Expanding into the United States presents a tremendous opportunity for new or established businesses. With a vast consumer market, numerous environments spread out across varying states and localities, and access to cutting-edge innovation, the US offers something for every company seeking global growth, recognition, and long-term success. However, avoiding the perils and streamlining the complications of establishing a legal presence in a new country always requires careful planning, and the US is no exception, with success requiring a good understanding of how to set up a subsidiary in the US amidst unique local regulatory, financial, and operational considerations.
While setting up a subsidiary in the US provides numerous advantages, including liability protection and tax benefits, the processes involved in incorporation, as well as ongoing compliance and management, can be intricate and resource-intensive. Companies must be able to adhere to both federal and state laws, obtain necessary registrations, and maintain proper corporate governance to ensure smooth operations.
To help, this guide provides a comprehensive overview of what a subsidiary is in the context of the US, the key steps involved in establishing one, and it explores an alternative approach—partnering with an Employer of Record (EOR) in the US. For many businesses, an EOR can offer a more cost-effective and time-efficient way to enter the US market by handling employment-related responsibilities without requiring the establishment of a formal subsidiary. By weighing the pros and cons of each option, companies can make informed decisions that align with their long-term goals and expansion strategies.
What is a Subsidiary?
In general terms, a subsidiary is a company owned or controlled by another company which is in turn known as the parent company. A subsidiary operates as an independent legal entity in its own way but remains under the direct control of its parent company. This type of structural relationship allows businesses to expand into new markets while mitigating financial and operational risks through a separation of liability.
Often, a subsidiary can be wholly owned (100% control by the parent company) or partially owned (where the parent owns a majority stake but not the entirety), though depending on the state and industry, different laws and tax treatments may apply.
Definition and Key Characteristics of a Subsidiary in the US
Typically defined by the corporate law of individual US states, a subsidiary is a legally distinct business entity that is incorporated under state law and is majority-owned by another corporate entity, known as the parent company. The percentage of the subsidiary that the parent company owns can be anywhere from 50-100%.
In the US, this structure allows international businesses to establish a local presence while maintaining a degree of separation from their primary operations
Key Characteristics of a US Subsidiary
✅ Separate Legal Entity – A subsidiary is legally distinct from its parent company, meaning it operates as an independent entity with its own rights, obligations, and liabilities. This separation ensures that any debts, legal disputes, or financial obligations incurred by the subsidiary do not directly impact the parent company, except for the parent’s ownership stake. This is in direct contrast to other simpler structures used by parent companies like a branch office, which is not a separate entity.
✅ Limited Liability Protection – One of the biggest advantages of setting up a subsidiary in the US is the concept of limited liability. The parent company’s risk is generally restricted to the capital it has invested in the subsidiary, safeguarding it from financial losses or penalties. This protection is particularly valuable in industries with high litigation risks, such as pharmaceuticals or technology, or industries of considerable risk, such as financial services.
✅ Local Compliance and Regulatory Obligations – A subsidiary operating in the US must comply with federal, state, and local laws, which include:
- Corporate Governance – Filing articles of incorporation, appointing directors, and maintaining constant corporate records.
- Employment Laws – Adhering to labor regulations at every level, from the Fair Labor Standards Act (FLSA) to state-specific worker protections and beyond.
- Tax Compliance – Registering with the Internal Revenue Service (IRS) and applicable state tax agencies, filing corporate tax returns, and ensuring compliance with payroll tax regulations.
- Financial Reporting – Depending on the state and entity type, subsidiaries may be subject to annual audits, financial disclosures (and SEC reporting if publicly traded).
✅ Tax Residency and Benefits – A subsidiary incorporated and managed in the US is considered a US tax resident, meaning it is subject to corporate income tax at both the federal and state levels. However, this status also allows access to various tax benefits, such as:
- Corporate Tax Rate – As of 2025, the federal corporate tax rate is a flat rate of 21% for resident companies, with state taxes additionally varying from 0% (e.g., Wyoming, South Dakota) to over 9% (e.g., California, New Jersey).
- Double Taxation Agreements (DTAs) – The US has tax treaties with over 60 countries, which can help foreign companies avoid double taxation and benefit from reduced withholding tax rates on dividends, interest, and royalties.
- State-Specific Incentives – Certain states, such as Delaware and Nevada, offer tax-friendly policies that attract foreign businesses by reducing or eliminating corporate taxes in specific situations.
✅ Operational Flexibility – Unlike a branch office, which typically operates within the parent company’s scope, a subsidiary has greater operational autonomy, meaning it can enter new industries, form its own partnerships, apply for government contracts, and secure independent financing without direct parental control. This flexibility enables businesses to tailor their operations to new opportunities in the US market and respond to local consumer demands effectively.
Types of Subsidiaries in the US
Companies expanding into the US can structure their subsidiary in different ways, depending on tax and operational preferences, including:
- Wholly Owned Subsidiary – A company entirely owned by the parent company, giving the parent full control over its operations.
- Partially Owned Subsidiary – The parent company holds more than 50% but less than 100% of the subsidiary’s shares, allowing significant influence while sharing ownership with other stakeholders.
