Why the US is still the preferred jurisdiction for global startups

According to a report released by the Bureau of Economic Analysis in November 2019 on the Activities of U.S. Affiliates of Foreign Multinational Enterprises (MNEs), majority-owned U.S. affiliates (MOUSAs) of foreign multinational enterprises (MNEs) employed 7.4 million workers in the U.S. in 2017, a 2.8% increase from the previous year which stood at 7.2 million.

MOUSAs stood for 5.8% of total private-industry employment in the U.S; largely in manufacturing and retail trade. The largest contributors to total MOUSA employment were those with ultimate beneficial owners in the United Kingdom, Japan, and Germany.

Formation Structures Favored by Foreign Companies

IR Global, a professional service network that offers legal, accountancy, and financial advice to businesses around the world, reports that there are four formation structures that are popular in the U.S. for foreign companies.

U.S. Corporation

A corporation has limited personal liability and is the most popular form of organization in the U.S., and the requirements and procedures are similar to the formation of companies in the UK. However, one major difference is that a U.S. corporation is subject to specific state law requirements. As such, a corporation in California has the potential for specific restrictions that would not apply to a corporation in Florida.

Delaware is well-known for liberal corporate law requirements and many corporations choose to incorporate there in order to benefit from increased flexibility in relation to future amendments in its charter. However, if the company conducts business in New York it is still subject to New York tax specifications.

The charter, otherwise known as the articles of incorporation, must be filed with the Secretary of State in the state where the corporation is formed.

A Branch of Foreign Corporation

Foreign corporations have the ability to establish a branch in the U.S. for business operations. However, most foreign corporations rather create subsidiary companies for tax and nontax purposes.

Most countries subject foreign corporations to domestic taxation should they open a branch or office, employ staff, sustain inventory or fixed assets, or operate business in the U.S. This gives the Federal and state taxing administration leave to evaluate the foreign corporation as if it is a permanent establishment.

The U.S. and state governments deem taxable income as being "effectively connected" with a U.S. source and as such, should a foreign corporation be "effectively connected" with income then said corporation will be subject to U.S. tax on that income, just as any domestic corporation would be.

Partnership

General and limited partnerships may be created, generally through a written partnership agreement, which is then registered under state law. A partnership is an association of two or more people created in order to conduct business for profit in the roles as co-owners.

U.S. tax law indicates that partnerships include syndicates, pools, joint ventures or other unincorporated organizations through which business is operated and which is not a corporation, trust, or estate.

For U.S. income tax reasons, partnerships are seen as conduits, and every partner recognizes a proportional part of the income, loss, and credit, even if it isn't allocated to the partners. Partnerships are popular as they offer flexibility for the designation of profits and losses, and also for distributions.

It's required that any partnership operating in trade or business within the U.S. and that has foreign partners withhold U.S. tax on the foreign partner's allotment share of the business's income.

Limited Liability Company (LLC)

Limited Liability Companies are exceptionally popular in the U.S., and is characterized as providing limited liability to its owners, management by members, and restrictions on ownership transfer.

As with other business formations, the creation of LLCs are subject to state laws. A multi member LLC is seen as a partnership when it comes to U.S. federal tax unless it chooses to be taxed as a corporation.

A single member LLC is seen as a disregarded entity when it comes to tax unless it chooses to be taxed as a corporation. In order to be eligible to be taxed as a corporation, the business must apply within 75 days of the beginning of the LLC's fiscal year.

LLCs are attractive to foreign investors who are wary of the cost of taxation at the corporate level and the polemical nature of American society.

What are other business formations popular in the U.S.?

What is a sole proprietorship? Sole proprietorship is a form of business which is informal and unincorporated where the owner is eligible for 100% of the profits, but also 100% of the debt and risk as the business isn't legally separated from its owner.

Sole proprietorship business is best-suited to an enterprise that is low-profit and low-risk who can be operated by one person.

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