Why do business in the US?
There are many reasons that make the United States a great country to start a new business. Not only is it recognised as a leader in research and development, there is a wealth of resources, with over one third of workers educated to degree-level or above. This workforce possesses a diverse skill set and language capability.
You can also find many options for funding sources: investment firms, banks, venture capitalists and angel investors. What’s more, incorporating a new business is straight-forward in the US, far quicker than many other countries.
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World Bank Ease of Doing Business Ranking (1-190)
Tax rates 2020
How to set up payroll in the US
You’ll need to take a number of steps to set up a legally compliant payroll in the US. Every US state has different laws, so do your due diligence.
Upon registering your business, you’ll need an Employer Identification Number (EIN) so the IRS can identify you on their system. Employees must also hold a Social Security number (SSN) to work in the United States. If a potential hire does not have an SSN, they must apply for one.
You can take on the new hire while they wait for a response, but if the application for an SSN is declined, the employee can no longer work for you. The IRS will heavily penalise an employer that pays a salary to an employee without an SSN.
On a federal level, the minimum wage in the US is $7.25 per hour. Some states set this higher, though. Overtime is often expected to be paid at time-and-a-half. As an employer, you must also withhold taxes and submit these to the IRS.
Taxes vary wildly in America, which each state having its own income tax brackets. You will need to withhold income tax from the salary of your employees. This will usually be charged at one of seven tax bands, with the lowest being 10% and the highest 37%. All employees in America pay tax, regardless of their level of income, but there are allowances available for varying familial circumstances.
You will also be responsible for withholding a number of social security taxes, such as Medicare insurance, and pension (401K) contributions. Employers must also pay taxes for disability insurance, unemployment insurance and worker’s compensation insurance. Once all of these factors are added up, expect the total cost of a new hire to be roughly 1.3 times their annual salary. Factor this additional expense into your annual payroll budgeting.
American employment law and HR considerations
American federal law offers comparatively few protections and rights to employees. This offers a degree of freedom to business owners. However, seriously consider a generous benefits package. For many Americans, perks and benefits are more important than a high salary.
A business is not legally required to provide paid annual leave or sick pay in America, but most do. The average paid leave entitlement in the US is 10 days, plus federal holidays. Many states have different laws surrounding unpaid leave on medical grounds, acting under the Family and Medical Leave Act (FMLA). As a result, any business that hires more than 50 employees must offer unpaid leave to employees on medical grounds.
Maternity leave is also subject to state law, though most businesses are not legally required to offer paid leave. Some employers will offer 6 weeks of paid maternity leave, as this is the minimum recovery time recommended by healthcare professionals. Additional, unpaid leave can then be negotiated with the employee.
There is no legal need to provide notice of terminating an employee in America. You can terminate somebody’s contract at will unless their contract says otherwise. The reverse is also true – employees do not need to inform you of their intent to leave your business. An employee can be fired or resign, clear their desk and leave your business in the space of a few minutes.
Overall, mandatory benefits in the US are few and far between outside of taxes. All the same, different states and industries have different legal requirements. Ensure you are legally compliant at all times.
Setting up a subsidiary entity in the US
When launching an overseas presence for your business, you will always be faced with a choice. You can create an American branch of an existing business or create a subsidiary company instead.
The best way to open a branch in the US to apply as a C Corporation. A C Corporation pays a flat business tax rate of 21%, regardless of annual profit. Any dividends paid to members of a C Corporation are also taxable on the individual’s individual tax return. This ‘double taxation’ is considered a negative element of opening a branch. Corporations are also more tightly regulated by the authorities.
An alternative is to create a subsidiary business. This is known as a Limited Liability Company or an LLC. The owner of an LLC is not personally responsible for any debts or legal difficulties incurred by the business, and all directors are known as members.
Tax is a huge consideration when doing business in the US. There are three different levels of tax incentive – federal, state and local. Registration restrictions and requirements vary from state to state. Consider seeking the advice of a financial expert to ensure that you register in the best possible location.
Wherever you choose to base your business, you must register for tax repayments in any state that you do business in. Familiarise yourself with Generally Accepted Accounting Principles, or GAAP. These are laid out by the Financial Accounting Standards Board (FASB). If you stick to the guidelines laid out by GAAP, your business is less likely to run into accounting difficulties or financial audits from the IRS.
Finally, be sure to understand the cultural nuances of doing business in the US. While we may feel familiar with American customs, certain things must be understood. In the States, there is a firm belief that time is money. Punctuality is critical, as is meeting deadlines. US business partners value efficiency above all else.
In the States, achievements and ability matter more than age, seniority or length of service. Never underestimate or belittle a business associate because they seem young or casual in their communication. Equally, don’t be surprised if an associate does not take kindly to small talk and prefers to get down to business immediately.
