The realm of tech entrepreneurship is vast, complex, and ever-evolving. Inovia Sessions offers a deep dive into this world, presenting insights, discussions, and firsthand experiences from those at the forefront of the industry. We’re excited to continue The Door to America mini-series, which provides a focused look at the strategies and intricacies of business expansion in the North American market.
In today’s episode, we’re diving into the administrative considerations and costs associated with expanding to North America. Joining us is Daniel Glazer, London Office Managing Partner at Wilson Sonsini, and an authority on assisting European startups break into the U.S. market.
With our host, Inovia Principal Mike McGraw steering the conversation, this episode unpacks the legal complexities of North American expansion and is brimming with hands-on advice. This recap highlights some of the key takeaways shared during the podcast episode – dive in!
Legal Framework: The Foundation of U.S. Expansion
Setting Up a U.S. Entity
Understanding the need to establish a separate U.S. entity is crucial when expanding into the American market. This decision significantly influences tax implications, liability risks, and employment law compliance. The expansion strategy can vary, from remote operations to hiring local employees or partnering with U.S.-based distributors. However, a physical presence, particularly hiring staff, necessitates a U.S. entity to avoid the complexities of using a European parent company. This approach mitigates potential tax liabilities in the U.S., shields the parent company from direct legal risks, and clarifies the often overlapping European and U.S. employment regulations.
When considering a U.S. presence, especially for on-site employee hiring, a thorough plan encompassing legal, tax, accounting, banking, business insurance, and payroll and benefits is indispensable.
Actionable Tip: Prioritize establishing a U.S. entity to manage tax, liability, and employment law challenges when expanding to the U.S. This critical step ensures a protected and efficient operational setup in the new market.
Delaware: The Preferred State for Incorporation
Delaware is widely chosen for incorporating a U.S. subsidiary due to its business-friendly environment, highlighted by its well-established corporate law and specialized courts. This state is known for its efficiency and cost-effectiveness in business setup, making it an ideal choice for foreign companies entering the U.S. market. Delaware’s legal infrastructure is designed to reduce friction in the incorporation process, providing a smooth entry for businesses. It’s also best appreciated by U.S. investors as a known quantity.
Actionable Tip: When expanding to the U.S., consider opting for a Delaware incorporation to benefit from its business-friendly legal environment and streamlined setup process. This strategic choice can ease the complexities of setting up and managing your U.S. operations.
State-Specific Registration and Documentation: Tailoring to Local Requirements
As businesses expand into the U.S., adapting to each state’s distinct legal and regulatory requirements becomes critical. Following establishing a Delaware subsidiary, companies must navigate additional registration processes in other states of operation. The process also requires providing state-specific employment documents. As a company expands into new states, this approach ensures adherence to the diverse and complex state laws and employment practices, essential for legal compliance and protection of the company’s interests across various U.S. jurisdictions. Don’t expect it to be a copy and paste, as material adaptations are required.
Actionable Tip: Ensure compliance with each state’s legal requirements as you expand across the U.S. Tailoring your approach to meet state-specific laws and documentation is crucial for a successful and legally sound expansion.
Employee Options: Aligning Incentives Across Borders
In the U.S. business landscape, offering stock options to employees is not just a common practice but often an expected one. This aspect of employee compensation is particularly emphasized in the U.S., where employees typically have a keen focus on stock options. For companies based in the UK or Europe, it’s usual to extend these option plans from the parent company to their U.S. employees.
Furthermore, it’s important to know that the U.S. tax treatment of options in a non-U.S. company is less favourable to American employees than the tax treatment of options in a Delaware company. However, that can be managed by simply grossing up the employees so they end up in the same place.
Actionable Tip: American employees are often well informed and more focused on option plans. Moreover, options from a non-U.S. company are taxed differently, potentially requiring adjustments to European compensation policies.
Business Insurance and Payroll Complexities
In the U.S., navigating the landscape of business insurance and payroll systems is crucial to establishing a successful operation. Unlike many European countries, the U.S. does not have a universal healthcare system, which significantly impacts the overall cost and structure of employee compensation packages. Notably, the primary cost of U.S. expansion is employees, who can be substantially more expensive than in Europe, factoring in higher salaries, health insurance, retirement benefits, and potential bonuses or commissions.
For startups and growing companies, these complexities can be daunting. Professional employer organizations (PEOs) play a vital role here, allowing companies to outsource payroll, retirement benefits, and health insurance needs. PEOs leverage economies of scale, offering more cost-effective and comprehensive packages than small or medium-sized companies could negotiate independently, simplifying administrative burdens and ensuring competitive benefits for U.S. employees.
Actionable Tip: Employee compensation and benefits are by far the largest cost item when expanding to the United States. They are not to be underestimated.
For deeper insights and to grasp the strategies discussed by Daniel Glazer, tune in to the full episode. Stay with us on this journey; our next episode promises a deep dive into raising in a North American VC landscape. Subscribe to ensure you don’t miss out!
