How to expand into the USA: guide for UK startups

After decades of working with startups, Daniel Glazer and his team observe that UK startups are most successful in their move into the US when they go either early or late. Daniel recommends you get it right in the UK or in the US before you attempt to expand in America:

Thinking about organising a recce to the US? Or having a few meetings while taking a holiday in the States? Remember, to be allowed to work in the US, you need a visa proving your right to work there.

But the definition of ‘work’ is somewhat fuzzy. For example, you can have meetings, attend conferences, pitch for investment, do some reconnaissance and so on. But a few days of working on your laptop or hanging out in a café while doing some coding could be considered ‘work’ for which a proper visa is required.

To be certain you stay on the right side of the law, speak to a US immigration specialist. If you’re discovered working illegally in the US, you could delay your plans by being ‘blacklisted’ – prevented from entering the US for a while.

If you don’t yet feel ready to hire employees in the US but need a few people to get started for you over there, you can just hire them as contractors, right? Not quite.

Before we move on to how to employ people in America, Daniel is keen to emphasise this important piece of advice: don’t hire people in the US as employees of your UK company. If you do this, you create three big problems:

• A big tax headache
  If your UK company employs someone in the US, under US law this can be viewed as the creation of an unincorporated US branch of your UK company. The UK company’s income could be taxed both by HMRC in the UK and the IRS (Internal Revenue Service, the US equivalent of HMRC) in the US.
• You make litigation more attractive
  When you set up a US subsidiary and employ people in the US through that subsidiary, you limit the litigation possibilities. Why? Because at this point in your company’s growth, your UK company is likely to have substantial assets while your US subsidiary has practically zero. There’s little for your US employee – or someone negatively affected by your US employee – to gain by suing your US subsidiary, and the UK company is not itself present in the US. But if you’ve employed someone in the US directly through your UK company and they (or a third party damaged by your US employee) sue your UK company, it could be extremely costly.
• You complicate legal matters
  The laws governing UK employers and US employees don’t necessarily align. If there’s a dispute, it could be time-consuming and expensive to resolve.

Before you employ anyone in the USA, it’s sensible to clarify exactly what you need and then seek advice from a specialist US lawyer.

Save yourself the headache of whether your people in the US are contractors or employees by consulting a US employment lawyer. Prepare job descriptions and the specialist will be able to tell you whether the role, in that particular state, is a contractor or an employee.

If the lawyer says the role you want to hire is an ‘employee’ then you have two choices:

• Set up a US subsidiary company
  And hire people as employees of that company (more about this below).
• Change the job description
  If you’re not yet ready to set up a US company, you can scale back the requirements of the job – and then make sure you and the contractor stick to it. It’s easy for a role to morph into an ‘employee’ role within a few months or a year, so keep an eye on it to make sure the job description still matches what the person is doing.

You generally don’t need a US company to:

• sell in the USA
• hire contractors in the US
• make contracts with companies in the US

However, when you need to hire employees in the US, you’re ready to set up a US company.

Why set up a subsidiary and not a US parent company for your business? You can do almost everything you could want to do in the US with a subsidiary, which is less expensive and time-consuming than creating a new US parent company of your UK company. When UK companies set up a US parent company, it’s nearly always a decision driven by US investors.

When you incorporate in the US, your US subsidiary will be incorporated as an ‘Inc’ company. The most common alternative is a ‘limited liability company’ (LLC).

For tax reasons, it’s typically more straightforward to incorporate as an Inc and not an LLC. This is because an Inc is taxed for its own activities. An LLC, by default, is a tax pass-through organisation so the parent company – that would be your UK company – is responsible for the taxes of the LLC. Under UK tax law, there’s usually little benefit for a UK company to have a US LLC instead of an Inc.

You’ve got your US subsidiary, incorporated in Delaware. Now you’re ready to hire your first employee, let’s say in New York. To do this, you need to register your company with the Secretary of State for New York. And for your New York employee, you’ll need two documents specific to New York state:

• IP assignment and confidentiality agreement
• offer letter
  This contains the financial details

Every time you hire an employee in a different state, you’ll need to do the same: register with the Secretary of State there, and use state-specific employment documents.

Or should that be Americanize your legals? 
As well as your corporation and employment agreements, there will be more legal issues to sort out for your American operations, such as:

• Patents and trademarks
  For the IP that you’ve registered in the UK, you’ll want to consider registering in the USA too.
• Data protection
  GDPR doesn’t apply in the USA – if you’re collecting personal information in the US, you’ll need to comply with the relevant US and state laws for data privacy.
• T&Cs
  In contracts, you’ll want to consider localising the terms and conditions for the American market – factoring in both the market norms and the governing law of the contract.

Besides legal, there are four other areas UK companies expanding into the US need to consider – to get these sorted out, factor in around three to four weeks:

• Tax accounting
  When you incorporate in the US, you’ll need to get an Employer Identification Number (known as an ‘EIN’ or ‘tax ID number’) – this is a unique, government issued identifier for your US subsidiary that allows you to set up a bank account and payroll in the US. Ask your US accountant to help you get an EIN as well as for help with your federal and state tax filings.
  Estimated cost: from $1,000 to $3,000
• Banking
  You’ll use the EIN to set up a US bank account for your US subsidiary.
  Estimated cost: minimal
• Business insurance
  You’ll need to extend your business insurance from the parent company to your subsidiary – ask your insurer if they can do this. If not, you can ask your insurer or your US accountant for a recommendation.
  Estimated cost: from $1,000 to a few thousand dollars
• Payroll and benefits
  It’s common for small companies (less than 50 employees) to co-employ people in the US through a Professional Employer Organisation (PEO). A PEO can organise the payroll, retirement benefits plan and health insurance for employees of your US subsidiary, which means your company doesn’t need to set these up separately.
  Estimated cost: people will be your biggest expense – see below

For most companies, people are the most significant cost of setting up in the USA. It’s common for salaries in America to be 1.5 to 3 times the equivalent UK salaries. And the benefits and payroll bill per person can reach $15,000 to $20,000. This is much higher than the UK because US employees usually expect you to cover their healthcare insurance.

Missed the webinar? Watch the video to see Anthony Rose, CEO of SeedLegals talking to Daniel Glazer of Wilson Sonsini.

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