Types of US Business Entities

US business laws allow for the creation of a variety of business entities.

These are defined as:

  • Sole Proprietorship

  • General Partnership

  • Limited Partnership

  • Limited Liability Partnership

  • Limited Liability Limited Partnership

  • Corporation (divided into C-Corp & S-Corp)

  • Non-Profit Corporation

  • Limited Liability Corporation

  • Massachusetts Trust

  • Trust

  • Joint Venture

  • Tenants in Common

  • Municipality

  • Association

Each type of business entity has its advantages and disadvantages and the choice of which to proceed with is usually defined by the both the intent of the persons involved in the creation of the entity and the amount of liability/risk they are willing to take on.

For example, in the case of a Sole Proprietorship, the owner assumes full liability for all taxes, debts, and all legal liabilities.

In the case of a Corporation or Limited Liability Corporation (LLC) shareholders or partners are not usually liable for the debts and other obligations of the entity.

As a general rule, as the amount of liability decreases so the amount of governance and legal oversight increases, as does the difficulty in setting up the entity.

Careful consideration should be given to the creation of an entity that has the potential to evolve. It is far better to start with a slightly more complex entity than is initially required rather than try to restructure it at a later point, as restructuring may be difficult and tedious.

*The materials on this web site is for informational purposes only and are not legal advice or a substitute for legal counsel.

Why Your B2B Organization Needs A Digital Strategy

Digital strategies are often thought of as being the realm of the business to consumer (B2C) market. However, times have changed and so has the digital marketplace. Business to Business (B2B) organizations need a digital strategy every bit as much as a B2C organization.

A solid digital strategy should combine two major elements, creating demand and responding to demand.

There are a large number of digital platforms available for organizations looking to leverage data for their demand generation activity. One such platform that has seen significant results is Rollworks. Consulting company SpringBox outlines how they made significant gains on behalf of their clients here.

Social Media is often seen as being strongly aligned with B2C demand response. The reality is more complex than that.

Twitter, while not as popular as a general communication tool, has become a leader in both breaking news and as a customer service platform for all size businesses.

Facebook is so focused on Business as a channel that they have released Facebook Workplace. It provides a communication platform that includes messenger, groups, and calling, in exactly the same way as the Facebook many of your employees are already using in their personal lives. This gives it an immediate advantage in that the interface is already familiar. For businesses with multi-location employees this type of digital tool can be extremely valuable.

Forums, including places like Reddit, often host conversations and threads that are relevant to B2B business - for example https://www.reddit.com/r/b2bmarketing/ provides a group of relevant  conversations around marketing for the B2B organization.

Ensuring demand generation and demand response are part of a digital strategy is essential for any organization.

Is Delaware the place to incorporate?

This small state in the North East of the United States is home to 60% of the Fortune 500 and 50% of all publicly traded companies. 

What makes it is so attractive? 
Delaware is the most business friendly of the 50 states, with statutes and courts specifically aimed at businesses that ease both the setup and the running of a business. Delaware’s business laws are extremely familiar to business lawyers, making questions about incorporation and other business matters easier to find answers to.

Delaware's tax laws are also extremely friendly to businesses. This is perhaps one of the most attractive elements to foreign businesses looking to establish themselves in the US.

For instance:

A business formed in Delaware, that doesn’t conduct business there, is not subject to corporate sales tax. 

Non-Residents of Delaware are not liable for personal income tax nor are state taxes payable on stock shares owned by people who do not live in Delaware. 

Delaware, unlike other states, does not require that corporate officers be named in formation documents, affording a greater level of privacy, which can be very attractive for foreign businesses.

Investors also prefer businesses that are incorporated in Delaware when seeking new investment opportunities.

Overall Delaware offers many advantages to foreign businesses looking to incorporate in the United States.

LLC, C Corp or S Corp

In the post - “Types of US Business entities”, we covered the major forms of business types that are available to organizations in the United States.

Generally speaking, most organizations opt for one of three types of entity: LLC, C-Corp or S-Corp. Let’s look at each of these in more detail.

Limited Liability Corporation - LLC

An LLC can be a single owner entity or a partnership between two or more people. An LLC is known as a pass-through entity, that is, the finances of the business are passed through to the owner (in the case of a sole proprietorship) or to the partners, based on their share of the company. This means that any losses can be deducted against personal taxes and any profits are subject to taxation at the personal rate.

