Set Up a Subsidiary in the U.S. : LLC and Foreign Company Guide

Introduction

Expanding your business into the United States is a major strategic milestone—but it comes with a web of legal, tax, and operational considerations. For international companies, setting up a U.S. subsidiary offers a powerful way to establish a local presence, gain credibility, and access one of the largest consumer and B2B markets in the world.

This guide walks you through the key steps and decisions involved in setting up a subsidiary in the U.S., from choosing the right legal structure to staying compliant with federal and state regulations. Whether you’re looking to support sales, manage local operations, or protect your intellectual property, a well-structured U.S. entity can give your expansion the stability it needs to succeed.

Why open a subsidiary in the U.S.?

Establishing a subsidiary in the United States provides foreign companies with significant advantages that go beyond basic market access. Unlike distributors or branch offices, a subsidiary is a separate legal entity, which offers greater strategic and legal flexibility.

Key Benefits of Setting up a US Subsidiary:

• Limited Liability Protection A U.S. subsidiary shields the parent company from local legal claims and liabilities. This legal separation helps reduce risk exposure when operating in a new market.
• Stronger Market Presence and Credibility Having a registered U.S. business enhances your reputation with local customers, partners, and financial institutions. Many U.S. clients prefer or require dealing with domestic entities.
• Operational Control A subsidiary allows you to hire local staff, open bank accounts, sign contracts, and execute on-the-ground strategies—all under your full ownership and oversight.
• Access to Tax Treaty Benefits Many countries have tax treaties with the U.S. that reduce withholding taxes on dividends and limit double taxation, depending on your subsidiary’s structure.
• Intellectual Property and Regulatory Compliance Registering a U.S. entity makes it easier to protect trademarks and comply with local industry regulations—especially important in sectors like tech, healthcare, and manufacturing.

Bottom Line: If your goal is to build a long-term, scalable presence in the U.S., setting up a subsidiary gives you the legal and operational framework to grow with confidence.

LLC or C-Corp? Choosing the Right Business Structure

One of the first decisions you’ll face when creating a subsidiary in U.S. is selecting the appropriate legal structure. For foreign-owned businesses, the two most practical options are:

C-Corporation (C-Corp)

A C-Corp is a separate legal entity that is taxed independently from its owners. It’s the most common structure for foreign subsidiaries, especially those planning to:

• Raise capital from U.S. investors
• Establish a scalable, formal governance model
• Operate in industries where corporations are the standard (e.g., tech, manufacturing)

Pros:

• Familiar to U.S. stakeholders (investors, customers, regulators)
• Easier to issue shares and onboard investors
• Recognized in international tax treaties

Cons:

• Subject to “double taxation” (corporate profits + shareholder dividends)
• Requires stricter corporate formalities (board meetings, bylaws, filings)

Limited Liability Company (LLC)

An LLC offers more operational flexibility and pass-through taxation—meaning profits and losses can be reported on the parent company’s tax return (if eligible and elected).

Pros:

• Fewer formal governance requirements
• Potential tax efficiency through pass-through treatment
• Easier to manage for small to mid-size ventures

Cons:

• Some tax treaties do not recognize LLCs, complicating foreign tax credits
• Less familiar structure for U.S. investors or partners

What About S-Corps or Branches?

• S-Corps are not available to foreign shareholders.
• Branch offices expose the parent company directly to U.S. liability and are rarely recommended.

Which Should You Choose?

• Choose a C-Corp if you need credibility, capital flexibility, or are planning long-term operations.
• Consider an LLC for leaner setups or early-phase market testing—just make sure you understand the tax implications in your home country.

Where to Incorporate: Delaware and Beyond

In the United States, incorporation is handled at the state level. That means your subsidiary company must choose a state of incorporation, which can significantly impact taxes, compliance requirements, and operational costs.

Why Delaware Is So Popular

More than half of U.S. publicly traded companies—and 68% of Fortune 500 firms—are incorporated in Delaware. Here’s why:

• Business-Friendly Courts Delaware’s Court of Chancery specializes in corporate law and offers faster, expert rulings.
• Minimal Disclosure Requirements Delaware doesn’t require shareholder or director names on public filings, offering more privacy.
• Predictable Legal Framework Decades of case law create consistency in how corporate disputes are resolved.
• Efficient Filing and Management Forming a company in Delaware is fast, inexpensive (starting at $89 for corporations), and supported by responsive state systems.

When to Consider Other States

If your subsidiary will have a physical presence in another state (e.g., an office or warehouse in California or Texas), incorporating there might make more sense. Otherwise, you’ll need to foreign qualify in that state—essentially registering and paying fees twice.

Examples:

• California: Imposes an $800 minimum annual franchise tax on LLCs and corporations, regardless of profitability.
• Texas: Offers a 0.375% franchise tax rate for wholesalers and retailers—an attractive option for distribution businesses.
• Nevada or Wyoming: No corporate income tax, strong privacy protections, but often better suited for holding companies than operational subsidiaries.

Key Tip: If you’re building an operational business, it’s often simpler and cheaper to incorporate in the same state where your physical activities will occur. For holding or IP entities, Delaware is usually the best choice.