- Joint Venture Subsidiary – Formed through a partnership between two or more companies, each contributing resources and sharing ownership, control, and profits as outlined in a joint venture agreement.
- Qualified Subchapter S Subsidiary (QSub) – A subsidiary that is 100% owned by an S corporation, allowing the subsidiary to be treated as a disregarded entity for tax purposes.
- Captive Real Estate Investment Trust (REIT) Subsidiary – An entity with more than 50% ownership by the parent company, primarily used for holding real estate assets to achieve specific tax and financial objectives.
What is a Foreign Subsidiary in the US?
A foreign subsidiary is a subsidiary incorporated in the US where a foreign corporate entity holds the majority of shares. This structure allows international businesses to operate within the US while maintaining a level of separation offering financial and operational independence.
In addition to the usual requirements concerning subsidiaries, foreign subsidiaries must comply with the Foreign Investment in Real Property Tax Act (FIRPTA), the US Foreign Corrupt Practices Act (FCPA), and industry-specific regulations, making legal counsel particularly helpful for proper compliance.
How Subsidiaries Differ from Branches and Representative Offices in the US
Understanding the differences between business structures is crucial when expanding into the US:
Business Structure | Legal Entity | Liability | Tax Benefits | Business Activities |
Subsidiary | Separate entity | Limited to investment | Eligible for local tax incentives | Broad operational scope |
Branch Office | Not separate from parent | Full liability on parent | No local tax benefits | Limited to parent company’s operations |
Representative Office | Not separate from parent | Minimal liability | Not applicable | Market research and liaison only |
Why Should You Create a Foreign Subsidiary in the US?
The US is a strategic gateway to global commerce, offering numerous advantages:
- Pro-Business Environment – The US consistently ranked among the top 10 economies for doing business in terms of business climate, legal system, and financial market accessibility
- Strategic Market Access – The US provides entry to a $26 trillion economy and access to globally impactful trade agreements like USMCA
- Tax Benefits – Federal corporate tax rates are 21%, with state incentives available
- World-Class Infrastructure – The US ranks 13th worldwide in terms of the quality of local and global infrastructure
- Strong IP Protections – The US maintains robust patent and copyright laws, protecting investments for foreign investors
Legal and Regulatory Steps and Requirements for Subsidiaries in the U.S.
Establishing a subsidiary in the United States requires businesses to follow a structured legal and regulatory process. The key steps include:
- Choose a State for Incorporation
Selecting the right state for incorporation is crucial, as different states have varying tax structures, regulatory environments, and business incentives. Some of the most popular choices include:
- Delaware – Known for its business-friendly laws, flexible corporate structures, and well-established Court of Chancery for resolving business disputes.
- Texas – Offers no state income tax, making it attractive for businesses looking to minimize tax burdens.
- Florida – Provides favorable tax policies and a strong business climate, particularly for companies in tourism, technology, and real estate.
- California & New York – While these states have higher taxes and regulations, they provide access to major markets and industries.
- Register with State Authorities
Once a state is chosen, the company must formally register its subsidiary by filing the appropriate documents with the Secretary of State’s office:
- Corporations must file Articles of Incorporation, which outline the business purpose, structure, and governance rules.
- Limited Liability Companies (LLCs) must file Articles of Organization, which establish the subsidiary as a legal entity separate from the parent company.
- Some states may also require additional filings, such as business licenses or permits, depending on the industry.
- Obtain an Employer Identification Number (EIN)
An Employer Identification Number (EIN) is a unique tax ID issued by the Internal Revenue Service (IRS). It is required for:
- Filing federal and state taxes.
- Opening business bank accounts.
- Hiring employees and processing payroll.
Businesses can apply for an EIN online via the IRS website or through a third-party service.
- Appoint a Registered Agent
A registered agent is a designated U.S.-based representative who receives and deals with official legal and tax documents on behalf of the subsidiary. This is a mandatory requirement in all states and helps ensure compliance with legal processes, such as lawsuits or tax notices. Many businesses use professional registered agent services to fulfill this role.
- Comply with Federal and State Tax Laws
Tax obligations vary depending on the state of incorporation, business structure, and revenue. Key tax requirements include:
- Federal Corporate Income Tax – Most subsidiaries must file corporate tax returns with the IRS.
- State Taxes – Some states impose income taxes, franchise taxes, or gross receipts taxes.
- Sales Tax Registration – Required if the business sells taxable goods or services.
- Payroll Taxes – Businesses with employees must withhold and remit federal and state payroll taxes.
- Maintain Corporate Governance Compliance
To remain in good standing with regulatory authorities, subsidiaries must adhere to corporate governance rules, which typically include:
- Filing annual reports with the state, outlining business activities and financial status.
- Holding board meetings and maintaining records of key decisions (for corporations).
- Updating business licenses and permits as needed.
Failure to comply with these requirements may result in penalties or loss of good standing status.
Additional Considerations
Depending on the nature of the business, companies may need to address additional legal and operational concerns, including but not limited to:
- Visa Sponsorship & Immigration Compliance – Foreign companies planning to hire international employees may need to sponsor work visas, such as the L-1 (intra-company transfer) or H-1B (specialty occupation) visas.