In either instance the LLC protects the owners from debt of the business.

Corporation - S-Corp or C-Corp

A Corporation, either S or C, has a greater level of reporting requirements. The organization must form a board of directors, hold annual meetings and produce an annual report.

The difference between an S-Corp and a C-Corp lies in the manner in which taxation is handled. An S-Corp is considered, like an LLC, to be a pass-through entity. This means that the business is not subject to taxes, but rather the owners report profits and losses on their personal taxes.

A C-Corp is not considered a pass-through entity and is subject to business taxation. However, any dividends paid are subject to taxation at the individual level.

At first glance there seems little difference between an LLC and an S-Corp, however for an overseas organization, a notable difference is that both S-Corp and C-Corp are recognized entities outside of the US, they are preferred by investors and are required for an IPO.

*The materials on this web site is for informational purposes only and are not legal advice or a substitute for legal counsel.

The Alternative to Creating A US Business

In the posts “Types of US Business Entities” and “LLC, C Corp or S Corp” we covered the types and benefits of the most common forms of business entities created by overseas organizations.

There is, however, an alternative path to doing business in the US - one that reduces risk, provides a pathway for smaller businesses and offers the ability for larger businesses to conduct a market test before launching a full organization in the US.

A Global Employment Organization, utilizing an Employer of Record status, conducts all the administrative, human resource, payroll, taxation and other activities associated with running a business in the US. As they are already compliant with all Federal and State filing requirements, the administrative burden on the overseas business entity is greatly reduced. This allows resources to focus on the core business functions without having to engage in the creation and setup of a US business entity.

Often Global Employment Organizations can provide local staffing to overseas businesses within a short timeframe, saving time and costs for hiring local staff to operate the business.

Areas such as Intellectual Property, accounting and reporting must be considered carefully before engaging in this model.

*The materials on this web site is for informational purposes only and are not legal advice or a substitute for legal counsel.

The SelectUSA Investment Summit & EU US Partners

I am a US Executive living in Berlin, Germany, and I am working with EU companies as they expand into the US.

If you or you company are looking at expanding into the US, or an EDO that would like to connect, let’s find some time to meet.

You can contact with me directly on www.euuspartners.com.

Or if you are attending, through the SelectUSA Investment Summit matchmaking platform.

I am looking forward to meeting you.

The SelectUSA Investment Summit

Where Business Potential Meets Business Opportunity

The SelectUSA Investment Summit promotes the United States as the world’s premier investment destination and connects qualified foreign firms with U.S. economic development organizations (EDOs) to facilitate business investment and job creation.

The Investment Summit draws high-caliber attendees to help you make connections and get started on business deals:

  • EDOs on site to share business location intelligence.

  • Pre-vetted potential investors actively seeking business opportunities in the United States.

  • Relevant service providers that can help investment possibilities become realities.

  • C-Suite executives and government officials who can discuss the latest policy and business trends.

SelectUSA Investment Summit (2019, May 30). Retrieved from https://www.selectusasummit.us/

The Cost of a US Employee - Salary

As we discussed in the previous post there are several cost elements to hiring a US employee. The next element for us to consider is Salary:

Knowing what to pay an employee is a delicate art that relies on both understanding the market forces and the willingness of the company to pass over an applicant because of a salary requirement that exceeds an original budget.

Any organization will have a budget for each position that has to be filled. However salary negotiations in the US are normal and often involve several offers and counter offers. Working with a recruitment company or a business advisor can certainly alleviate some of the unknowns involved in this process.

Alternatively services such as: 

provide broad ranges for both types of positions and grades of employee. These websites will allow an organization to fix a starting point for their budgets and negotiations.

It should be remembered that salary is only one of many components of total compensation that has a cost implication for a business. Other components include paid time off, bonuses, and retirement fund matches, though the latter two are more discretionary for the hiring company. 

Paid time off or annual holiday (vacation time in the US) is usually another element of compensation negotiations. The average employee in the US receives 10 days of personal vacation per year, usually calculated on a pro-rata basis for each month worked. And higher level, more experienced employees generally receive 15 or even 20 days per year. 

This is much lower than that given to employees in Europe and is increasingly becoming part of non-financial remuneration discussions.

The Cost of a US Employee - Benefits

In previous posts we have discussed recruitment and salary costs. We will now consider both Federal costs and additional benefits.

