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Startup Guides Published:  Jan 9, 2023 9 min read
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How to expand into the USA: guide for UK startups

At SeedLegals, founders regularly ask us about expanding their business into America – if and when to start up in the US, how to register a business in the States, the contracts you need, how to hire people in the US, how to give share options to workers abroad, and more.

To answer all these questions, and to highlight some of the pitfalls for UK businesses when they expand to the US, we ran a webinar with Daniel Glazer of Wilson Sonsini, the international American law firm that specialises in advising high-growth technology companies from corporate formation to IPO/M&A exit and beyond.

In this post, we’ve summarised the essential information for founders considering expanding into and hiring in the United States. You can view the full-length webinar video below.

Thinking about raising investment from US investors?
Head over to our other post, How to raise investment in the USA: guide for UK startups

Go to the US either early or late

After decades of working with startups, Daniel Glazer and his team observe that UK startups are most successful in their move into the US when they go either early or late. Daniel recommends you get it right in the UK or in the US before you attempt to expand in America:

  • Move into the US early
    If you decide that the USA is the big opportunity for your products or services, then you might decide to move into the US early. Typically, companies who go early move the management team to the US and leave ‘back office’ functions (HR, IT, Finance etc) in the UK. The company becomes a transatlantic US-facing business: the team optimises the products for the US market, raises with US investors and scales from there.
  • Move into the US late
    Wilson Sonsini finds it’s becoming more common for UK companies to move into the US late. Let’s say you raise a Seed or Series A in the UK and build products initially for the UK or European market. Then, around Series A, you find you get pulled into the US by customer traction or growth. You’ll be selling remotely and your management will be travelling frequently as demand grows for an Americanised version of what you’ve already built in the UK. Eventually, it makes sense to set up the structure in the US to Americanise your company properly.
  • Go ‘in the middle’
    If you don’t have product-market fit in the UK or the US, then trying to scale simultaneously in both countries is very difficult.

 

Don’t ‘work’ in the US without a visa

Thinking about organising a recce to the US? Or having a few meetings while taking a holiday in the States? Remember, to be allowed to work in the US, you need a visa proving your right to work there.

But the definition of ‘work’ is somewhat fuzzy. For example, you can have meetings, attend conferences, pitch for investment, do some reconnaissance and so on. But a few days of working on your laptop or hanging out in a café while doing some coding could be considered ‘work’ for which a proper visa is required.

To be certain you stay on the right side of the law, speak to a US immigration specialist. If you’re discovered working illegally in the US, you could delay your plans by being ‘blacklisted’ – prevented from entering the US for a while.

Daniel Glazer Wilson Sonsini

When you arrive in the USA, watch out for carefully worded questions at the immigration checkpoint. An officer might ask you, ‘How many days are you planning to work here?’ If you’re simply attending a conference or similar, make sure you say that and clarify that you aren’t planning to work in the US.

Daniel Glazer

London Office Managing Partner,

Wilson Sonsini

Make sure US contractors aren’t ‘employees’

If you don’t yet feel ready to hire employees in the US but need a few people to get started for you over there, you can just hire them as contractors, right? Not quite.

In the USA, whether someone is an ‘employee’ isn’t determined by whether they have an employment agreement. Similar to how the IR35 rules work in the UK, your ‘contractor’ might in fact be an employee under the relevant state laws, in which case you could be liable for payroll taxes, contributions to the Workers’ Compensation fund and so on.

If you hire someone in the US via a freelance platform like Fiverr or Upwork, then it’s more likely your worker will be seen as a contractor.

But if you hire someone and give them the ability to sign contracts on behalf of your company, or if they have a senior title (for example, Chief Revenue Officer), then no matter what method you used to hire them, there’s a substantial risk that the relevant state authorities would view them as an ‘employee’.

Legal issues are much more prominent in everyday life in the US than in the UK
This means Americans are often more aware than Brits about how to work the legal system to their advantage.
Let’s say you hire a contractor in the US and they work only for you, for 50 hours a week. If, after a while, you fall out with them, the contractor might decide to ask you for a hefty severance package in exchange for not telling the state government that they believe they were operating as an employee and you - as their 'employer' - avoided paying payroll taxes.

