Expanding Your UK Business to the US: Legal, Taxation, Banking, and Profits Explained

From UK Success to US Domination: How to Conquer the World's Largest Market!

Your incredible product has taken the UK by storm, leaving customers clamoring for more. Your innovative approach has set you apart from the competition, establishing a proven track record of sales success and a loyal client base. But now what? The time has come to expand, to conquer new frontiers. And where better to set your sights than the land of opportunity—the United States!

Unlocking the vast potential of the US consumer market could propel your business to unprecedented heights. As the largest economic market in the world, the possibilities are endless. But how exactly do you make your mark? Don't worry—we've got you covered!

Disclaimer: We're not US tax lawyers, but we have the expertise to help UK businesses like yours thrive in the US market. In this blog post, we'll guide you through the essential steps for establishing a strong foundation to conquer the US, covering everything from legal considerations to financial strategies.

So, buckle up and get ready to embark on an exciting journey. We'll show you how to navigate the complexities of US expansion, setting you up for remarkable success in the land of opportunity. Let's make your business a transatlantic triumph!

We will be considering these factors:

• Legal Entity

• People

• Taxation

• Banking

• Profits

Legal Entity

In the UK there is generally a form of legal entity by which most small businesses trade, the Limited Company (Ltd). There are others such as partnerships but on the whole, most businesses are formed as Limited Companies to limit the liability of the owners. The ownership is represented by shares. The owner of more than 50% of the shares is in control of the business. The Ltd pays tax on its profits and the owner takes some of what’s left in the form of dividends.

This simple system does not exist in the US. Instead there is a dazzling array of legal entities, including, LLCs, Corporations, Incorporations and Partnerships. A tax lawyer would be able to help advise on the best structure for you. We can point you in the direction of a tax lawyer that can help. You have to think about where you want the profits of the business to land. If you want to build up funds in the US then you can take one approach whereas if you want the profits to flow back to the UK then some choose to create a subsidiary of their UK business. This means that the US business is owned by the UK business. The benefit of this approach is that the US subsidiary can pay its UK parent company in the form of dividends and so the profits end up in the UK as desired.

People

Depending on the size and nature of the business, you would likely need to have people on the ground. It is useful to have a US person nominated to be the “responsible person” for Tax purposes. The rules on whether a person would be an employee or a subcontractor are similar to the UK. It is determined by the relationship between the employer and the person performing the services. The evidence of the degree of control and independence must be considered. The IRS states that the facts fall into three categories;

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how a worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another. The keys are to look at the entire relationship and consider the extent of the right to direct and control the worker. Finally, document each of the factors used in coming up with the determination.

Reporting for both independent contractors and employees is generally more complicated than in the UK. Here’s how:

Independent contractors

You first need to prove that the individual has the right to work and is registered with the IRS. You would ask them to complete a specific IRS form in which they declare their tax status to you. This includes an address, their tax status and the tax identification number. You would keep that form and ensure that you clearly mark each payment you make to the individual. You do not generally need to deduct any tax from the amounts they get paid. There are some exceptions to that, for example, if the individual does not have a US tax registration. In January of each year you need to send the individual a document (1099) which tells them how much they were paid in that year. You also send a copy of this to the IRS.

Employees

This is where things get very complicated! In addition to the Tax and National Insurance paid in the UK, there is also an array of additional taxes. Some of these taxes are paid to the Federal Government, but others are paid to the State and even the city in some cases. This information needs to be reported to the Federal and State governments on a quarterly basis and there are other reports sent that cover the entire tax year and are sent in January. The good news is that payroll providers are very good at calculating the tax, filing with the authorities and paying it on your behalf. There are other employment laws that are out of the scope of this blog post.

Taxation

When it comes to business taxes, the US has different taxation structures than the UK, and the one you choose will impact how profits are taxed. One common structure is a pass-through entity, such as an LLC or S Corporation. With these structures, the business itself does not pay income tax. Instead, the profits "pass through" to the owners' personal tax returns, and they are taxed at the individual level. This avoids double taxation, as the profits are only taxed once.

An additional complication is that the US federal tax rate varies based on the business structure and the amount of taxable income, so it's important to understand the applicable tax rates and comply with federal tax reporting requirements. As stated earlier, tax is paid not just to the federal government, but sometimes to the State that the business is located in and even to the City. An example of this is New York City. A business with an office in NYC has to pay federal tax plus New York State tax and New York City tax. There are some states like Florida, however, which do not have a state income tax nor city taxes, so a pass-through business based in Florida only needs to pay Federal Tax.

