US market entry is a choice of structure, not an address
A company heading into the US usually gets asked about the state: Delaware, Wyoming, Texas. But the state is the second question. The first is which legal body the business will be present with. There are two working options, and they change almost everything: who is liable for debts, how tax is computed, how much reporting lands on the head office.
A subsidiary is a separate US legal entity — most often a C-Corporation, sometimes an LLC — owned by the foreign parent. A branch is the foreign business itself, registered to operate in a US state; there is no separate entity, and the US activity stays part of the parent company.
The difference sounds formal right up until the first lawsuit, the first enterprise customer, and the first tax return. After that it gets very practical.
A subsidiary: a separate body between you and the market
A subsidiary draws a line. US debts, lawsuits, and claims from contractors and customers stay inside it by default and do not flow up to the parent — the parent risks its investment in the subsidiary, not the whole business. In a market where people go to court more readily than in most countries, that is the main argument rather than an abstraction.
A separate entity also has a commercial side. A US enterprise customer signs more comfortably with a US company than with a foreign vendor: a familiar jurisdiction, a familiar court, a familiar bank account. Hiring contractors, opening a US business bank account, taking payment, and eventually raising US capital are all easier with a body that is itself American.
The form of the subsidiary is a decision too, not a detail. A C-Corp is the standard when investors or a separate team are on the horizon, but it carries its own rate and its own filings. An LLC under a foreign parent behaves differently: by default it is transparent for tax, and the foreign owner picks up a US tax obligation directly — not always what people want at entry. Which fits depends on the model; we cover it in the piece on choosing between an LLC, a C-Corp and an S-Corp.
A branch: the same business under a US sign
A branch creates no new entity. The foreign company registers in the relevant state as a foreign entity — gets the right to operate, appoints a registered agent — and works under its own name. "Foreign" here does not only mean another country: a Delaware company selling in California goes through the same registration in California.
The price of simplicity is the missing line. The parent company is liable in full for the US operations. On top of that, the US activity pulls in reporting that partly opens up the head office as well. In practice a branch is rarely chosen for active selling; it shows up in narrow scenarios — representative functions, certain regulated cases, a short market test without building a structure.
Where the tax line runs
This is where most of the confusion hides, because "a branch is simpler" at the legal level does not mean "a branch is simpler" at the tax level.
A C-Corp subsidiary is a US corporation. It pays federal income tax at 21% (plus state tax where it applies), and when it moves profit to the parent, that is a dividend. Dividends to a foreign owner are subject to 30% withholding by default (Chapter 3, withholding at source), and that rate is reduced by the income tax treaty between the US and the parent's country — sometimes to markedly less.
A branch is the mirror image. The foreign company pays tax on income effectively connected with its US business (ECI) at the same corporate rate — the return is Form 1120-F (see the IRS instructions for Form 1120-F). And on top comes the branch profits tax under section 884: an extra 30% on the "dividend equivalent amount" (the part of branch earnings treated as remitted to the head office). A tax treaty reduces this too. The point of section 884 is to tax branch profit roughly the way it taxes a subsidiary's profit followed by dividends — the government closes the gap between the two setups.
In short. A subsidiary → a separate US entity, liability ring-fenced; a C-Corp pays 21% and withholds tax on dividends to the parent (30%, treaty-reduced). A branch → no separate entity, the parent is liable; tax on ECI via Form 1120-F plus the branch profits tax (section 884, 30%, treaty-reduced). The overall tax burden of the two is brought close on purpose — the choice is not "where tax is lower" but "where there is less risk and simpler operations." Exact rates and relief depend on your country's treaty and are confirmed case by case.
Form 5472 and transfer pricing: what gets forgotten at entry
Either option almost always means transactions between the US operation and the head office: a loan, payment for services, a shipment of goods, a brand license. And this is where mistakes cluster most.
Those transactions have to run at market prices — the arm's length rule, section 482 under the IRS. If the US operation buys from the parent above market or pays an inflated royalty, the tax authority may recompute profit as if prices had been at arm's length. The related-party transactions themselves are disclosed on Form 5472: it is filed both by a US company that is 25% or more foreign-owned and by a foreign company engaged in a US trade or business. Per the IRS instructions for Form 5472, the penalty for failing to file or for incomplete data starts at 25,000 dollars — this is the case where the bookkeeping is built up front, not reconstructed later.