Don’t hire US employees out of your UK company

Before we move on to how to employ people in America, Daniel is keen to emphasise this important piece of advice: don’t hire people in the US as employees of your UK company. If you do this, you create three big problems:

  • A big tax headache
    If your UK company employs someone in the US, under US law this can be viewed as the creation of an unincorporated US branch of your UK company. The UK company’s income could be taxed both by HMRC in the UK and the IRS (Internal Revenue Service, the US equivalent of HMRC) in the US.
  • You make litigation more attractive
    When you set up a US subsidiary and employ people in the US through that subsidiary, you limit the litigation possibilities. Why? Because at this point in your company’s growth, your UK company is likely to have substantial assets while your US subsidiary has practically zero. There’s little for your US employee – or someone negatively affected by your US employee – to gain by suing your US subsidiary, and the UK company is not itself present in the US. But if you’ve employed someone in the US directly through your UK company and they (or a third party damaged by your US employee) sue your UK company, it could be extremely costly.
  • You complicate legal matters
    The laws governing UK employers and US employees don’t necessarily align. If there’s a dispute, it could be time-consuming and expensive to resolve.

Before you employ anyone in the USA, it’s sensible to clarify exactly what you need and then seek advice from a specialist US lawyer.

US state laws exist alongside - and sometimes in conflict with - federal law
Unlike in England, where all counties are governed by English law, in the USA, every state has the authority to create laws and enforce them. Federal laws apply across the whole of the USA, and state laws vary by state. Sometimes federal and state laws don’t align.
Confused about which law applies? Get help from a specialist US lawyer.

Write job descriptions, and get advice from a specialist

Save yourself the headache of whether your people in the US are contractors or employees by consulting a US employment lawyer. Prepare job descriptions and the specialist will be able to tell you whether the role, in that particular state, is a contractor or an employee.

If the lawyer says the role you want to hire is an ‘employee’ then you have two choices:

  • Set up a US subsidiary company
    And hire people as employees of that company (more about this below).
  • Change the job description
    If you’re not yet ready to set up a US company, you can scale back the requirements of the job – and then make sure you and the contractor stick to it. It’s easy for a role to morph into an ‘employee’ role within a few months or a year, so keep an eye on it to make sure the job description still matches what the person is doing.

 

Set up a Delaware subsidiary to hire employees

You generally don’t need a US company to:

  • sell in the USA
  • hire contractors in the US
  • make contracts with companies in the US

However, when you need to hire employees in the US, you’re ready to set up a US company.

Wilson Sonsini recommends UK limited companies set up a Delaware corporation as a wholly-owned subsidiary of your UK business. It takes a day or two to sort this out – and bear in mind it’s more expensive to incorporate in the US than it is in the UK.

Why set up a subsidiary and not a US parent company for your business? You can do almost everything you could want to do in the US with a subsidiary, which is less expensive and time-consuming than creating a new US parent company of your UK company. When UK companies set up a US parent company, it’s nearly always a decision driven by US investors.

Why do companies incorporate in Delaware?
Delaware has a global reputation as the most business-friendly state - it has predictable corporate governance rules, a robust infrastructure of services for new and established businesses, and specialist courts known for fair and speedy decisions. That’s why Delaware is the most common state of incorporation in the US - for both US and international companies. By setting up in Delaware, you’ll reduce friction in operating in the USA. And you don’t need to incorporate in all the states where you operate or hire - you only need to incorporate in one state.
Find out more at choosedelaware.com

Incorporate as an Inc not an LLC

When you incorporate in the US, your US subsidiary will be incorporated as an ‘Inc’ company. The most common alternative is a ‘limited liability company’ (LLC).

For tax reasons, it’s typically more straightforward to incorporate as an Inc and not an LLC. This is because an Inc is taxed for its own activities. An LLC, by default, is a tax pass-through organisation so the parent company – that would be your UK company – is responsible for the taxes of the LLC. Under UK tax law, there’s usually little benefit for a UK company to have a US LLC instead of an Inc.

 

Register in the states where you hire

You’ve got your US subsidiary, incorporated in Delaware. Now you’re ready to hire your first employee, let’s say in New York. To do this, you need to register your company with the Secretary of State for New York. And for your New York employee, you’ll need two documents specific to New York state:

  • IP assignment and confidentiality agreement
  • offer letter
    This contains the financial details

Every time you hire an employee in a different state, you’ll need to do the same: register with the Secretary of State there, and use state-specific employment documents.