Expanding to the US may have implications for your UK tax obligations as well. It's important to consider how profits earned in the US will be treated for UK tax purposes, taking into account any applicable tax laws, treaties, and regulations. Remember, tax laws and regulations are subject to change, so staying informed and seeking professional advice is essential to ensure compliance and optimize your tax strategy. By understanding the taxation of profits in the US, you can make informed decisions and effectively manage your business's financials in the new market.Consulting with both US and UK tax advisors can help you understand the potential impact on your overall tax position.

Banking

When expanding your UK business to the US, setting up banking operations is a crucial step. Having a US-based business bank account will allow you to receive payments from customers, pay expenses, and manage your financial transactions efficiently. Here are some key considerations for banking:

Research and Choose a Bank: Start by researching different banks that offer business banking services in the US. Look for banks that have experience working with international businesses and offer services tailored to your needs. Consider factors such as fees, transaction limits, online banking capabilities, and customer support.

Establish a US Business Entity: Before opening a business bank account, you will need to establish a legal entity for your business in the US, such as an LLC or Corporation. Banks typically require proof of legal entity formation, such as articles of organization or incorporation, to open an account.

Documentation Requirements: When opening a business bank account, you will need to provide certain documentation. This typically includes your business's Employer Identification Number (EIN) obtained from the Internal Revenue Service (IRS), proof of business formation, proof of identity for the account signatories, and potentially additional documents depending on the bank's requirements.

International Transaction Capabilities: As an international business, you'll likely need banking services that support international transactions. Look for a bank that offers features like foreign currency exchange, international wire transfers, and the ability to process payments from international customers.

Merchant Services: If you plan to accept credit card payments from customers, consider the merchant services provided by the bank. Look for competitive rates, secure payment processing, and integration options with your chosen e-commerce platform or point-of-sale system.

Online Banking and Integration: A robust online banking platform is essential for managing your US business finances remotely. Look for a bank that offers user-friendly online banking with features like account balance monitoring, transaction history, fund transfers, and the ability to download statements. Integration with accounting software can also streamline your financial management processes.

Accessibility and Customer Support: Consider the accessibility of the bank's branches and ATMs, especially if you anticipate needing in-person banking services. Additionally, reliable customer support is crucial for resolving any issues or answering questions that may arise.

Compliance and Regulations: Be aware of US banking regulations and compliance requirements, such as anti-money laundering (AML) regulations and Know Your Customer (KYC) requirements. Ensure that your business adheres to these regulations to maintain a smooth banking relationship.

Remember to consult with banking professionals or financial advisors who specialize in international business to ensure you choose the right bank and banking services for your specific needs. By selecting the right banking partner, you can establish a solid financial infrastructure to support your US expansion efforts and effectively manage your finances in the new market.

Profits

It's also important to understand how profits will be treated for tax purposes. Depending on your chosen legal structure, profits may be subject to taxation in the US. However, the UK parent company typically does not need to pay tax on this income as it has already been taxed in the US. If you have a subsidiary in the US that is owned by your UK parent company, it's important to establish transfer pricing arrangements. Transfer pricing refers to the pricing of goods, services, or intellectual property transferred between related entities in different countries. Proper transfer pricing ensures that profits are allocated appropriately between the US subsidiary and the UK parent company, taking into account arm's length pricing guidelines and avoiding potential tax issues.

As a US business, you will need to comply with various tax reporting requirements on all profits. This includes filing annual income tax returns, providing information on income, deductions, and credits. It's crucial to maintain accurate financial records and work with a qualified accountant or tax professional to ensure compliance with all reporting obligations.

Bottom Line

Remember, this blog post provides general information and should not be considered legal advice. Consulting a tax lawyer or banking professional with experience in international business can help you navigate the complexities of expanding to the US market successfully, but we can jumpstart your journey with a firm foundation. Expanding your UK business to the US can be a lucrative opportunity. By understanding the legal, tax, financial, and people considerations involved, you can establish a solid foundation for your business's success in a new economic market. For expert help with expanding your operations into the US, book a call with our team to explore your options and turn your dreams of transatlantic triumph into a tangible reality. Get ready to conquer the US market and take your business to new heights!