In a previous Insights article, we examined the issues faced by American companies seeking to locate in the UK. The practicalities are complicated for US companies, and UK companies looking to expand into the US also face a similarly complex (but ultimately potentially very rewarding) journey.
Establishment of a US company
Setting up a US office is probably the most important step for any UK company wanting to do business in the US. That’s certainly the case if you’re considering hiring U.S.-based employees, especially if you’re also considering offering them equity incentives. If you intend to operate in an area where US product liability claims, patent infringement or other litigation are common, the existence of this US company will make it more difficult for plaintiffs to access the UK parent company’s deeper pockets.
Some highly regulated U.S. industries may require certain types of business operations to be conducted through a U.S. company. Although not required by law, many US companies simply prefer to transact with other US companies. American venture capital investors generally require a UK company to establish a US parent company before investing (the so-called “Delaware flip”). Whether your UK company should “convert” into a US parent company to access US VC investment is a question that requires careful consideration of the commercial, legal and tax implications.
Setting up an American bank account
Setting up an American corporate bank account through a US company is the next most important step, as it is far more efficient than trying to do things through a UK company. However, the recent turbulence and instability in the American banking sector has highlighted the complexity of doing business in the United States. Before Silicon Valley Bank (SVB) became the second-largest failed bank in U.S. history, it was the preferred lender for high-tech startups.
SVB also spent nearly a million dollars lobbying for the deregulation policies in President Trump’s 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, which undermined the Dodd-Frank Act, which restricted the extremely risky activities of the financial industry that led to the financial crisis had been contained between 2007 and 2008. This dilution of regulatory strength ultimately created the conditions for the SVB’s demise.
SVB’s management also appears to have neglected the fundamentals of actual banking — the bank had no chief risk officer for much of last year — and the bank’s investment strategy was not well thought out. Like many smaller regional banks in the United States, the majority of SVB’s deposits were not insured by the Federal Deposit Insurance Corporation (FDIC). This is also true for some larger US banks, but they can withstand anxious market fluctuations much better than the regional banks. A number of banking reform proposals are being discussed in Congress, including Senator Elizabeth Warren’s bill that would completely repeal Trump-era financial deregulation. It remains to be seen which will ultimately prevail.
The importance of due diligence
Although the FDIC ultimately guaranteed all of SVB’s (and other troubled banks like Signature and Silvergate) deposits, whether insured or not, this was not a given. There was no legal obligation for the FDIC to do so, and it cannot be assumed that such intervention would be repeated if another bank failure occurred. This is crucial for UK companies entering the US market. It’s now more important than ever to conduct rigorous due diligence before selecting a U.S. bank (and not just choose the bank that will get you an account quickest).
Everything takes longer than you think
Given this turmoil, it should be clear that expanding into America requires careful planning, foresight and implementation of corporate compliance. However, UK businesses should be under no illusions about how quickly this process will happen. It generally takes much longer than most assume to set up a subsidiary and obtain a federal employer identification number (EIN) before finally opening a U.S. bank account used for payroll and employer and employer registration Tax identification numbers are required in each state in which the company wishes to operate.
Obtaining a Federal Employer Identification Number from the US Internal Revenue Service (IRS) is a lengthy and highly bureaucratic process, especially at this time when such applications are subject to significant delays.
If your company is unwilling to entrust legal responsibility for the company in the US to a senior executive who is a US citizen, it will be much easier and quicker for your designated UK manager to obtain an Individual Taxpayer Identification Number (ITIN). before applying for an EIN number. Obtaining the ITIN alone can take up to 16 weeks.
Navigating the US market requires patience, but also requires experienced and knowledgeable guidance from a trusted partner like Motion Paradox, who is familiar with the legal and business environment on both sides of the Atlantic, because that is where we operate ourselves.
