Expanding business to USA - What's the right structure? Parent entity or a Subsidiary?

Expanding your business to the United States is a major step that opens doors to a whole new market. However, navigating the complexities of setting up a business in the US can be overwhelming. One of the most crucial decisions you’ll need to make early on is the structure of your business: should you set up a parent entity or a subsidiary? The right choice depends on several factors, including your long-term business goals, the type of operations you plan to run, and whether you intend to raise capital. Both options have their advantages and disadvantages, and understanding these will help you make a more informed decision.

Parent Entity: The Ideal Structure for Growth and Investment

A parent entity, which is essentially the main controlling company of a group of subsidiaries, is typically the preferred structure for businesses that plan to expand quickly, raise capital, or scale their operations. If you are an international founder looking to establish your business in the US and want to attract investors, a parent entity is often the most suitable option.

Key Benefits of a Parent Entity:

1. Attracting Investors:One of the biggest reasons companies choose to set up a parent entity in the US is to attract investors. Venture capitalists (VCs) and angel investors tend to prefer this structure because it centralizes the ownership and control of the company at one level. It also makes it easier for investors to understand the company’s intellectual property (IP) rights and equity distribution. Investors want to see a clear ownership structure, and having the IP and cap table (the record of ownership) under the parent entity simplifies this process.
2. IP Control and Flexibility:In a parent entity setup, your intellectual property remains centralized at the parent company level. This gives you more control over your assets and allows for smoother transitions as your company grows. For instance, if you need to sell or license your IP, it’s more straightforward with a parent entity.
3. Capital and Fundraising:If you’re looking to fundraise or attract large investments, investors prefer a parent entity structure because it offers transparency and control over the business. Most investors will expect the parent entity to be the key location for capital raising and funding, ensuring that they are investing in the core company.
4. Scalability:A parent entity allows for greater scalability as it serves as a central point for all subsidiaries. As your business expands globally, it’s easier to manage and operate subsidiaries in different regions while still keeping the core operations under the parent company.
5. Tax Benefits:Depending on your home country’s tax laws, operating through a parent company can offer tax advantages when you consolidate global profits and expenses. The parent entity could help with financial reporting, tax filings, and deductions related to business expenses across borders.

Subsidiary: A More Flexible Option for Regional Operations

A subsidiary, on the other hand, is typically a smaller, more localized entity that operates under the parent company but is legally independent. Setting up a subsidiary in the US is an ideal option if your primary goal is to establish a presence in the US market without immediately raising funds or making significant changes to the ownership structure.

Key Benefits of a Subsidiary:

1. Localized Operations:A subsidiary is often set up when the focus is on local operations—such as sales, customer service, or managing specific regulatory requirements—without the need to centralize the IP or funding at the parent level. For example, if you are a fintech company planning to work with a US bank, a subsidiary might be the best way to structure the local operations while maintaining control of the core assets under the parent entity.
2. Simplicity and Lower Costs:Setting up a subsidiary is often simpler and less costly in the short term. It allows you to operate in the US with a more straightforward setup, particularly if your business doesn’t require large-scale investments or complex IP management. A subsidiary also allows you to hire employees, create local partnerships, and comply with US regulations without the need for extensive corporate restructuring.
3. Tax Advantages:Depending on your business goals, a subsidiary may help with tax management in the US. Subsidiaries are subject to US tax laws and can often take advantage of specific tax benefits aimed at local businesses. This could include state-level tax incentives or deductions for operating in certain industries, which could make it an attractive option for companies focused on minimizing their tax burden in the US.
4. Flexibility in Operations:Subsidiaries allow you to tailor your operations to the US market without affecting the parent company’s operations back home. You can adapt your business model, marketing strategies, and sales channels based on local needs and conditions.
5. Employee Benefits and Regulations:When expanding to the US, you’ll need to consider employment laws, benefits packages, and employee relations. A subsidiary allows you to set up US-based teams while managing employee benefits, insurance, and tax filings locally, which can be a more manageable option when compared to running everything through a parent entity.

Which Structure is Right for You?

The choice between a parent entity and a subsidiary ultimately depends on your business goals and long-term vision for expansion into the US. Here are some key considerations:

• Choose a Parent Entity if:
  • You plan on raising capital from investors, particularly venture capital.
  • You want to centralize ownership and control of your intellectual property.
  • Your business will require substantial investment and long-term growth across multiple regions.
  • You need greater flexibility for raising funds and managing investments from outside sources.
• Choose a Subsidiary if:
  • You’re not looking to raise capital immediately and just need to establish a local presence in the US.
  • You plan on focusing your US operations on specific functions, such as sales or compliance.
  • You want a more straightforward structure with lower initial costs and regulatory complexity.
  • Your operations in the US are independent from the core operations of the parent company.

In Conclusion

The decision to choose between a parent entity or a subsidiary is a critical one when expanding your business into the US. By understanding the benefits of both structures, you can make a decision that aligns with your business goals and sets you up for long-term success in the US market.

To dive deeper into this topic and learn more about how you can structure your business expansion to the US, be sure to check out our YouTube video with Spencer from Commenda. He shares valuable insights and offers expert advice on navigating the complexities of US business setup, helping you make an informed choice for your company’s future.