Armanino Blog

Talking about International Franchise Tax

Entity choice is an important decision for any inbound franchise business.

You’ve built a successful franchise business model and now you want to bring it to the United States. Whether your goal is to take a large chunk of the market and build a lasting U.S. presence, or just funnel profits back to your home country, there are tax implications you need to consider.

These decisions may not be exciting, but they are very important choices to make as you seek to bring your operations to the United States. Ideally, your answers will help you make the right call on decisions such as forming a corporation or a limited liability corporation. This is always an important choice and there is no one right answer for every franchisor. It’s a complicated decision with a lot of moving parts.

Where does the conversation begin with inbound franchisors?
As an entrepreneur, you are proud of the business you have created, but you may not have given much thought to tax implications or entity choice. You just want to open up your yogurt store and start selling as fast as you can. It’s really important, however, to have the proper professional guidance from the start so you don’t have to unwind problems that are created innocently.

We need to look at the reasons why you are coming to the United States so you can make the right decisions going forward. It’s not always a question that has been given a lot of thought, but the answers can go a long way toward determining your future.

In a corporate environment, it may be more difficult to repatriate profits back to your home country if that is your plan. But if funds are to be invested in the United States to grow your franchise business, this could be a good choice.

What other factors matter for the franchisor looking to build a strong U.S. presence?
Most new franchisors set up as LLCs. One of the reasons is to take advantage of the single layer of taxation that LLCs offer.

Another is the fact that LLC owners (called members) can draft the LLC governing document in such a way as to facilitate even the most complicated of economic relationships. It is simply better suited to those relationships than a corporation with several types of shares and convertible debt.

There is very little ‘corporate’ type maintenance required, meaning the owners can decide for themselves how the business is to be managed and what powers management has.

An LLC will generally require foreign owners to be pulled into the U.S. tax system, but if you’re looking to build something lasting in the United States, that becomes less of an issue.

What are the drawbacks to choosing an LLC?
The LLC structure is still relatively new and so there are some attorneys who prefer and will recommend corporations over LLCs due to the long legal history surrounding corporations. In addition, many foreign governments have yet to form solid opinions on how to tax their residents when they receive income from U.S. LLCs.

There is less information to disclose with a corporation, making tax filings easier. There are times when an LLC can mesh very nicely for tax purposes with their home country’s tax system, but in other instances, it’s not such a good mix.

How does entity choice affect the future sale of your business?
It’s very easy to sell the assets of an LLC. Most buyers want to buy assets. If you were to say, ‘Oh, I can only sell my stock,’ a lot of buyers are going to say, ‘No thank you.’ Why? Because they don’t want to buy past liabilities. When you have an LLC, if the end game is to sell the assets of your business at some point, it opens up a world of potential buyers.

Selling or distributing assets from a corporation can lead to a tax nightmare. At the end of the day, taxes are only part of the conversation. But they are an important part and need to be considered before you make your move.

Armanino has the available resources to provide clients with tax and consulting services to help manage any endeavor. In addition, we have the consulting network and expertise to help your company grow.

October 12, 2014

Stay In Touch

Sign up to stay up-to-date with the latest accounting regulations, best practices, industry news and technology insights to run your business.

Related News & Insights
SaaS Market Trends
Between the uncertainty of 2022 and the highs of 2021, what will 2023 hold?

December 14, 2022 | 09:00 AM - 10:00 AM PT
Fraud: Current Trends & Hot Topics
Don’t let fraud negatively impact your organization.

December 8, 2022 | 11:00 AM - 12:00 PM PT
Year-End Tax Planning for High-Net-Worth Individuals
Optimize your tax position before December 31.

December 8, 2022 | 09:00 AM - 10:00 AM PT