply to luxury goods and vices such as alcohol, tobacco, and gasoline.
  
• Property Tax: This tax becomes relevant when your business requires tangible assets, inventory, or operational vehicles. While many states apply a basic and relatively low tax rate, businesses in industries like manufacturing should be cautious about states such as Connecticut, Maryland, Kentucky, and Oklahoma, which have higher property taxes.
  
• Unemployment Insurance Tax: Both federal and state governments levy this tax, but it accounts for only about 10% of the total tax burden among these five categories. The tax structures for unemployment insurance are complex and often non-transparent. While some states impose a lighter burden, the overall impact is usually minimal, making it less critical to optimise.
  

Now that we’ve covered tax considerations, let’s explore how different states compare in terms of business-friendliness.

Choosing the Right State!

Attentive readers may have noticed Wyoming frequently mentioned as the least tax-heavy state. For this reason, it ranks as the number one “most favourable state” in terms of taxation.

However, before rushing to Jackson, Wyoming—a town with a population of roughly ten thousand—it's essential to consider other factors your business needs. Less quantifiable assets, such as talent availability and skill sets, might limit your ability to optimise taxation alone. A decision-making questionnaire provided to SMEs after expansion to the U.S.A., revealed that businesses expanding to the U.S. prioritise Customers & Partners above all else. Other key factors were respectively Industry Sector, Time Zone, Talent, Costs, and Personal & Investor Networks.

For example, moving to the Bay Area may seem attractive, but it’s a decision that should not be taken lightly—especially if you plan to remain competitive in the European market. The nine-hour time difference makes it extremely challenging for founders to coordinate business operations effectively across both continents.

Make a Roadmap

Choosing the right timing for your business expansion is crucial. Moving too early might spread your resources too thin, while moving too late could mean facing stronger competition.

When expanding into new regions, hiring employees at home who can operate independently in these areas is essential. If your team consists exclusively of Dutch- or French-speaking members, expansion may prove challenging.

A Go/No-Go decision framework is the best way to assess your business's readiness to expand. Take 3–4 months to:

• Research your product, target customers, and competitors.
• Identify a shortlist of potential states and locations.
• Connect with partners who can guide you through regulations and operations.
• Develop a solid one-year budget and staffing plan.

If, at the end of this process, you arrive at a Go, you're ready to take the next steps. A No-Go will highlight areas where your business is not yet prepared for expansion, allowing you to refine your strategy.

Conclusion

Expanding or relocating your business to the United States can be a major success, but it requires thorough planning and careful consideration before taking the leap. The American tax system adds complexity when determining the best location for your business, but it should not be the only factor in your decision-making. Key assets such as talent availability and your customer base should take priority.

At CFOrent, we have expertise in setting up businesses in the USA and even operate our own private office in New York. If you're considering expansion or feel ready to take the next step, don't hesitate to contact us for a tailored strategy to help you succeed and achieve your own American dream!

In our upcoming articles, we'll take a closer look at well-known business hubs such as New York, San Francisco and Delaware. Additionally, we'll explore lesser-known alternatives and provide insights on talent acquisition, customer bases, and state and local tax systems.

Sources

• Business structures: IRS
• Check-the-box regulation of LLCs
• Tax Foundation: compare states
• Personal Income Tax: IRS
• Personal Income Tax and use of labour: LLCs and personal income tax
• Decision questionnaire