Coming to America: What is the best legal structure for selling your products in the USA?

As an international lawyer, my clients based outside the U.S. often ask how they should structure sales of their products in the U.S. market.  Actually, they usually say, “we have decided to form a U.S. subsidiary [or to sign this proposed agreement, or to…], how much would you charge to help us?”  And then I ask some questions and the client and I work together to implement a strategy that meets the client’s goals, which may be different than the client’s original plan.

If you wish to sell your products in the U.S., you have several good options, including selling directly, appointing a sales representative or distributor or forming a U.S. subsidiary. Each approach has certain benefits and drawbacks. You should work with a lawyer to help you determine the best structure for your business.

Depending on your product, you may be subject to labeling requirements and other regulations under U.S. federal and state law, which are not discussed here.

  1. Direct Sales. You can sell your products directly to U.S. customers via the internet or telephone. The chief benefit of direct sales that it is simple and generally has the lowest cost (e.g., the cost of setting up a website, payment processing and shipping and import duties). The direct sales method may be used only if you do not plan to open a U.S. office. You should not open a U.S. office (e.g., a branch office) using your non-U.S. company because there is a material risk that the office will result in a permanent establishment, which could subject your non-U.S. company to U.S. federal tax. The main drawback of direct sales is that you will need to do all product marketing and promotion on your own and may encounter challenges in achieving market acceptance without a local presence. You will also need to determine how to efficiently ship your products to the U.S. and determine any if import restrictions, duties or other charges will be levied.  If you engage in direct sales to U.S. customers, you should prepare terms of conditions of sale, including warranty terms, for issuance to your U.S. customers.
  2. Sales Representative. You can appoint a U.S. sales representative. A sales representative is an independent contractor that does not take title to your products, but earns a commission on product sales that the representative generates for your company. The main benefits of appointing a sales representative are: (a) you do not need a U.S. office, (b) it does not, by itself, create a permanent establishment, (c) you can rely on the representative’s market knowledge and expertise to expand your U.S. sales, (d) it is relatively inexpensive to implement and (e) you can often appoint multiple U.S. sales representatives (as long as your arrangements are non-exclusive) and combine this approach with direct sales from your home office. The main drawbacks of using a sales representative are that: (i) you do not limit your company’s liability to customers because you maintain direct contact with customers for sale, warranty and other issues; (ii) a sales representative may not be able to offer as high of a level of marketing and sales support for the products as a distributor (described below); and (iii) you may have a disagreement with your representative (so you should have good termination rights). If you appoint a sales representative, you need a sales representative agreement to memorialize these rights and all the other customary rights and obligations.
  3. Distributor. You can appoint a U.S. distributor.  A distributor will generally buy your products for its own account, take title to those products and resell them to its customers. The distributor will make money on the spread between the price it pays you for the products and the price at which it sells the products. The main benefits of this distribution method are that: (a) it does not require a U.S. office or place of business, (b) it does not, by itself, create a permanent establishment, (c) it limits your company’s liability to U.S. customers because you have no direct contact with customers (assuming the distributor is charged with managing warranty and other ongoing issues), (d) it is relatively inexpensive to implement, and (e) you can rely on the distributor’s market knowledge and expertise to expand your U.S. sales and manage regulatory and customer issues. The main drawbacks of using a distributor are (i) you will probably lose some margin on sales because of the spread retained by the distributor, which may also result in higher prices for your products, possibly making them less competitive; and (ii) you may have a disagreement with your distributor (so you should have termination rights). If you appoint a distributor, you need a distribution agreement to memorialize these rights and all the other customary rights and obligations.
  4. Subsidiary. You can form a U.S. subsidiary and directly distribute and sell your products in the U.S.. The subsidiary may be wholly-owned by your home company or can be owned by additional or different people or entities. If your home company is a corporation and it will be the sole owner (parent) of the U.S. subsidiary, the U.S. subsidiary should usually be structured as a U.S. corporation or limited liability company (LLC) that files a Form 8832 U.S. federal tax election with the Internal Revenue Service to be taxed as a corporation.  Generally speaking, a U.S. corporation or LLC that elects to be taxed as a corporation is subject to U.S. federal income tax on its net income at the rate of 34% and withholding tax on dividends of the lower 30% and the rate in the tax treaty between the U.S. and the owner’s home country, which can range from 0%-10%.  For example, if the sole stockholder of the U.S. subsidiary is a Mexican corporation, dividends would be subject to a 5% withholding tax, if the stockholder owns at least 10% of the U.S. subsidiary’s voting stock, or 10%, in all other cases (See Article 10, U.S.-Mexico Tax Treaty). Net income of the U.S. entity may be reduced if the U.S. entity pays the parent company for bona fide services provided to the subsidiary pursuant to a services agreement.  The U.S. subsidiary will also be subject to tax at the state level depending on the state in which it is organized and in which it conducts business.  You will need to hire a U.S. Certified Public Accountant (CPA) to prepare and file the subsidiary’s federal and state tax returns.  If the subsidiary has employees, it must withhold and pay U.S. federal taxes on the amount of salaries paid.  There may also be state-specific payroll taxes and unemployment insurance payable, depending on the state in which the subsidiary’s employees are located.  The principal benefits of distributing products through a U.S. subsidiary are: (c) you retain control over the manner and method of product sale distribution, (b) you develop a U.S. brand and market presence, (c) depending on your home country, your directors, officers, select employees and major shareholders may be eligible for U.S. Visas such as the E-1/2 and L-1, (d) you do not need to pay a third party sales representative or distributor and (e) the formation of a subsidiary does not, by itself, create a permanent establishment of the non-U.S. parent company.  The main disadvantage is that this is most expensive structure to implement in terms of legal fees and startup and ongoing business expenses.