Establishing your U.S. Entity
In contrast to the 2020 DVITUS research findings, a smaller percentage of Benelux ventures in this study were found to be actively operating in the U.S. with a legal entity. While the 2020 DVITUS research indicated that 73% of Dutch ventures had established a U.S. legal entity, only 38% of Benelux ventures in this study indicated operating with a U.S. entity. Instead, 52% of Benelux ventures in this study were engaged in the U.S. market without a legal entity, operating under their parent company.
Experience Setting up a U.S Entity
Out of all companies, 38% are operating in the US with a legal entity. 52% are active without a legal entity, operating under their parent company. There are multiple reasons why companies wait to set-up a US entity, some first want to test the market to see whether they have any traction where others are solely exporting to the US from Europe with their European entity.
It's a common strategy for companies entering the U.S. market to first operate under their parent company. This allows them to gain market dynamics, test their products or services, and assess customer response without committing to the complexities of establishing a separate legal entity. Upon receiving positive feedback and witnessing favorable results, many ventures may proceed to establish a legal entity in the U.S., thus solidifying their presence and commitment to the market.
The majority of entrepreneurs (56%) states that setting up an entity is easy to very easy. Many emphasized the crucial role of seeking professional assistance from legal counsels familiar with US and European law, since it’s important to make sure that the foreign parent company is protected from any exposure in the US.
Figure 25: Experience of Setting Up a US Entity
U.S. Legal Structure
1. Incorporation
Most Benelux ventures (84%) opted to establish their U.S. entity as a corporation in the state of Delaware. A smaller percentage of surveyed ventures chose New York (4%) or Texas (4%) as their U.S. entity location. While companies have the freedom to choose any state for their U.S. entity, regardless of their operational footprint, Delaware stands out as a particularly attractive option for incorporation.
Figure 26: State where the US Entity was Incorporated
Industry experts in this study agree that over the years, Delaware has solidified its reputation as a prime destination for setting up a U.S. entity. The state offers numerous advantages, including favorable corporate laws, a well-established legal framework, and a business-friendly environment. Delaware's streamlined incorporation process, robust corporate governance practices, and efficient court system have made it a preferred choice for businesses seeking to establish a strong legal foundation for their operations in the United States.
One of Delaware's key strengths lies in its streamlined incorporation process, which allows businesses to establish their presence swiftly and efficiently. Additionally, the state's robust corporate governance practices ensure transparency, accountability, and protection for shareholders, bolstering investor confidence and facilitating business operations.
2. Legal Structure
There are different types of entities in the US, the main ones being a Corporation and a Limited Liability Company (LLC). Of all Benelux ventures, 60% formed a Corporation and 40% set-up an LLC. The majority of entities (84%) were set-up in Delaware and 16% of entities have another incorporation state.
Delaware Corporation
Delaware
LLC
Non Delaware Corporation
Non Delaware LLC
The decision to set-up a Corporation or an LLC depends on various factors. Including the nature of the business, the number of owners, tax implications and liability considerations. Foreign companies usually opt for a Corporation when doing business in the US. However, an LLC can be particularly interesting when engaging into a joint venture with a partner in the US. In this scenario, an LLC helps to avoid double taxation for the US partner which.
However, when entering into a partnership it is important to note that in such joint ventures, the members—often the foreign entity—are potentially exposed to U.S. taxation, as the Benelux entity is required to file tax returns in the United States. To minimize this exposure, establishing a U.S. holding company between the parent holding and the joint venture LLC, or creating a parent company solely dedicated to holding interests in the joint venture LLC, can be effective strategies. These solutions aim to minimize the risk of tax exposure for the Benelux parent company.
Considering the tax implications and potential exposure for the parent company, it is advisable for Benelux ventures to consider setting up a corporation, specifically a C-Corporation. Within the realm of corporations, there are two primary classifications based on tax status: C-Corporations and S-Corporations. C-Corporations face double taxation, with taxes imposed at both the corporate level and the shareholder's level.
Conversely, S-Corporations are categorized as pass-through entities, meaning that profits and losses flow through to the shareholders, who are then taxed only once on their personal returns. It’s important to note that for S-Corporations, shareholders must be 100% U.S. citizens or specific entities, which may pose limitations for Benelux ventures. Therefore, opting for a C-Corporation structure may offer more flexibility and suitability for ventures with international shareholders. Below an overview of the differences between corporations and Limited Liability Companies.
Benefits of Operating with a U.S Entity
A significant proportion of surveyed Benelux ventures in this study (52%) indicated that they conduct operations in the U.S. without establishing a legal entity. There were different reasons for not setting up a US entity, the majority of ventures (25%) preferred to do business via their parent company instead of a US entity or felt that they didn't have a large enough presence in the US market and/or the US market didn't offer enough potential for them to set-up a separate entity for this.
The ventures that were active with a legal entity, frequently highlighted the advantages of operating in the US with a local entity. The main benefits mentioned by the respondents are:
Figure 27: Reasons for NOT Forming a U.S. Entity
Streamlining direct product distribution channels.
Fostering stronger client relationships and trust.
Facilitating the development of extensive networks and partnerships.
Providing a shield against potential legal and tax risks for the parent company.
During qualitative interviews, ventures emphasized the strategic advantages and operational ease associated with conducting business in the U.S. market through a legal entity.
One of the respondents in this study in the life sciences & health sector, chose to establish a legal entity to assert control over the U.S. market and directly distribute products, stating: "We recognized the critical importance of establishing a local presence. Therefore, we made the strategic decision to form a U.S. entity. This approach allows us to directly distribute products and assert control over the U.S. market, aligning with our goal of Americanizing our operations." Establishing a local presence in the U.S. not only facilitates more efficient product distribution but also enhances a venture's control and adaptability within the U.S. For instance, a Belgian technology company in this study highlighted the necessity of a U.S. presence for effective management of operations, deeming it impractical to solely execute from Belgium. Similarly, a respondent specializing in marine and offshore products emphasized the importance of being aware of legal complexities and addressing them appropriately, stating, "If something happens in America, you'd rather deal with it there." This underscores the advantage of handling legal or tax matters directly within the U.S. jurisdiction to protect the parent company from potential exposure and liabilities.
In response to whether success in the U.S. is affected by operating with or without a U.S. entity, the experiences of Benelux ventures in this study reveal a nuanced perspective. While some ventures have found success operating without a legal entity, there is widespread acknowledgment of the benefits that come with establishing one.
"Underscore the importance of administrative readiness and the necessity of a US presence"
These advantages include increased control over operations, the ability to foster trust and stronger relationships with stakeholders, and direct access to the market. Consequently, many ventures are considering the establishment of a legal entity as a strategic move to further enhance their presence and success in the U.S. market. This strategic decision aligns with their long-term goals of solidifying their foothold and maximizing opportunities in the competitive U.S. business landscape.
