Expanding Your Business to the U.S.: Choosing the Right Legal Structure

• By: Spain-US Chamber of Commerce, Inc.

Expanding your business to the U.S. market is a major opportunity for growth and a key step in your U.S. business expansion strategy, but choosing the right legal structure is critical. Whether forming an LLC, C-Corp, or S-Corp, this decision affects tax obligations, liability protection, and business operations. Understanding your options ensures a strong legal foundation for long-term success in the U.S. business expansion journey.

Legal Structure Options in the U.S.

1. Limited Liability Company (LLC)

One of the most common structures for foreign businesses pursuing U.S. business expansion is the limited liability company (LLC). An LLC is one of the most popular choices for foreign businesses entering the U.S. It provides limited liability protection while offering a flexible tax structure. LLCs are particularly attractive to small and medium-sized companies that want a straightforward and low-maintenance legal framework.

Advantages:

• Provides limited liability protection for owners.
• Offers a flexible tax structure with pass-through taxation (profits are taxed only at the individual level, avoiding corporate tax).
• Fewer compliance requirements compared to corporations.
• Foreign investors can fully own an LLC.

Disadvantages:

• Cannot issue stock, which limits fundraising opportunities.

2. C-Corporation (C-Corp) – Best for Growth and Investment

For companies with long-term growth ambitions, particularly those seeking to attract investors or even go public, a C-Corporation (C-Corp) is often the preferred structure. Unlike an LLC, a C-Corp is a separate legal entity, meaning that it pays corporate taxes independently from its owners. This results in double taxation, as profits are taxed at the corporate level and again when distributed as dividends to shareholders. Despite this, C-Corps offer unlimited growth potential, as they can issue multiple classes of stock and accept investment from both U.S. and foreign entities.

Advantages:

• Provides strong liability protection for owners.
• Can issue multiple classes of stock and accept investments from both U.S. and foreign entities.
• No ownership restrictions—ideal for companies planning to expand globally.

Disadvantages:

• Subject to double taxation:
  • The company pays corporate taxes on its profits.
  • Shareholders pay taxes on dividends received.

3. S-Corporation (S-Corp) – Tax Benefits for U.S. Residents

Another option, S-Corporation (S-Corp), allows pass-through taxation while still offering the corporate structure. However, it comes with strict limitations—most notably, S-Corps can only be owned by U.S. citizens or residents, making them an impractical choice for Spanish companies looking to establish a foothold in the U.S.

Advantages:

• Allows pass-through taxation, reducing the overall tax burden.
• Provides corporate liability protection.

Disadvantages:

• Only U.S. citizens or permanent residents can own an S-Corp.
• Limited to 100 shareholders.

4. Representative Office – A First Step Without Financial Risk

For businesses that prefer not to establish a separate entity, operating as a branch office of the Spanish parent company is a possibility. While this approach may seem straightforward, it comes with significant legal and financial risks. A branch is not an independent entity, meaning that the parent company is directly liable for all obligations, debts, and potential lawsuits in the U.S. Additionally, branches are subject to U.S. corporate taxation, and profits may be subject to an additional branch profits tax of up to 30%.

For companies still exploring U.S. business expansion but not ready for full-scale operations, a Representative Office might be the right choice. This structure allows a company to establish a presence for market research, networking, and promotional activities without engaging in commercial transactions. Since it does not generate revenue, it is not subject to U.S. taxation. However, its scope is very limited, as it cannot sign contracts or conduct sales.

Advantages:

• Ideal for testing the market before making a full commitment.
• Not subject to U.S. taxation, since it does not generate revenue.

Disadvantages:

• Cannot sign contracts or conducting business transactions.
• Limited to non-commercial activities.

Which Option is Best for Your Business?

Choosing the right legal structure depends on several factors, including the business model, tax strategy, liability considerations, and long-term objectives. Spanish companies planning U.S. business expansion should carefully assess their options and seek professional legal and financial guidance to ensure they make the best decision for their growth and success.

The U.S. market presents exciting opportunities, but structuring your business correctly from the start is crucial.

With the right approach, Spanish companies can achieve successful U.S. business expansion and establish a strong, sustainable presence in this competitive landscape.

• The Official Chamber of Commerce of Spain in the United States is a recognized nonprofit organization aimed at enhancing business and commercial ties between Spain and the United States. Founded in 1980 and located in Miami, this Chamber is of considerable importance due to its strategic location, multicultural component, and excellent communication network. Miami is the perfect city to target both the American and Latin American markets.
• www.spainuschamber.com