Federal Costs:
The Federal Insurance Contributions Act (FICA) imposes two taxes on employers & employees. The first is Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the second is for Hospital Insurance (HI; commonly known as the Medicare tax).

For 2018, the FICA tax rate for employers is 7.65%—6.2% for OASDI and 1.45% for HI.

On a salary of $128,400 (or more), an employee and his employer each will pay $7,960.80 in Social Security tax in 2018.

For more details on the calculations and implications see the following sites:

Additional Benefits:
While many of these are optional, many are seen as requirements for attracting quality employees.
Unlike many European countries, the US does not have socialized health care. Each individual must bear either the direct cost of medical care or obtain some form of health insurance. 

Many employees pay either the entire cost of this insurance or a portion of it. This will typically cost in the range of $2000 - $4000 per year per employee depending on age, gender and any pre-existing conditions. Note that it is illegal in the US to ask candidates their age or if they have any pre-existing medical conditions. Candidates can not be excluded from consideration based on age or gender.

Several companies offer managed healthcare benefits packages for small to mid-sized organizations:

Other benefits that organizations may include in compensation packages include Dental insurance plans, Vision insurance plans, Childcare assistance, Tuition reimbursement, Retirement planning, Long term disability payments and dependant care costs.

At the very least an organization should factor a range of 1.25 - 1.5 times the base salary as a complete compensation package. It is also worth considering the mix of benefits that are offered to employees, some work well, others are not so well received. See this Forbes article on which work better.

There are several companies that can manage payroll for a business, including making the appropriate deductions, Federal, State and Elective:

The Cost of a US Employee - Recruitment

Hiring an employee in the US has, like hiring in any other country, associated costs. These can be broken down into the following buckets:

Federal costs
Optional Benefits

Recruitment costs:
There are several approaches to recruiting new employees in the US. Using the services of a recruitment company (sometimes referred to as a Headhunter) can save time for the hiring organization because they manage the posting of recruitment ads, the initial screening of applications and potentially even the screening of candidates via phone or in person.

Recruitment companies fall into one of two broad categories:
Retained Recruiters:
Partnering with a recruiter on a retained basis means the recruiter will charge an upfront fee to conduct a search. They will operate on an exclusive basis, meaning the job will only be filled through this recruitment company. These recruiters work very closely with the hiring organization and will take their time and using an agreed methodology to find the best person for the job. The process will usually result in the production of a shortlist of anything from three to ten names being presented to the hiring organization before interviews commence. Ideally the retained recruiter will be able to present five candidates with the perfect skills, location, salary etc allowing the hiring company to focus on selecting the best candidate.

Contingency Recruiters:
Contingency recruitment is sometimes described as No Win, No Fee. This is a service performed by a recruitment company for free until the day a candidate represented by them takes a position with the hiring organization. Recruiters working on this basis often have to compete with the client’s internal HR department, advertising, direct applicants and typically one or more other recruitment companies.
The contingency recruiters aim is to represent the best candidate or candidates and to do this faster than the other channels. If for instance the vacancy is hard to fill, there will only be a few candidates qualified for the position. Identifying and contacting these individuals before other recruiters is vital for the successful no win, no fee recruiter.

The primary difference between these two types of recruitment is the level of service. A retained recruiter has agreed to a particular service level and will continue with the service until the position is filled or the agreement is terminated.

A contingency recruiter will have multiple positions they are trying to fill and may well devote more attention and effort to positions that are easier to fill.

Alternatively a company might decide to handle the posting of recruitment ads and screening themselves. There are numerous recruitment websites available for hiring in the US, such as Monster, The Ladders, Indeed, and several others. The professional networking site LinkedIn is also a very popular place for businesses to post openings and is heavily favored by recruiters.

The disadvantage of this approach is that the hiring organization must filter, screen and correspond with the applicants. For some positions this could result in an organization having to dedicate many hours of work to deal with the piles of applications received. 

The advantage of this approach, however, is that all applications are seen by the business, and some applicants may be easily recruited for other positions. In addition, the cost may well be lower than hiring a recruitment company.

The Cost of a US employee - Infrastructure

Beyond the recruitment, compensation and tax implications there are infrastructure costs associated with hiring an employee based in the US.

Working from Home
There are three places that a US employee can based from. Their home, an office or on the road (particularly in sales roles).