Step-by-Step Guide to Setting Up a Subsidiary in the USA

Setting up a U.S. subsidiary involves more than just filing paperwork. It’s a structured process that touches legal, tax, and operational functions. Here’s a simplified step-by-step overview:

1. Approve the Subsidiary at the Parent Level Start with a board resolution or formal approval from your company’s leadership authorizing the creation of a U.S. entity.
2. Choose a Legal Structure and State Decide whether to form an LLC or C-Corp, and select the best state for incorporation based on your strategy and operations.
3. File Formation Documents Submit either:
   • Articles of Incorporation (for C-Corps), or
   • Articles of Organization (for LLCs) to the Secretary of State in your chosen jurisdiction. You’ll need to include basic details like the company name, business address, and registered agent.
4. Appoint a Registered Agent All U.S. entities must designate a registered agent with a physical address in the state of incorporation to receive legal documents.
5. Obtain an EIN from the IRS A federal Employer Identification Number (EIN) is required for tax filings, hiring employees, and opening a U.S. bank account for your new company. You can apply online or through IRS Form SS-4.
6. Open a U.S. Business Bank Account Banks will require:
   • Certified formation documents
   • EIN confirmation
   • ID for company officers or signatories
   • Note: Many banks require an in-person visit, though some fintech options now support remote onboarding for foreign-owned companies.
7. Register for State and Local Taxes Depending on where you operate, you may need to register for:
   • State income/franchise tax
   • Sales tax collection
   • Payroll tax accounts
8. Secure Business Licenses Some states or cities require specific licenses to operate legally. Fees and requirements vary by industry and location.

Pro Tip: Keep detailed records from the start—ownership structure, meeting minutes, operating agreements, and intercompany contracts. This protects your liability shield and supports tax and regulatory compliance.

Subsidiary Laws and Tax Must-Knows

Once your subsidiary is set up, staying compliant with U.S. laws and tax rules is critical. Missteps can lead to penalties, audits, or even the loss of liability protection. Here are the essentials every foreign parent company should understand:

Federal Tax Compliance

• Corporate Income Tax U.S. subsidiaries are taxed at a flat federal rate of 21% on their net income. They must file an annual return using Form 1120.
• Withholding Tax on Dividends If the U.S. subsidiary distributes profits to the foreign parent, those payments are subject to a 30% withholding tax—unless reduced by a tax treaty (often down to 5–10%).
• Transfer Pricing Rules All intercompany transactions must comply with IRS Section 482, requiring arm’s-length pricing and proper documentation. This includes royalties, service fees, and loans between the parent and subsidiary.

State-Level Taxes and Nexus Rules

• Franchise Taxes Many states impose minimum franchise or margin taxes (e.g., California charges $800/year, even with no income).
• Economic Nexus Even without a physical office, a subsidiary may trigger tax obligations if it exceeds revenue thresholds in a state (e.g., $500,000 in California sales).
• Sales Tax Selling products in the U.S. may require registration to collect and remit state sales tax—even for remote sellers.

Legal Compliance and Governance

• Maintain Corporate Formalities To protect the liability shield, maintain clear separation from the parent company. This includes:
  • Holding annual meetings
  • Keeping separate financial accounts
  • Documenting board decisions
• Employment Compliance If hiring locally, you must comply with federal and state labor laws. This includes I-9 verification, workers’ compensation insurance, and payroll reporting.
• Industry Regulations Some industries—like finance, healthcare, and logistics—require specialized licenses or permits. Tech firms may also need to comply with U.S. data privacy laws like CCPA in California.

Quick Tip: Consider working with a cross-border accountant or tax advisor to navigate U.S. federal and state requirements—especially for transfer pricing and treaty planning.

Ongoing Compliance and Risk Management

Forming a subsidiary in U.S. is only the beginning. To preserve its legal standing and protect the parent company from risk, ongoing compliance is essential.

Annual and Periodic Filing Obligations

• State Annual Reports Most states require annual (or biennial) reports that update company details and pay maintenance fees. For example:
  • Delaware: Annual franchise tax and report
  • Florida: Annual report due May 1
  • California: Biennial Statement of Information
• Federal Tax Filings File IRS Form 1120 annually. If your subsidiary makes payments to the parent (e.g., dividends, royalties), proper withholding and treaty documentation is required.

Corporate Governance Requirements

Maintain your corporate veil with:

• Properly documented board resolutions for major decisions
• Updated bylaws or operating agreements
• Clearly separated bank accounts and financial records

Failure to uphold these formalities could result in “piercing the corporate veil,” exposing the parent to U.S. liabilities.

Insurance and Risk Mitigation

• General Liability Insurance: Covers third-party claims (injury, property damage)
• Directors & Officers (D&O) Insurance: Protects management from personal legal exposure
• Cyber Insurance: Recommended for companies handling personal or sensitive data

Use of Compliance Tools

Many growing subsidiaries use tools like Avalara or ONESOURCE to:

• Automate tax filings
• Track sales tax nexus
• Monitor reporting deadlines across jurisdictions

Watch for Regulatory Triggers

Foreign companies should regularly review whether they’ve:

• Entered new states that require tax registration
• Grown enough to cross economic nexus thresholds
• Changed business activities that now require licensing

Final Tip: A proactive compliance strategy reduces legal exposure and ensures your U.S. subsidiary remains a reliable platform for growth.

Conclusion: Set Up Smart, Grow with Confidence

Set Up a Subsidiary in the U.S. opens the door to one of the world’s most competitive and opportunity-rich markets. But with that opportunity comes complexity—legal formalities, tax obligations, and compliance risks that require careful navigation from day one.

The key to long-term success is not just setting up quickly, but setting up correctly. That means choosing the right business structure for the us subsidiary, complying with local laws, and maintaining strong governance practices. When done right, your U.S. subsidiary becomes more than a legal entity—it becomes a strategic asset that drives growth and strengthens your global footprint.

At Altios, we specialize in helping international companies establish and manage their operations abroad. From entity structuring and tax planning to HR, compliance, and market entry strategy, our local experts across 22 countries—including the U.S.—can guide you through every phase of your expansion.

Frequently Asked Questions (FAQ)