Ever thought about moving your company in the US? Since time immemorial entrepreneurs have sought to earn their stripes in the biggest pond of them all.
Thinking of moving to the US? We’ll go over some of the most compelling reasons to reallocate your HQ to the US and also cover off the tax and accounting implications of doing so – not the least of which will be Capital Gains Tax.
There’s a reason the US is still the land of opportunity for founders around the world. On average, it takes only six days for a business setting up in the US – which has led to the creation of over 2 million jobs in 2015 according to the US Census Bureau.
With such low friction, more folks are moving their headquarters closer to their American customers, tech talent and venture capital finance usually based out of the hallowed enclaves of Silicon Valley. Venture Capital funding reached a decade-high of $155 billion in 2017, so its no coincidence why entrepreneurs are looking to relocate closer to the honey pot.
The US is known for the success of its tech start ups in particular, with the likes of Uber, AirBnb and more achieving meteoric status in the last decade, with the promise of other ‘unicorns’ appearing on the horizon too (á la DoorDash).
It follows that great tech companies are built by great tech talent, and moving closer to the talent pool by itself can be the determining factor before making the move. Developers of every description are available and although the US is known for relatively competitive wage rates, hiring the right candidate can be an expensive task. The average cost varies between states, as each has it’s own labour laws and business setup costs – that said, there are better places than others to break ground.
Which state is the best for Start Ups?
In short, there is no best state for every start up, as each will be driven by its own imperatives such as the need to be close to the market, the need for a convenient location for staff or the desire to be in a hot spot like San Francisco or Brooklyn.
Interestingly enough, WalletHub attempted to do just that in July 2019 when it ranked each state based on the metrics ‘Business Environment Rank, Access to Resources Rank and Business Costs Rank’, and when the dust settled Texas arose the winner. Takin out the most attractive Business Environment ranking, which is comprised of factors such as the entrepreneurship index, average length of work week and the growth in the number of small businesses, the lone star state is supposedly the best state to operate your start up today. Other states such as Delaware are preferred for their competitive tax rates.
Even before deciding which state to setup shop, even if that does turn out to be Texas, you’ll need to get the business documentation organised early. Visa’s, Government programs and registrations can all smooth the runway and ensure you’re running from day one.
- When moving to the US you need consider your visa options.
- L-1A Visa – for businesses trading for at least 12 months and employ 4 or more people.
- Initial stay of 2 years whilst business is operating
- Opportunity to apply for green card (permanent residency)
- E-2 Visa – for businesses trading for less than 12 months and employ fewer than 4 people
- Initial stay of 2 years whilst business is operating
- Opportunity to apply for extension
The precursor to either of these visas being granted is an understanding of significant investment both in terms of capital and manpower in the business – there’s no such thing as a free lunch and the American’s have a reputation for their appetite.
Tax implications of moving to USA
When moving to the US, rather than deal with the tax requirements of two different countries simultaneously, some Australian startups fully dissolve their Australian operations and migrate their assets, both human and monetary capital, over to an entity based in the US. This can be an issue when considering any intellectual property (IP) held by the company. For instance, there are significant software costs to re-develop an app that is still currently used by Australian consumers.
One solution may be to retain the IP in the Australian company and licence its use in the US entity through a royalty or commercial agreement. Such arrangements can be complex so we recommend the involvement of a specialist or commercial lawyer. In such circumstances where your Australian company goes dormant, considering tax residency and transfer pricing are worthwhile exercises.
The Flip Up & Potential CGT Rollovers
Alternatively, the shareholders of the Australian entity may wish to transfer their shares to the US entity (i.e. a flip up), although this will trigger a Capital Gains Tax event. CGT concessions may be available to negate a gain, that rely mostly being rollover relief – specifically Subdivision 152-E for small businesses, the ‘replacement asset’ in this case being the US business. The shareholding of each entity must be similar and again we recommend an Australian tax specialist be involved to help confirm your elgibility for a rollover. From the perspective of the US entity, a US Attorney will need to review the share swap to connect both sides of the equation.
In either scenario you can expect increased costs of compliance with both Australian and American regulations, although, perhaps the opportunity cost of not donning the stars and stripes would be greater still.