Doing Business in the USA
The United States of America (USA), commonly referred to as the United States (US), is located in North America and bordered to the north by Canada, and to the south by Mexico.
An economic powerhouse, the US is a federal republic comprising 50 states, a federal district, and several territories. It is also the world’s third largest country by both size and population, recording a gross domestic product (GDP) of more than US$25 trillion in 2022, around a quarter of the global total.
The US is a prominent and vocal member of the World Trade Organization (WTO), the Organisation for Economic Co-operation and Development (OECD), the United States-Mexico-Canada Agreement (USMCA), the Asia-Pacific Economic Cooperation (APEC), and the Organization of American States (OAS).
Doing business in the US offers both domestic and foreign companies a wealth of exciting opportunities, but there is a lot to take on board before expanding into the market. As a federal republic, for example, each individual state has sovereignty relating to taxes, labour and laws. Additionally, each county or city within a state has the power to impose requirements for local taxes and business licences.
Despite such challenges, the size and unrivalled growth prospects of the US continue to attract companies keen to invest in the country and do business within its borders.
The US has always sought to provide foreign investors with a stable and welcoming market for doing business.
It has a particularly well-developed and transparent legal system that protects businesses and their diversified investments; advanced infrastructure; and access to one of the world's most lucrative consumer markets.
The US also benefits from a low tax environment and a tax system that provides a range of appealing incentives for businesses to invest in research and development (R&D), helping them to stay ahead of the curve and remain competitive in today’s global marketplace.
At both federal and state level, foreign investors are eligible for funding allowances, such as long-term subsidised loans. To help encourage new businesses to prosper within its borders, the US is committed to offering investors some of the best services available, encompassing tax credits, grant programmes, loans and tax exemptions.
Foreign companies can now benefit from aid, granted by three federal agencies: the Economic Development Administration (EDA) which offers long-term loans with preferential rates for activities leading to job creation, the Small Business Administration (SBA), and the United States Department of Agriculture (USDA) which can guarantee up to 90% of the loans granted to commercial companies that create jobs in rural zones.
Given the raft of benefits on offer, it’s no surprise that a host of international companies are today doing business in the US, including Rolls-Royce, Siemens, Unilever and Shell.
When it comes to the best places in which to do business in the US, the opportunities are spread around.
As well as global names such as New York and Los Angeles, there are a number of exciting emerging centres. For example, Miami won the top spot in the first ever ‘Investing in America’ ranking produced by the Financial Times and Nikkei in 2023. The ranking measured the best US cities for foreign businesses and foreign investment in the US, with Florida providing three of the top 10 cities and Texas and North Carolina contributing two cities each.
It’s easy to understand why the US is an attractive market for companies looking to invest overseas. As well as representing around 25% of all global economic activity, the US is also home to a quarter of the world’s top 500 companies.
As evidenced by TMF Group’s Global Business Complexity Index 2023, the US remains one of the simplest jurisdictions for doing business. This simplicity stems from an active focus on creating a business-friendly environment that entices foreign direct investment (FDI).
While the US economy is currently growing at a slightly less brisk pace than it has historically, as a result of the ongoing pressures impacting the global markets, no other economy boasts such a reliable and consistent record of long-term economic growth.
And while the US has experienced inflation in recent years, the change from President Trump to President Biden means there is greater confidence amongst investors. President Trump was tax and business friendly, but the volatility that his administration brought could be challenging for businesses in the country. The Biden administration tends to offer a calmer environment in which to invest.
As well as having one of the world’s most dynamic consumer markets on their doorstep, foreign companies doing business in the US also benefit from easy access to cross-border trade with neighbouring countries, such as Mexico and Canada, thanks to the North American Free Trade Agreement (NAFTA), which has gradually eliminated most tariffs and other trade barriers on products and services.
As already touched upon, several US states and cities offer tax credits and other investment incentives to attract global investments. Companies starting in – or expanding into – and doing business in the US can also take advantage of a highly skilled, well-educated and mobile workforce that is fed by some of the world’s top universities and colleges.
And for those with a winning idea, the US also provides a strong regime of intellectual property rights protection and enforcement, which is understandably attractive to those investing in innovative R&D activities.
While the US is certainly a land of opportunity, as with any market, there are a number of challenges and considerations that companies should become familiar with.
Each of the 50 states has its own specific state laws and regulations, and corporations will need to therefore ensure they are fully compliant with both federal rules and these state-level considerations to avoid reputational risks and, potentially, prosecution.
