Top 10 Financial Considerations for Life Sciences Businesses Looking to Expand Into the United States

Are you looking to expand your business into the United States market and are unsure of what resources you’ll need to keep your business and its finances in order?

From determining the appropriate entity to ensuring you have the appropriate service providers and banking systems, researching your options will allow for a smoother transition across borders. The following is a list of resources and questions to set your business up for success when expanding into the United States (“U.S.”) market.

If you’re looking to hire employees in the United States, you’ll be navigating U.S. payroll, benefits, and compliance requirements. Payroll providers handle payments, compliance, and payroll tax administration on your behalf. When exploring resources, companies should also consider the impact of being the employer of record vs. hiring a Professional Employer Organization (“PEO”). Companies should consider other benefit services they may need and inquire if their payroll provider supports them, such as Human Resources (“HR”) support, employee benefits, such as health insurance, and retirement plan administration.

Beyond the commonly implemented Delaware C-Corporation, the United States offers numerous entity types ranging from corporations, partnerships, S-Corporations, and Limited Liability Companies (“LLCs”). Companies should consider the impact of each business type and which state makes the most sense to form the business under. Each entity type can have a drastically different impact on your global tax, so it’s important to carefully consider how to best structure your business. When determining where to incorporate the business, it’s important to understand the different financial and legal impacts each state can have.

Is your business formed in a state where you don’t have employees or operations? Are you looking to hire employees in numerous states? If so, you may need to hire a registered agent to ensure you remain in good standing in each state you’re operating in. Registered agents help ensure you have a physical presence in states, where required, and can handle annual secretary of state filing obligations.

Companies should establish a US bank account and find a trusted banking partner. When growing your business operations, consider what banking services may be needed both now and in the future. Will there be significant cross-border activity and the need to move money internationally frictionlessly? Will you need a loan, line of credit, or other debt services? Will you need access to checks, credit cards, or other means to make payments? These considerations can help you determine which banking partner makes the most sense.

Companies should consider how they will be providing liquidity to the US business and what the long-term business of the US entity will be (i.e., research and development organization or service provider to an affiliate). Will the US company be financed by the non-US parent company? If so, is that financing intended as an equity investment, or as a loan? If a loan is being offered, companies should review what interest is being charged and when the expectation of repayment will be to make sure the related party transactions are maintained appropriately. Alternatively, the US business may be a service provider for affiliates, with that relationship providing revenue and liquidity to the US organization. How companies obtain liquidity and operate is critical to ensuring a clear and tax-compliant global structure.

Who will be managing the U.S. subsidiary? Will any employees from the non-U.S. parent company be traveling to the United States to perform services or assist with starting up the U.S. subsidiary? You will need to consider the extent of their activities to avoid establishing a taxable presence for the non-U.S. parent company in the United States, which can lead to adverse tax consequences.

Do you plan to distribute U.S. profits back to the foreign parent company? Where there is a profitable U.S. subsidiary, the U.S. company may distribute dividends to the non-U.S. parent company. Generally, dividends paid to a non-U.S. parent company by a U.S. subsidiary are subject to a 30% withholding tax. This rate may be reduced under an applicable U.S. tax treaty. You should seek guidance regarding the tax rate and whether any structural planning ideas can minimize the withholding impact.

Will there be intercompany transactions (purchase/sale of tangible goods, services, licensing arrangements, financing, etc.) between related party entities? If so, you will need to establish clear transfer pricing policies. Determining which entity owns/develops/funds the intangible assets driving the business and safeguarding where the intangible assets are owned is critical to the global structure. Companies should review whether any development is taking place in other locations and ensure consistent structuring is done to safeguard the ownership location of their intellectual property and prevent unwanted tax exposure in additional jurisdictions. Which entity signs customer contracts and earns third-party revenue should also be clarified.

Selecting the appropriate accounting system is key to ensuring you have timely and accurate financial reporting. Whether you are managing the U.S. finances internally with a local or global finance team or outsourcing to a third-party U.S. accounting team, ensuring you have an accounting system that can support your business and growth allows for additional functionality and accuracy. Businesses should review if they will need accounting software with consolidation and currency conversion functionality. Companies should consider if they will be granting equity awards and need to track the corporate capitalization table and from where and how invoicing and payments will be done. There are numerous software decisions to explore that can greatly impact the accuracy and efficiency of your reporting.

Will you need general liability, directors’ and officers’, cyber security, product loss, errors & omissions, or other forms of business insurance? Ensuring you’re identifying areas of potential exposure and working with a knowledgeable insurance agent can be great risk mitigation tactics.

Bringing a business to the United States has the potential for many positive benefits, but it also comes with numerous traps for an ill-prepared business. Whether you are just starting your research or already have boots on the ground, the Life Sciences Services Team at Withum is happy to discuss your business goals and provide guidance to ensure your business is set up for success.