- Intellectual Property Protection – Businesses in technology, entertainment, or manufacturing should secure trademarks, patents, or copyrights with the U.S. Patent and Trademark Office (USPTO).
- Business Insurance Requirements – Companies may need to purchase general liability insurance, workers’ compensation insurance, or professional liability insurance to mitigate risks.
Evaluating the Pros and Cons of Subsidiaries in the US
Advantages
Tax Incentives – The US offers local companies tax credits for R&D and investment incentives in most areas and industries.
Market Presence – A local entity builds long-term credibility, enables government contract bidding, and eases supply chain management.
Operational Control – A US-based subsidiary allows greater autonomy in local hiring and management decisions.
Challenges
Regulatory Complexity – While incorporation in the US is comparatively straightforward, compliance with multi-tiered laws such as those that exist in the US is unnecessarily time-consuming and open to misinterpretation.
High Costs – Incorporation, office space, and hiring can be costly (average cost of setting up a US subsidiary: $50,000–$100,000).
Lengthy Processes – Business registration and compliance can take several months, particularly if there are errors made.
Why Shouldn’t You Set Up a Subsidiary in the US? Exploring Alternatives
What is an Employer of Record (EOR) According to the US?
An Employer of Record (EOR) is a third-party organization that serves as the official employer for a company’s workforce, typically in a specific country or jurisdiction where the company has no established legal entity. In the United States, an EOR takes on the legal and administrative responsibilities of employing workers on behalf of a business, thereby eliminating the need for the company to establish a subsidiary or legal entity. This solution is particularly beneficial for foreign businesses looking to expand into the US market quickly, compliantly, and cost-effectively.
Key Functions of an Employer of Record
By acting as the official employer, an EOR handles critical employment-related tasks, including:
✅ Payroll Processing – An EOR manages essential payroll calculations, wage distribution, and tax withholdings in full compliance with federal, state, and local regulations. In the US, this includes Social Security contributions, Medicare, and unemployment insurance.
✅ Tax Compliance – The EOR ensures that all necessary payroll taxes are filed and paid, helping businesses avoid legal risks and penalties associated with non-compliance. It can also provide legal expertise that helps companies avoid unnecessary payments and maximize revenue.
✅ Employee Benefits Administration – The EOR facilitates mandatory and other common complementary benefits such as health insurance, retirement plans (e.g., 401(k)), paid time off, and workers’ compensation, ensuring adherence to US labor laws and boosting a company’s attractiveness with potential hires.
✅ HR and Compliance Management – The EOR oversees the formation and management of employment contracts, including onboarding, background checks, and terminations, while also ensuring compliance with employment laws such as the Fair Labor Standards Act (FLSA), Family and Medical Leave Act (FMLA), and anti-discrimination laws enforced by the Equal Employment Opportunity Commission (EEOC).
✅ Work Visa and Immigration Support – If hiring foreign employees in the US, an EOR can manage visa sponsorships, work permits, and compliance with US immigration laws, such as H-1B visa regulations.
Why Use an Employer of Record in the US?
For businesses expanding into the US, using an EOR offers several sizeable advantages over establishing a subsidiary entity:
- Faster Market Entry – Setting up a subsidiary can take months due to incorporation paperwork, tax registrations, and compliance procedures. An EOR enables companies to start hiring within days.
- Cost Savings – Incorporating a legal entity comes with administrative expenses, legal fees, and ongoing operational costs. An EOR eliminates these overhead expenses.
- Reduced Risk – Navigating US labor laws can be complex, especially since each state has different regulations and best practices. An EOR ensures compliance and competitiveness across all jurisdictions.
- Focus on Business Growth – With HR, payroll, and compliance managed by the EOR, companies can focus on scaling operations, sales, and customer acquisition.
The Benefits of Using an EOR Over a Subsidiary
Subsidiary | Employer of Record (EOR) | |
Time to Set Up | 3–6 months | 1–2 weeks |
Legal Entity Requirement | Yes | No |
Compliance Error Risk | High | Low |
Administrative Burden | High | Minimal |
Hiring Flexibility | Limited to US laws | Immediate hiring possible |
Cost | $50,000+ | * |
(*EOR pricing structures may vary, typically being a fraction of the employed worker’s monthly salary)
An EOR allows companies to expand into the US market without needing to navigate regulatory hurdles, reducing time-to-market and minimizing risk.
Conclusion: Simplifying Expansion with INS Global
While setting up a subsidiary in the US offers benefits like market credibility and tax incentives, the complexities of regulatory compliance, financial management, and operational oversight can be overwhelming. Instead of navigating these challenges alone, businesses can consider the benefits of partnering with INS Global’s local Employer of Record (EOR) services.
Since 2006 companies have relied on our expertise to access 160+ markets worldwide, including the US, efficiently and risk-free. INS Global simplifies US market entry by managing employment contracts, payroll, and compliance, allowing businesses to focus on growth.
📞 Contact INS Global today to explore a streamlined approach to expansion.
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