Setting up a Branch vs. a Subsidiary

– Foreign corporations that have overseas expansion plan must decide the initial structure for their prospective business activities in the U.S. It varies by situations but in most cases they set up a liaison office fist.

If market researches and feasibility tests are positive, then they covert to branches (foreign branch corporations), furthermore, they set up U.S. subsidiaries (domestic corporations) to engage in trade.

– In daily operation, there are no major differences between doing business as a branch and a subsidiary normal operation.

A major difference exists regarding liability issues.    Liability of a branch directly affects financial condition of a mother-company, whereas it does not for a subsidiary.

Therefore, a subsidiary is favored over a branch to limit the effect from debts and losses.

Subsidiaries are incorporated in the State of Delaware since Delaware maintains flexible laws for corporations.

On the other hand, a branch may be a better choice since there is no tax for branch corporations, whereas there is 15% withholding of tax for subsidiaries when transferring income to overseas.

– As an alternative, there is a Limited Liability Company.

There is no debt or liability issue just like a U.S. subsidiary and since a single member limited liability company is treated as a disregarded entity by tax laws, taxation will be same as that of foreign branch corporation.