Expanding Business to the U.S.: A Branch or A Subsidiary?

When expanding a business into the U.S., a company has a multitude of considerations. One of the first is whether to establish a branch or a subsidiary? There are many pros and cons for each. A branch has advantages in that it does not need a formal assignment of contracts, patents, or other assets from the main office, it usually can be easily opened and closed. A subsidiary, on the other hand, is a separate entity. So, it will require the assignment of contracts and assets from the parent. However, it has the potential for raising investments in the U.S., it can sponsor foreign employees for U.S. work visas, it appears more reliable in dealings with U.S. companies, and it is a better fit for market expansion. Here is a non-exhaustive list of comparison factors.

Assignment of contracts
Branch: Since a branch is not a separate entity, there is no need to assign contracts
Subsidiary: Since a subsidiary is a separate entity, the contracts must be assigned from the parent to the subsidiary. However, not all contracts can be assigned. It depends on the terms of the contract and applicable laws.

Transfer of other assets
Branch: There is no need for a formal transfer of assets since the branch is not a separate entity. The branch will do business in the name of the company and using the company’s assets.
Subsidiary: If the subsidiary needs the parent’s assets (for example, patents, trade secrets, real property), these assets will have to be transferred to the subsidiary (via the assignment, sale, transfer of ownership, lease, licensing agreements, and the like).

Independence/ control
Branch: The main office will likely have more control and more streamlined subordination with the branch. The governance will likely be determined under the laws of the home country.
Subsidiary: The parent company will have control to the extent of ownership. The governance will have to be determined under the applicable state and U.S. federal laws (registration, securities, regulations).

Visas for employees
Branch: If the main office plans to send its employees to the U.S., they will require sponsorship of a U.S. company. Since the branch is not a U.S. company, it will not be able to sponsor foreign nationals for work visas.
Subsidiary: On the other hand, the subsidiary may sponsor foreign employees for work visas.

Potential liability
Branch: All branch activities will bind the main office because it is one entity. So even if the company has no assets in the U.S., creditors will likely aim for the company’s assets in its home country.
Subsidiary: The parent is usually not liable for the subsidiary’s liabilities. However, there is still a possibility that the creditors will be able to reach the parent’s assets (for example, if the parent signed up as a guarantor, or if it essentially formed a single enterprise with the subsidiary).

Branch: Depending on the country and relevant U.S. international tax treaties, the income received from U.S. activities may be taxed in the U.S. fully or partially.
Subsidiary: The subsidiary will have to pay federal, state, and local corporate taxes in the U.S.  If the subsidiary sends dividends to the U.S. parent or other shareholders overseas, it may or may not be double-taxed, depending on the U.S. international tax treaties.

Investment opportunities
Branch: Investments will likely be limited to the stock of the foreign company.
Subsidiary: The subsidiary will be able to issue its own shares to investors / employees / partners. It can do so independently from the parent’s line of business. So, it may potentially make it easier to raise investments in the U.S.

Maintenance Expenses
Branch: Depending on the anticipated activities, the company will need to lease a space, buy equipment, hire employees, and incur other office-related expenses.
Subsidiary: For a subsidiary, there may be additional expenses such as registration, business licenses, and additional regulatory compliances.

Ease of closure
Branch: A branch can be easily closed (just winding it down and transferring remaining assets to the main office).
Subsidiary: It may take more time and expenses to close a subsidiary (e.g., selling it to a different company, restructuring, distributing the assets).

Branch: A branch fits better for a shorter term, for simpler activities, or a transitory period. It is more compact and more controlled.
Subsidiary: A subsidiary fits better for a long-term plan with views on expanding the market, developing U.S. ties, and raising investments.

Many other factors depend on the company’s industry, country, governance, business ties, available resources, and multiple other variables.  A company should carefully consider all possible pros and cons in choosing the expansion methods and have a clear strategy in place before making this bold step.

August 2, 2021

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