INTERNATIONAL POLICY DIGEST

If you’re considering taking your startup global, research and pick the best structure for you.

Startups in sectors like technology, sustainability, and finance are successfully expanding their operations across international borders. In 2024, for example, American electric vehicle manufacturer Rivan raised $5 billion to enter European markets. Meanwhile, Byju’s, a leading Indian edtech company, secured $2 billion to bring AI-powered learning tools to the U.S. and Europe. 56% of U.S. businesses now plan on international growth.

For startups looking to follow suit, it’s crucial to choose the right business structure that supports, rather than hinders, expansion. Subsidiaries and branch offices are usually the top options, but each have vastly different implications for your liability and taxes abroad. Take time to research and pick the best structure for you, and you’ll be set up for sustainable growth overseas.

Consider liability — are your assets protected across borders?

Subsidiaries generally offer better liability protection than branch offices. A subsidiary is essentially an entirely separate company owned by a parent company, complete with its legal identity. Therefore, the parent company isn’t responsible for any losses the subsidiary might incur. However, the parent company controls the subsidiary’s assets, which are protected if the subsidiary company faces losses. This protection in new markets is important, especially as 90% of business owners don’t correctly understand liability risks.

In contrast, a branch office isn’t a separate business. It’s more like an extension of the parent company, and part of the same legal entity. So, the parent company is directly held responsible for any liabilities, fines, or settlements incurred by the branch office. This type of structure is simpler to establish than a subsidiary but leaves you at greater risk. It’s usually best used to test a new market without much expense before you decide to scale your operations in that country and upgrade to a subsidiary.

Choosing a legal structure: LLC tax efficiency

Most subsidiary companies opt to be limited liability companies (LLCs) or corporations, with these two legal structures determining tax implications. LLCs have an edge over corporations, as they can provide your business with the legal protection of a corporation and the financial benefits of pass-through taxation. This means your international subsidiary won’t be hit with double taxation. Normally, a corporation has to pay taxes at the corporate level, and then the shareholders pay taxes again on the same business income personally. But, with an LLC, you don’t file a corporate income tax return. Instead, the owner(s) report the business profits on their personal tax returns.

It also might be that your U.S. startup wasn’t set up as an LLC. Maybe it’s currently a sole proprietorship, partnership, or C-corp. Although you can still establish your own subsidiary as an LLC, switching your U.S. company to this structure is worth switching to benefit from pass-through taxation. LLC owners may even be able to deduct up to 20% of their qualified business income on their tax return and save even more money. And, if you’d rather stay focused on growing your business abroad, you can hire a registered agent to form your U.S. LLC for you. This service usually costs over $100 (plus state fees), but discounts are sometimes available. A current Northwest Registered Agent promotion offers LLC formation for $39 (plus state fees) and provides free registered agent services for a year.

Simple taxes — the advantage of branch offices

If you initially decide to establish an international branch office instead of a subsidiary, you’ll also need to understand the tax implications of this structure. The branch’s income is taxed at the standard U.S. corporate tax rate of 21%. Since it’s part of the parent company, you usually won’t need to file a separate tax return for the branch. Instead, you’ll have to file Form 8858 annually, as part of the parent company’s federal income tax return. This form is relatively easy to fill out, which helps take some of the pressure off. You just need to give a brief overview of the branch’s income statement and balance sheet.

Although you’ll also have to deal with the country’s income tax laws, the foreign tax credit stops you from being taxed twice on the same income. This U.S. tax credit lets you reduce your U.S. tax bill by the amount of income taxes paid to the foreign country. There’s a cap on how much credit you can claim, calculated within your U.S. tax return.

Expanding your startup abroad can be an effective way to reach new customers and boost brand recognition. If you choose the right business structure, you’ll be in the best position possible to enjoy sustainable international growth.