Next to it sits the question of state presence. As soon as a business has people, a warehouse, or steady sales in a given state, a tax connection (nexus) appears — an obligation for state tax and, for goods, for sales tax. The picture is not limited to the federal level; on the state part, see the piece on nexus across several states.
The same fork at entry
In our experience one mistake repeats more than others — and in both directions. First version: a company enters fast and cheap through a branch, starts selling, and a few months in a large US customer's procurement asks for a contract with a US entity, a US bank account for payment, and a Form W-9. It turns out the subsidiary has to be created anyway — but now the signed contracts, the account, and the already-engaged contractors have to be moved under it. The migration costs more than the right structure would have cost on day one.
The reverse version: a full C-Corp with a board and complete reporting is stood up for a short market test that a light presence would have covered — and the company pays to maintain a structure it does not yet need. Both cases are about one thing: the structure should match the ambition. Under-building and over-building both have to be redone, and redoing anything in the US is always dearer than assembling it once.
So we start the market-entry conversation not with the form of the documents but with the questions that decide the form: who you sell to in the US and who those buyers are, whether there will be people and a warehouse, whether you need a US account for customer payments, whether investors are likely within the next couple of years. The answers settle the choice between a branch and a subsidiary faster than any rate comparison.
What companies usually choose — and why
In our experience an active US entry — with sales, a team, contracts — almost always goes through a subsidiary, and more often through a C-Corp. Ring-fenced liability, a body a US counterparty understands, a clean "company — account — books" line, and the option to bring in investors later all outweigh the apparent simplicity of a branch.
A branch stays a tool for narrow tasks. And there is a nuance here that is not resolved by a general rule: whether a branch's business profit is taxed in the US at all can depend on whether the activity forms a "permanent establishment" under your country's tax treaty. Treaties differ and the reading is subtle — exactly the fork where a one-size answer from an article does more harm than good.
What does not change with the choice: the US operation must be set up as exactly what it is, with correct reporting and market prices inside the group. Everything else follows from that first decision.
How Edeal sets this up
US market entry rarely comes down to one service. It is structure, state registration, an EIN, a bank account, the tax regime of the US operation, related-party reporting, and intra-group pricing all at once — and all of it has to be aligned with each other, not assembled from separate places.
At Edeal we work through the parent company's business model: what is sold in the US and to whom, whether there will be people and a warehouse, whether investors are planned, how money should move between countries. That decides the choice between a subsidiary and a branch and the form of the subsidiary itself. Then we set the structure up end to end — the company, the EIN, the account — and take the bookkeeping and reporting onto support, including Form 5472 and market prices inside the group. We do not offer workarounds: the goal is a US presence that holds up under review and does not get in the way of growth.
Planning your company's entry into the US market?
On a consultation we will work through your model and pick the structure — subsidiary or branch, C-Corp or LLC — and, where needed, set up the company, EIN and account end to end and take the bookkeeping and international reporting onto support.
FAQ
What is the difference between a US subsidiary and a branch?
A subsidiary is a separate US legal entity owned by the foreign parent: its debts and lawsuits stay inside it by default. A branch is the foreign business itself, registered to operate in a state; there is no separate entity, and the parent company is liable for the US operations.
How is a US branch of a foreign company taxed?
The foreign company pays tax on income effectively connected with its US business (ECI) at the regular corporate rate, filed on Form 1120-F. On top sits the branch profits tax (section 884) — 30% on the dividend equivalent amount, reduced by an applicable tax treaty. The overall burden is close to the dividend tax a subsidiary would face.
Do you have to file Form 5472 when entering the US market?
Usually yes. Form 5472 is filed by a US company that is 25% or more foreign-owned, and by a foreign company engaged in a US trade or business, to report related-party transactions. Per the IRS instructions the penalty for not filing starts at 25,000 dollars, so these transactions are tracked from the start.