To incorporate or not to incorporate

October 24, 2021

On occasion, we receive inquiries from potential clients overseas that want us to help them set up a company – sometimes they tell us they want to set up “whichever type of company is best”, and other times they already have something in mind – e.g. “I want to set up an LLC”.

While in many cases, forming a company is the best course of action, in other situations it’s not, and the client ends up with a U.S. subsidiary which lays dormant while requiring annual maintenance – annual report filing and registered agent services.

The impetus for setting up a subsidiary in the U.S. tends to be one of the following:

·        The potential client has been successfully operating in Europe, serving the European operation of a U.S. based company. The U.S. company is now seeking a broader relationship and wants their service in the United States. In order to properly service the client in the United States, an on-the-ground operation is needed.

·        The company has been selling into the U.S successfully (i.e. their overseas company has been selling directly to companies in the U.S.), but they have heretofore not had a U.S. entity. As their business in the U.S. expands/grows, they determine that they can win additional business/be more competitive if they have a U.S. company that can either a) contract directly with U.S. customers, or b) provide services to the parent company – e.g. sales lead sourcing, after-sales service and marketing.

·        They are interested in applying for an E-2 investor visa, and are planning to set up a business in the U.S.

·        They’ve been told that they need an Employer Identification Number (“EIN”) and want to set up a company to obtain one, or need to set up a bank account, and want to have a U.S. company as the account holder.

In the first three situations above, it makes sense to form a company. In the last, it often does not – if the overseas company expects to continue to sell/contract from overseas with U.S. customers, and has no plans to hire any employees in the U.S., the utility of forming an entity is questionable – a foreign company can obtain an EIN and a U.S. bank account if needs to – this does not require that a company be formed.

Part of our role as legal counselors is to advise clients when a particular course of action is not in their best interest and is, in fact, counterproductive. The decision to form a U.S. company should not be one that’s taken lightly as it’s fairly easy to form, but is not so easy to dissolve if not needed.