Employees based from home will expect, at a minimum, a company to provide a computer or laptop (more common), an internet connection, and either a company cell phone or reimbursement against their personal cell phone usage. 

Services such as Skype provide free video-conferencing, more advanced video conferencing, file sharing etc. And as paid services will be required, this also adds to the infrastructure costs. 

Work from an Office
An organization that envisages short to medium term growth of its presence in the US may opt to lease an office space. The most flexible solution is to rent from office space provider such as: 

These companies offer a range of options including fully serviced office spaces that include reception areas, conference rooms, the use of a receptionist who will answer and route calls using the company name and receive and handle mail. 

Leasing a standalone office space has different challenges including the provision of utilities (including water, electric and internet access, among others), maintenance arrangements and the potential for building modification for the layout and purpose of the company. This path is better suited to more established organizations or those who have a team of employees. 

On the Road
For organizations with full-time sales employees, it is not uncommon for them to be based out of hotels during the week while they travel to potential or existing clients, returning home at the end of the week. Businesses should expect to cover all expenses (including a company car or mileage reimbursement and hotel accommodation) and provide a per diem to cover the costs of meals and other out of pocket expenses. 

One common method for covering employee costs is to provide the employee with a company credit card and then have them submit receipts with each monthly statement.

Taking Steps Into the US Marketplace - Marketing Strategy and Investment

Underestimating the amount of funding for marketing is perhaps one of the biggest mistakes made by organizations seeking to enter the US marketplace.

Under investment may be due to reliance on established practices in the home country or misunderstanding practices in the US. Either way, this can be detrimental to the success of a new US based venture.

The UK’s largest retailer, Tesco, attempted an entry into the US market in 2007. Five years later it admitted failure and withdrew from the US. How did this large, well established brand, with a broad range of marketing experience fail to find a market for its products in the US?

The primary reason was Tesco’s underestimation on the cost of entering the most open and broad marketplace in the world. Tesco initially invested £1.5Bn in their operation, which proved woefully inadequate. 

In addition, their marketing was based on the type and style used with success in the UK. However, US consumers were confused and uninterested in the messaging. 

And finally, much of the initial product offerings from Tesco didn’t match US consumer expectations and they lacked critical marketing execution to persuade customers. Some basic market research at the start of their endeavor could have addressed consumer needs and expectations.

The Tesco failure may now serve as a lesson for businesses looking to enter the US marketplace. Success means ensuring that communications, product or service offerings and marketing strategy with investment are aligned with the US methods of doing business rather than on perceived practices, often based on established practices from the originating country.

Taking Steps Into the US Marketplace - Time

One of the biggest challenges facing Non-US based organizations entering the US marketplace is the time difference.

An organization based in, for example Berlin, Germany, with an office in California is 9 hours ahead of their office, which is an entire work day. And even small time differences can lead to many organizational and customer support challenges. Using Germany as an example, let’s consider… 

Will the US staff be required to match or overlap with their German based counterparts? 
Will the German based staff be required to timeshift to ensure communications with their US based counterparts. 
If the customer support staff are based in Germany, will they work US hours? 
How will staff be managed if the people they report to are 9 hours ahead of them?
How will urgent/crisis management be handled?
How much autonomy will the US organization have to address customer and other issues?

These challenges are not insurmountable, but they do require careful consideration. There is no “one size fits all” solution to these scenarios. Any organization looking to establish a presence in the US must have a strategy in place for them before they open for business rather than trying to deal with time issues as they arise.  

And many of the solutions will have cost implications beyond those initially budgeted for when considering the move to the US.

Taking Steps Into the US Marketplace

Having decided that your organization should establish a presence in the US, there are several steps to consider as part of the process.

Step One - Careful Research

Before taking the legal steps of establishing a business presence, organizations should consult with an advisor who can guide them through both the legal and business implications of creating a business entity in the US.

An essential part of the preparation process is market research. Just because your product or service does well in your home country, or even the region in which your business is currently located, doesn’t mean that success will translate to the US.

Like every other country, the US has a very distinct culture which varies across the country. What is appealing in New York might not be so appealing in Arizona. What captures the imagination of a California resident may well be of no interest to a resident of Missouri. 

Without careful research it is easy to overlook the nuances of American culture and perspectives.

Partnering with an advisor who has access to established US-based market researchers is essential to ensure that these and other important considerations are uncovered.