What is a Branch Office and What is a Subsidiary?

A branch office is not a separate legal entity of the parent corporation.  Accordingly, operating a branch office is actually just having the foreign parent corporation operating in the U.S.  For the reasons mentioned in What Constitutes Doing Business in the United States, this is not an ideal arrangement.  Although this is a simple structure, this structure, as stated in What Constitutes Doing Business in the United States, generally subjects the parent corporation to taxation on its entire corporate income (rather than just the branch's income, although there may be allocation schemes that allow for inter-country allocations), and this structure does not shield the parent corporation from liability incurred at the branch level.  Thus, liability in the U.S. at the branch level would expose the foreign parent corporation to liability.  Therefore, using a U.S. subsidiary -- discussed below -- is a advantageous both for controlling tax and liability issues.

A subsidiary is a separate legal entity from the parent, although owned by the parent corporation.  Usually, the subsidiary is wholly-owned by the parent corporation.  There is no requirement in the U.S. to have a local director.  All of the directors of the subsidiary could be in the home country.  For reasons discussed elsewhere on this site, it is easier to manage the subsidiary to have officers (not necessarily directors) in the U.S. to manage the subsidiary, but in today's world of email, it is quite manageable to have the ultimate decision-makers for the subsidiary be based at the home office of the parent company.  All matters for the board can usually be handled by email, and scanned copies of signed documents almost always are adequate in the United States.  Unlike many foreign countries that have formal procedures, with original signatures, and notarizations, such formal requirements have largely been repealed in the U.S. 

subsidiary can be formed as any type of separate legal entity, but the most common forms are corporations and limited liability companies.  Taxation of the subsidiary is on the subsidiary's income alone, and when properly structured and operated, the liabilities of the subsidiary are not attributable to the parent corporation.

An LLC can be formed for about $500 to $1,500 or less assuming that the parent corporation uses a general LLC operating agreement.  The LLC should, after being formed, file a an election to be taxed as a corporation in the U.S.  Failure to make this election would eliminate the tax benefits of having a U.S. subsidiary (but would not eliminate the liability insulation).  The reason for this is that an LLC owned by one entity (in this case the foreign parent) is for U.S. tax purposes "disregarded" unless the election is to be taxed as a corporation is made.  Disregarding the entity means the U.S. subsidiary would be just a branch of the foreign parent company. 

Because an LLC does not by statute have a board of directors or officers (rather it has by statute either a manager or its owner as its manager), if a corporate-like structure is desired for the LLC, the drafting of the LLC operating agreement with special provisions that make the LLC look like a corporation can cost generally between $5,000 and $7,500.

Please continue on for a discussion about using a regular corporate entity in the U.S. rather than an LLC.