In addition, each state in which an entity registers in then also requires a local agent. TMF Group has expertise in providing such administrative services across all 50 states, and has helped countless international companies stay compliant with local requirements.
The US also has a complex array of federal, state, and local taxes – indeed there are more than 80,000 different tax jurisdictions nationwide, and the Internal Revenue Service (IRS) is well known for strictly enforcing tax rules.
The Covid-19 pandemic, meanwhile, resulted in a host of new legislation related to issues such as employee leave and work from home mandates.
To help address some of these challenges, TMF Group has produced a comprehensive overview of how to do business in the US.
In the US, taxes are imposed at the federal, state, and local levels. Local knowledge is therefore essential in helping corporations navigate this complex landscape.
US tax reform legislation enacted in December 2017 permanently reduced the federal 35% Corporate Income Tax (CIT) rate on resident corporations to a flat 21% rate. US taxation of income earned by non-US persons depends on whether the income has a nexus with the US, and the level and extent of the non-US person’s presence in the US.
The US does not levy VAT or sales tax at the federal level. Each state and local jurisdiction may levy a sales tax, which typically varies between 0% and 10.02% across states. The maximum rate for Capital Gains Tax (CGT), meanwhile, is 21%.
IFRS (International Financial Reporting Standards) is not used in the US, because the US government has not adopted it as the official accounting standard. The US instead uses its own set of Generally Accepted Accounting Principles (GAAP).
|Taxes at a glance:
The regulatory landscape in the US is constantly evolving, making it crucial for corporations to keep their finger firmly on the pulse. The US Anti-Money Laundering (AML) laws, for example, consist of a number of statutes and implementing regulations, starting with the Bank Secrecy Act (BSA) that was enacted in 1970.
When it comes to more recent developments, the Corporate Transparency Act (CTA), effective from 1 January 2024, creates the first robust and comprehensive database of beneficial ownership information. Aimed at preventing corrupt business practices, such as the financing of terrorism, it will provide essential information to law enforcement agencies.
The US Department of Labor (DOL) is the main government organisation responsible for enforcing labour regulations in the US.
The DOL currently administers and enforces around 180 federal labour laws, including the Fair Labor Standards Act (FLSA), which governs standards for wages and overtime pay, and the Occupational Safety and Health (OSH) Act, which covers workplace health and safety standards. The Employment Act (EA) covers contracts of service.
Both federal and state laws prohibit employers from discrimination in hiring employees on the basis of race, colour, religion, sex, age, ethnic/national origin, disability, or veteran status. Employers are required to apply to the DOL to obtain approval to hire a foreign worker.
A US work permit is not the same as a US work visa. A work permit allows individuals already residing in the US to work legally. However, a work visa is a type of visa that must be applied for before entering the country.
Each state has the power to establish its own regulations on payroll cycles. Wages may be paid weekly, biweekly, monthly, or semi-monthly. According to the FLSA, the federal minimum wage is fixed at US$7.25 per hour. Several states have subsequently established their own minimum wage rates.
The social security system in the US comprises Old-Age, Survivors and Disability Insurance (OASDI), as well as Hospital Insurance (Medicare). Employers and employees both typically each contribute 6.2% of an employee’s salary towards OASDI, and both also contribute 1.45% towards Medicare.
In addition, employers are subject to federal and state unemployment taxes, known as FUTA and SUTA respectively. FUTA is a 6% tax based on the first US$7,000 of wages paid to each employee, while SUTA varies by state and company unemployment history.
In terms of business representation, foreign investors stepping into the US commonly use either a corporation, a limited liability company, or a partnership. The type of business entity you choose will depend on several factors: liability, taxation, and reporting purposes.
Getting such an entity up and running in the US is a relatively straightforward process, especially when partnering with a reliable corporate services provider or registered agent. The timings for filings can vary and can take anything up to several days to obtain the necessary filing evidence, due to each state having its own requirements for the different types of entities.
You may be required to register in each state you operate in, depending on each state’s statutes. Broadly, a company is considered to be conducting business activities in a state when:
- Your business has a physical presence in that state
- Your company’s revenue from that state exceeds a threshold dollar amount
- Any of your employees work in that state
In order to receive the best legal and tax advice before proceeding with the actual incorporation or company formation, it is best practice to liaise with counsel and a tax adviser for each new entity being established.
While the US remains a popular market for companies looking to expand their presence, the increasing size and scale of regulatory demands can present significant challenges. Legal requirements vary on both a federal and state level, so maintaining good governance in the wake of new requirements, such as the CTA, can be complex for those entering the market for the first time.