Finally, you will be expected to be available at all hours when doing business in America. Many Americans work long hours. If you switch off your computer and laptop at the end of a working day, expect to find a number of increasingly panicked and bemused messages when you next check-in.
Setting up in the US FAQs
As a non-resident of the US, you have two main options when setting up a new business. Decide between a Limited Liability Company (LLC) or a C Corporation. See our entry on, “Setting up a subsidiary entity in the US” for more information on which is best for your business.
Expect to wait between 8 and 12 weeks before your business is ready to start trading in the US.
There is no minimum share capital requirement to create an LLC, C Corporation or S Corporation in America. However, if you want citizenship as part of your business enterprise, you’ll need to invest $1m to qualify for an EB-5 green card.
If you wish to establish an American branch of your company, the easiest way is to set up a C Corporation. This will have tax implications but offers a little more flexibility than setting up an LLC.
You do not need an American bank account to register your business, but it will speed up the process. You do not need to be an American citizen to open a US bank account.
It will cost around 1.3 times the annual salary of an employee to bring in a new hire in the US.
Officially, America follows a traditional western working week of 9 – 5, Monday to Friday. Many Americans work more than this, though. The average office employee in the US works at least 50 hours per week. Any employee that works more than 40 hours may expect overtime, payable at 1.5 times their usual salary.
Many job seekers in the US consider a benefits package more important than a higher base salary. A generous healthcare package that covers family members is often considered a dealbreaker when considered an employment offer. Dental, optical and life insurance policies are also very welcome supplementary benefits.
Tuition assistance is popular among young and low-paid employees that are keen to gain new skills. Wellness programs, such as discounted gym memberships and subsidised meals, are common. Flexible working hours and patterns are welcomed. Matching contributions to a retirement package, such as a 401K, will also appeal to applicants.
Unless stated otherwise in a contract or the employee is part of a labour union, contracts can be terminated at will in the US. This is a double-edged sword, as it also allows employees to resign without notice. Employees can still make claims for unfair dismissal too, so ensure you have good reason to terminate a contract. If making mass redundancies or liquidating a business, it is considered good practice to offer 60 days’ notice to employees.
Most companies offer 10 days of paid annual leave to employees, though this not required under federal law. In addition, the US has 10 federal public holidays each year. Some states will celebrate additional holidays. As an employer, you will also be expected to make reasonable accommodation for time off on religious grounds. Christmas is the only religious federal holiday in the United States.
The Medicare tax is withheld from an employee’s salary. This is a contribution to America’s national health program. The rate of Medicare tax is assigned by the IRS, but it’s typically 1.45% of a salary. All employees and business owners must pay the Medicare tax, regardless of income.
There are two types of entrepreneur Visa available to British business owners looking to establish themselves in the US. Both last for five years at a time. The E-1 Visa is available to British business owners that can show that 50% of more of their custom comes from the United States.
The E-2 Visa, meanwhile, is based upon an international treaty between the UK and US governments. To qualify for an E-2 Visa, you’ll need to prove that you are making a substantial investment into an American business and will be able to support yourself while also hiring local employees.
You could also apply for an L-1 Visa if you can prove that your SME will benefit the American economy. This Visa will initially be restricted to just one year, though. You will need to apply for an extension after this period. The success of this application will depend upon the financial performance of your business.
A green card is a permit that allows a foreign national to permanently live and work in the US. You can earn a green card as a skilled employee of a US business. If you wish to gain a green card as a business owner rather than an employee, you have three options.
An EB-1 green card is awarded to business owners looking to start an American enterprise. This green card is very hard to gain, though. You will need to demonstrate exceptional skills and experience.
An EB-2 green card is a more popular choice. This is the green card awarded to exceptional employees, such as those with advanced educational qualifications or unique skill sets that supersede those of American applicants. Application for an AB-2 green card requires a National Interest Waiver.
As a small business owner, you can apply for an NIW yourself rather than doing so through an employer. To qualify for an NIW, you’ll need to prove that your business will benefit the US – economically, socially and ethically.
You will also be quizzed on your business acumen. An NIW will only be granted if authorities consider your business almost certain to succeed. Letters of recommendation from business leaders will help your cause
If you’re wealthy, you can buy your way into American residency by applying for an EB-5 green card. This is a green card designed for investors. It will be awarded to anybody that can prove their business can offer ten sustainable, full-time jobs to American citizens.
The catch is that you’ll also need to invest a minimum of $1m of your own money into this venture. In areas with high levels of unemployment and limited working opportunities, you may be able to negotiate this down to $500,000.