Have you been considering expansion to the United States? If you have, we’re not surprised; it is one of the most well-known and attractive markets in the world, and for many businesses an obvious choice.
However knowing the market is not the same as understanding it, as is shown by the many enterprises that fail to get their business off the ground in the US. How can you bridge the difference between failure and success? Wendy Piergolam of PraxisIFM New York guides you a long way in the right direction.
The US is undeniably an economic powerhouse. It has been and will continue to be a popular destination for businesses from outside the US looking to expand across their national borders. In addition to well-established companies, many startups are charmed by the opportunities and attractiveness of the market. The American Dream is still very much alive – and for many entrepreneurs, succeeding in the US is the ultimate goal.
America’s international attraction
So what exactly makes the US so attractive to international entrepreneurs? To start with, it is one of the largest economies in the world, and it is forecasted to remain so for the next decades. Despite the increasing competition from other fast growing markets – and regardless of rising anti-globalisation and protectionist sentiment, the US is expected to strengthen its reputation as an attractive hub for international investors.
In fact despite the divided opinions on its current government the US remained the largest recipient of foreign direct investment in 2017, attracting an estimated USD311bn.
The US Dollar is one of the most used currency in international transactions which illustrates the leading role the US continues to play in international business. In addition, American employees are generally well-educated, productive, innovative, and mobile.
These characteristics of the US market have contributed to making it one of the world’s most attractive markets for venture capital and private equity funding. What’s more, the US market is very accessible for foreign businesses. In fact, a study performed a few years ago by the National Venture Capital Association (NVCA) found that venture-backed companies with at least one foreign-born founder are responsible for an increasing amount of IPOs and subsequent job creation.
The study concluded that 33% of venture-backed companies that went public between 2006 and 2012 had at least one immigrant founder at the helm. The study also found that those public, venture-backed companies with at least one immigrant founder represent a market capitalisation of USD900bn.
The difference between failure and success
All this sounds very promising for international entrepreneurs. Then why is it that there are more companies that fail in their expansion to the US than there are that succeed? Frankly, failure almost seems the rule rather than the exception. What do the successful businesses do that the failing enterprises don’t?
Obviously, there are many factors to take into account, and what might work perfectly for one company can be completely unsuitable for another. But from our experience, one factor always plays an important role: preparation. Know your market; know the challenges, and the most common pitfalls that decide the fates of so many businesses entering the US can be avoided.
That is why here we share some of the most vital issues and guidelines that every company expanding to the US should take into account.
Understanding the US market
Understanding your market is the key to making any expansion a success – and despite the seemingly endless opportunities in the US market, it is no exception to this rule.
If your company has plans to start a business in the US, you should be extremely cautious in its strongly competitive and complex market. You need to familiarise yourself with as much information as possible about the regulatory environment and infrastructure before attempting to gain access to it, because mistakes could be costly.
One common mistake to be aware of: most foreign entrepreneurs think they are already familiar with US culture, as many countries in the world are constantly exposed to US media and influences – but they are wrong.
Basing an expansion strategy for the US on the idea that you already ‘get’ the American corporate culture and market is a common mistake that has caused many foreign businesses to fail in America. The US is a very large country consisting of smaller states, between which there are vast differences. Even the largest cities, like New York City or Los Angeles, have a substantially different culture than the rest of the state they are part of. Do not make the mistake of thinking you know ‘the US culture’; because that single culture doesn’t exist.
Federal, State and City regulations
The US comprises of 50 states, one federal district (Washington, D.C.), and one incorporated territory.
At PraxisIFM we often experience that foreign owners are surprised by the liabilities and potential tax consequences of working across different states. Though federal government is superior to state government, each state has its own laws and regulations and can almost be seen as a country on its own. Furthermore, there can be local city laws applicable. If you plan on doing business in more than one state, these are crucial elements to take into consideration.
You need to determine in which state to incorporate your business, but also understand in which additional states one may need to register, and have an idea of the tax implications that follow your decision. Some states are much more stringent than others and as such it is wise to have a tax advisor assess the proper course of action. Simply having sales people frequently flying on and off to different parts of the US could trigger tax liabilities.
LLC v. corporation
First of all, as a foreign business owner it is relevant to take into account the distinction between a legal entity and a tax entity. These are different concepts, but often confused. Simply said, a tax entity classification is the way the IRS (and the state taxing board) will view the business. The legal entity classification is how everybody else (i.e. courts, state, contractual partners) sees the business.
An LLC and a corporation share many characteristics but there are also some important differences. An LLC is always considered to be a pass-through-entity, meaning that the business owners are subject to tax rather than the entity itself. However, it can be possible to elect to be taxed as a corporation, if certain qualifications are met. When making a decision you should be aware that a corporation can be converted into an LLC, but an LLC cannot simply be converted into a corporation (though it can merge with or into a corporation).
Changing the legal form of your business can be a costly exercise. As it’s relatively easy and inexpensive to obtain a certificate of incorporation in the US, a great number of foreign business owners choose this option to try to cut costs at the setup. Unfortunately, this often means they encounter the equivalent of these costs and more at a later stage while correcting the errors they made at the start.
In short, carefully consider what type of structure is most suitable for your business, and make sure you take the future into account.
Employment contracts are very common in many countries, but almost non-existent in the US. This is crucial to be aware of when hiring employees.
Most US employers provide their hires with an offer letter, which will contain confidentiality clauses when appropriate. In some exceptional cases involving key employees there will be a contract in place, but this is not the standard.
Furthermore the US has the concept of ‘Employment at Will’ which entitles an employer in the US to freely terminate an employee’s contract at any time, without notice and without cause, so long as the reason is not unlawful. Similarly, the employee enjoys the right to terminate employment at any time and for any reason.
The principle of ‘at will’ employment, however, is not interpreted uniformly in all states. Some states interpret the concept broadly, while others have created exceptions to it, or otherwise restricted its application. Foreign business owners must recognise that exceptions to at-will employment have steadily eroded the doctrine, to the point that employers can face substantial legal risks when terminating employees. It is therefore often recommended to provide offer letters rather than any form of contract.
Get support for your expansion to the US
PraxisIFM’s New York office has a dedicated desk to assist foreign clients entering the US market. Our team consists of local and foreign professionals to bridge the difference between what our foreign clients are accustomed to at home, and what they can expect in the US.
We have the global experience as well as the local know-how to assist companies with everything from setting up a new office to complying with local regulations, and take care of the whole administrative hassle that most business owners dread to do.
Although the US remains a market of growth, and is still attracting large numbers of foreign investments – the reality is that the regulatory landscape in America is changing significantly.
While companies anticipate a level of uncertainty and instability when dealing with emerging markets, they are now for the first time facing similar challenges when dealing with developed markets such as the US and Europe where matters such as Brexit and government shutdowns have become part of doing business.
The recent government shutdown in America lasted for over one month, during which newly formed companies faced many challenges, one example being that they were unable to receive their EIN tax ID number. In the US this number is needed to open a bank account, to setup payroll, to get insurance, among many others things. Companies are also trying to determine how their global mobility programs will be impacted.
Having a local partner who can support you, help provide guidance and solutions has become an essential necessity during market entries. Our clients see the added value of paying an expert to minimise their risk of being non-compliant in unknown markets and furthermore that saving time on non-core activities is an investment.
…and sometimes the smartest business decision you can make.
For expert advice on doing business in the US contact Wendy Piergolam in our New York office.