Employment laws differ from state to state
You can’t simply copy-and-paste employment contracts. You’ll need to use different documents and to abide by different laws in every state in which you hire people.
In which state do you need to recite a statute for IP assignment to be valid? Where are you not allowed to ask candidates for their salary history? Find out the answers and more in Daniel’s PDF, The UK startup’s guide to US employment

Americanise your legals

Or should that be Americanize your legals? 😁
As well as your corporation and employment agreements, there will be more legal issues to sort out for your American operations, such as:

  • Patents and trademarks
    For the IP that you’ve registered in the UK, you’ll want to consider registering in the USA too.
  • Data protection
    GDPR doesn’t apply in the USA – if you’re collecting personal information in the US, you’ll need to comply with the relevant US and state laws for data privacy.
  • T&Cs
    In contracts, you’ll want to consider localising the terms and conditions for the American market – factoring in both the market norms and the governing law of the contract.

 

Sort out your banking, tax, insurance and payroll

Besides legal, there are four other areas UK companies expanding into the US need to consider – to get these sorted out, factor in around three to four weeks:

  • Tax accounting
    When you incorporate in the US, you’ll need to get an Employer Identification Number (known as an ‘EIN’ or ‘tax ID number’) – this is a unique, government issued identifier for your US subsidiary that allows you to set up a bank account and payroll in the US. Ask your US accountant to help you get an EIN as well as for help with your federal and state tax filings.
    Estimated cost: from $1,000 to $3,000
  • Banking
    You’ll use the EIN to set up a US bank account for your US subsidiary.
    Estimated cost: minimal
  • Business insurance
    You’ll need to extend your business insurance from the parent company to your subsidiary – ask your insurer if they can do this. If not, you can ask your insurer or your US accountant for a recommendation.
    Estimated cost: from $1,000 to a few thousand dollars
  • Payroll and benefits
    It’s common for small companies (less than 50 employees) to co-employ people in the US through a Professional Employer Organisation (PEO). A PEO can organise the payroll, retirement benefits plan and health insurance for employees of your US subsidiary, which means your company doesn’t need to set these up separately.
    Estimated cost: people will be your biggest expense – see below

 

Be ready to pay bigger salaries in the US

For most companies, people are the most significant cost of setting up in the USA. It’s common for salaries in America to be 1.5 to 3 times the equivalent UK salaries. And the benefits and payroll bill per person can reach $15,000 to $20,000. This is much higher than the UK because US employees usually expect you to cover their healthcare insurance.

 

Grant share options from your UK parent company

To grant share options to employees in the US, you’ll need to set up an unapproved option scheme (it’s easy on SeedLegals).

Don’t grant options out of your US subsidiary. Your US corporation has no assets (and therefore little value) and it could become very complicated down the line because your US employees would become co-owners of your US subsidiary.

For the options you give your US employees, you’ll need to get a US 409A valuation for your company from an independent specialist. Unlike the HMRC valuation you get for an EMI scheme, the 409A valuation normally isn’t discounted from the fair market value, so the strike price for your US employees will usually be higher than for your UK employees with EMI options.

Read more in our guide, How to give share options to your overseas employees

You can have an unapproved scheme and an EMI scheme
An EMI scheme is for your UK PAYE employees.
An unapproved scheme is for UK contractors and advisors, and employees outside the UK.
We explain the differences in our post, Share options explained

Watch video

Missed the webinar? Watch the video to see Anthony Rose, CEO of SeedLegals talking to Daniel Glazer of Wilson Sonsini.

The full video is one hour: the first half covers how to expand and hire people in the US, as set out above in this post. The second half is about raising money from US investors, which we’ve set out in our blog post: How to raise investment in the USA: guide for UK startups

About Wilson Sonsini

Wilson Sonsini Goodrich & Rosati started working with tech companies in the early 1960s, often taking companies from ‘garage stage’ startup to IPO and beyond. Famously, the firm incorporated Google in 1998, took them public in 2004 and still works with Google now.

Wilson Sonsini’s London office is led by American expat Daniel Glazer, with a team of 35+ US, UK and dual US/UK-qualified tech lawyers. Every year, the team incorporates US subsidiaries for several dozen UK companies and works with hundreds of UK and European companies throughout their US lifecycle.

If you have questions about expanding your company into America and hiring in the US, take a look at Daniel’s comprehensive FAQs on US expansion, fundraising and exit

 

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