In a previous Insights article we examined the issues faced by American companies wishing to set up business in the United Kingdom. The practicalities of doing that are complicated for US firms, and equally UK companies looking to expand into the USA face a similarly complex (but ultimately potentially very rewarding) journey.
Establishing a US Entity
Establishing a US entity is probably the most essential step for any UK company wishing to do business in the USA. That’s certainly the case if you are thinking of hiring USA-based employees, especially if you are also considering offering them equity incentives. If you intend to operate in a space where US product liability, patent infringement, or other litigation claims are frequent, having that US entity makes it more difficult for claimants to access the UK parent company’s deeper pockets.
Some heavily-regulated US industries may require certain types of operation to be run through a US entity and although it’s not a legal imperative, many US companies simply prefer to transact with other US companies. American Venture Capital investors generally require a UK company to establish a US parent company before investing (the so-called “Delaware Flip”). Whether your UK company should “flip” into a US parent company to access US VC investment is a question that requires careful consideration of the commercial, legal, and tax implications.
Establishing an American Bank Account
Establishing an American corporate bank account through a US entity is the next most important step because it’s far more efficient than trying to run things through a UK entity. However, it’s here that the complexities of doing business the United States have been highlighted by the recent turmoil and instability in the American banking sector. Before becoming the second-largest bank to fail in US history, Silicon Valley Bank (SVB) had been the go-to lender for high-tech start-ups.
SVB also spent close to a million dollars lobbying for the deregulatory policies in President Trump’s Economic Growth, Regulatory Relief, and Consumer Protection Act 2018, that undermined the Dodd-Frank Act which had curbed the extremely risky financial industry activities that led to the financial crisis of 2007–2008. This dilution of regulatory strength ultimately created the conditions for SVB’s downfall.
SVB’s management also appear to have neglected the basics of actual banking – the bank had no chief risk officer for most of last year – and the bank’s investment strategy wasn’t well-considered. Like many smaller, regional banks in the USA, the majority of SVB’s deposits were not insured by the Federal Deposit Insurance Corporation (FDIC). This is equally true of some larger US banks, but they can withstand fearful market jitters much better than the regional operations. There are a number of proposals for banking reform being discussed in Congress, including Senator Elizabeth Warren’s legislation to repeal Trump-era financial deregulation completely. Which, if any, will ultimately prevail remains to be seen.
The Importance of Due Diligence
Although the FDIC eventually guaranteed all SVB (and other troubled banks Signature and Silvergate) deposits, whether insured or not, that wasn’t a foregone conclusion. There was no legal obligation on the FDIC to do so and it cannot be assumed that such an intervention would be repeated if a bank failure happened again. This is vital for UK companies entering the US market to bear in mind. The importance of performing rigorous due diligence before selecting a US bank (not simply rushing to choose whichever institution will give you an account the fastest) is now even greater than ever.
Everything Takes Longer Than You Think
It should be clear in light of this turmoil that expansion into America requires careful planning, forethought, and execution of corporate compliance. However, UK firms should be under no illusion about how speedy this process will be. It generally takes much longer than most assume to form a subsidiary and get a federal Employer Identification Number (EIN) before finally opening a US bank account, which is required for payroll services and registering for employer and tax identification numbers in individual states where the company wants to operate.
Getting a federal Employer Identification Number from the US Internal Revenue Service (IRS) is a lengthy and very bureaucratic process, especially at present when such applications are subject to severe delay.
Equally, if your company isn’t willing to entrust a senior executive who is a US citizen to be legally responsible for the company in the US, it is much easier and faster if your designated UK executive obtains an Individual Taxpayer Identification Number (ITIN) prior to applying for an EIN number. Obtaining the ITIN alone can take up to 16 weeks.
Navigating the US marketplace requires patience but also demands experienced and knowledgeable guidance from a trusted partner like Motion Paradox, familiar with the legal and business environment on both sides of the Atlantic because that’s exactly where we ourselves operate.