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For a company expanding into the United States, the choice of entity is as much a question about its home country as about the U.S. itself.
Picture a Spanish manufacturer that has just signed its first large client in Texas. It needs a local presence, and quickly. Its U.S. lawyer suggests an LLC: flexible, simple to form, tax-efficient. On paper, the decision takes a week. The problem appears months later, when the company’s tax adviser in Madrid looks at the same LLC and sees something very different.
That gap between how a structure looks in the United States and how it looks back home was the thread running through a recent episode of Under the Basswood Tree, the podcast of Washington, D.C. firm [Basswood Counsel]. In it, Basswood partner Christopher Klug and Meritxell Mont, corporate attorney and tax adviser at Capital Auditors & Consultants, discussed how international companies should approach the choice of a U.S. business structure.
You can watch the full conversation below, followed by a summary of the key points.
Watch the conversation: U.S. Business Structures – Legal and Tax Choices Across Borders
Christopher Klug, Partner at Basswood Counsel, and Meritxell Mont of Capital Auditors & Consultants discuss U.S. business structures and the legal and tax considerations involved in cross-border expansion.
Prefer to listen? Listen to the episode on [Spotify] or [Apple Podcasts].
Three routes into the U.S. market
Most international companies end up choosing between three options. Each can work well; the question is which one fits the business and its home jurisdiction.
| LLC | Corporation | Branch | |
|---|---|---|---|
| Separate legal entity | Yes | Yes | No |
| Default federal tax treatment | Disregarded (one member) or partnership | Taxed at 21% | U.S. profits taxed, plus possible branch profits tax |
| Parent’s liability | Limited | Limited | Directly exposed |
The corporation is the most familiar of the three. It pays its own federal tax at a flat 21%, and dividends sent to a foreign parent face 30% withholding unless a tax treaty reduces it. A branch avoids creating a new entity, but it gives up the liability shield that the other two provide. The LLC sits in between, and it is also where most of the complications arise.
What the label doesn’t tell you
A point both speakers returned to is that the legal form of a business and its tax classification are separate decisions. By default, a single-member LLC is disregarded for U.S. federal tax purposes, meaning its income is treated as its owner’s. With two or more members it is taxed as a partnership, and the owners can also elect to have it taxed as a corporation.
For a foreign owner, that flexibility cuts both ways. If the United States treats the LLC as transparent while the home country treats it as a company, or the other way round, the result is a hybrid entity. That can mean double taxation, lost tax credits or, within the European Union, anti-hybrid rules that deny deductions altogether.
Beyond Washington: the state layer
Federal tax is only part of the bill. Each state has its own system, which may include corporate income tax, franchise tax or a tax on gross receipts, and some states without an income tax make up for it elsewhere. A company incorporated in Delaware will not necessarily pay its state taxes there. Obligations tend to follow employees, property and sales. The same applies to corporate formalities, from registered agents to annual reports, which vary by structure and by state.
Where treaties help, and where they stop
Tax treaties can change the numbers considerably, reducing withholding on dividends, interest and royalties and defining when a company has a taxable presence at all. They have limits, though. U.S. treaties generally cover federal income taxes only, so state taxes remain outside their scope. Their benefits also have to be earned: a company must meet the treaty’s requirements and be able to document that it does.
Two advisers, one structure
The practical conclusion of the conversation is straightforward. A structure should be designed by advisers on both sides of the border working together, not reviewed by each in turn. A U.S. adviser can build something that works perfectly under U.S. rules and still creates problems in Spain, and a Spanish adviser working alone can make the mirror-image mistake.
Before committing, a company needs clear answers on:
- where and how it will operate in the U.S.;
- how each country will classify the entity;
- which states it will owe tax in;
- whether it qualifies for treaty benefits.
In practice, that means bringing both sets of advisers into the conversation before the entity is formed rather than after.
If your company is considering a U.S. expansion, our international tax team can review the structure with your U.S. advisers from the outset.
Frequently asked questions
Is an LLC or a corporation better for a foreign company in the U.S.?
It depends on the company’s activities, plans for its profits and the tax rules of its home country. A corporation offers a clear separation from the foreign owner. An LLC is more flexible, but its tax treatment depends on its classification in both countries.
How is a foreign-owned single-member LLC taxed?
By default it is disregarded for U.S. federal income tax purposes, so its income is attributed to its owner. It still has specific reporting obligations, such as filing Form 5472.
Is a branch cheaper than a subsidiary?
Not necessarily. Branch profits are taxed in the U.S. and a branch profits tax may also apply. The parent company is also directly exposed to U.S. liabilities.
Do U.S. tax treaties apply to state taxes?
Generally, no. They usually cover federal income taxes only.
Planning to expand into the United States?
Capital Auditors & Consultants advises international companies on cross-border structuring, in coordination with advisers in the United States and other jurisdictions. Talk to our international tax team
About Meritxell Mont
Meritxell Mont is a Spanish lawyer specialising in legal and tax advice to companies with a strong international focus. She has experience assisting multinational companies with their establishment in the Spanish market and supporting businesses in internationalisation processes in other countries. She is also responsible for international business development and manages the Barcelona office of Capital Auditors & Consultants.
Listen to the full episode to learn more:
