Tax & Legal Structure Considerations When Expanding a UK Recruitment or Consulting Business to the US
Breaking into the US market is an attractive option for UK-based recruitment and consulting businesses. The US has a $400 billion recruitment industry (according to IBISWorld) and a high demand for skilled consultants, with an estimated 52% of US companies outsourcing at least one business function, according to the consulting firm Deloitte. However, expanding your business to the US isn’t just about market opportunity—it’s about navigating a new tax and legal landscape.
UK Recruitment Agencies & Contractors are expanding with success in the US market.
If you’re a UK recruitment agency or consulting firm considering expansion, here’s what you need to know about tax structure, legal considerations, and compliance. Ensuring your business adheres to UK and US regulations can make or break your success.
Read this page if you are an American employee moving to the UK. Read this page if you are a UK employee moving to the United States.
Business Structure and Taxes: Choosing the Right Entity
Permanent Establishment (PE) Rules: US-UK Tax Treaty Benefits
One critical concept for UK businesses expanding to the US is understanding “permanent establishment” (PE). Under the UK-US Tax Treaty, a UK business is generally only subject to US tax if it has a permanent establishment in the US. This concept is crucial, as it determines whether your business is considered to have a taxable presence in the US.
According to Article 5 of the US-UK Tax Treaty, a permanent establishment includes:
1-A fixed place of business (such as an office or branch) in the US.
2-Dependent agents in the US who have the authority to sign contracts for the UK business.
However, the treaty overrides the IRS’s Effective Connected Income (ECI) rules, which typically tax foreign companies on income connected with a US trade or business, even if the company does not have a fixed presence. If no PE exists, the US cannot tax UK businesses under the treaty, avoiding double taxation.
Effective Connected Income (ECI) vs. Tax Treaty Protections
The IRS defines ECI broadly and taxes income that is “effectively connected” to a US trade or business. However, the tax treaty limits the IRS’s reach by ensuring that only income attributable to a PE is taxable. This provision is advantageous for UK recruitment agencies or consulting firms, as it can help them avoid US federal income tax if they do not maintain a fixed place or a dependent agent in the US.
Choosing the Right Legal Structure for Tax and Liability Protection
Selecting the correct business structure is essential for managing tax liabilities and protecting your assets. Each structure—Limited Liability Company (LLC), C-Corporation, or S-Corporation—has distinct advantages and disadvantages based on your business model, liability concerns, and tax preferences.
Many companies opt for Delaware incorporation due to its flexible business laws. However, consider where you’ll operate, as this determines your tax obligations and legal requirements. For example, California has stringent employee protection laws, whereas Texas may offer fewer regulatory hurdles.
According to Delaware’s Division of Corporations, more than half of US public companies are incorporated in Delaware for business-friendly policies.
Limited Liability Company (LLC)
An LLC is a popular choice for UK businesses expanding to the US because of its flexibility and tax advantages. However, tax treatment of LLCs can be complex, especially for foreign owners.
Pros:
Pass-Through Taxation: LLC income is generally taxed only once at the individual level, bypassing corporate taxes. However, UK LLC members may still be liable for UK taxes on their US income.
Limited Liability: Members’ liability is limited to their investment, protecting personal assets.
Flexibility: LLCs offer significant operational flexibility and fewer compliance requirements compared to corporations.
Cons:
Permanent Establishment Risk: If the LLC has a PE in the US, the UK business may still be taxed by the IRS.
Self-Employment Tax: LLC members may be subject to self-employment taxes, which include Medicare and Social Security unless structured carefully.
Limited Treaty Benefits: The US-UK Tax Treaty doesn’t apply as easily to LLCs as to C-Corporations, potentially resulting in double taxation.
When a Limited Liability Company (LLC) in the United States is owned by a UK person or UK company, there are specific filing requirements that must be met under IRS regulations:
Form 1120: If the LLC elects to be treated as a corporation for tax purposes, it must file Form 1120, US Corporation Income Tax Return. This form is required to report the LLC’s income, gains, losses, deductions, and credits and to determine the corporation’s tax liability.
Form 5472: In addition to Form 1120, the LLC must file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation, if it has a foreign owner. This form provides information about foreign ownership and any reportable transactions between the LLC and its foreign owner, including capital contributions, loans, and payments.
UK owners of a US LLC need to ensure they comply with these filing requirements to avoid potential penalties and to maintain proper tax status.
C-Corporation (C-Corp)
A C-Corp is a separate legal entity that provides strong liability protection and, under the tax treaty, makes it easier to navigate international tax obligations.
Pros:
Separate Taxation: C-Corps are taxed as separate entities, reducing the risk of individual-level liability. This structure makes it easier to apply the tax treaty to avoid double taxation.
Corporate Tax Rate: The US has a 21% federal corporate tax rate, which can be advantageous if retained earnings are reinvested.
Tax Treaty Compatibility: C-Corps can fully benefit from the US-UK Tax Treaty, limiting tax obligations on business profits not attributable to a US permanent establishment.
Cons:
Double Taxation Risk: Profits are taxed at the corporate level and again as dividends to shareholders, though this can be managed through the tax treaty.
Compliance and Costs: C-Corps face higher compliance costs and additional formalities, such as board meetings and annual reporting.
Double Taxation Treaty and UK-US Tax Relief
The UK-US Double Taxation Treaty helps prevent paying taxes twice on the same income. It allows UK companies to offset taxes paid in the US against their UK tax obligations, significantly impacting profitability. The UK Government’s official page on double taxation provides more details on this treaty.
Employment and Payroll Taxes
If you plan to hire US employees, you must register for Employer Identification Numbers (EIN) and comply with US employment tax laws. Expect to contribute to Social Security, Medicare, and federal unemployment taxes.
Legal and Compliance Essentials
Data Privacy and Compliance
UK-based companies familiar with GDPR may face different privacy laws in the US, such as the California Consumer Privacy Act (CCPA). Ensure compliance with US data privacy standards to avoid fines and potential lawsuits.
Visa Requirements for On-the-Ground Operations
For UK consultants planning to work onsite, the B-1 (business visitor) visa or the L-1 (intra-company transfer) visa are common options. Alternatively, the H-1B visa is useful for specialized roles but is subject to caps and lottery systems.
Recruitment Agency Helping US Corporate Clients with Hiring
Scenario: A UK-based recruitment agency wants to source candidates for US corporate clients using platforms like LinkedIn.
Action Steps:
Tax Implications: Register a US entity to avoid withholding tax on business income.
Legal Requirements: Secure an EIN and verify compliance with employment agency laws in states where you operate.
Visa Considerations: If any recruiters will work in the US, look into appropriate visas.
Management Consultant Expanding to New York
Scenario: A London-based management consultant has been invited to work on-site for a client in New York.
Action Steps:
Tax Implications: Leverage the Double Taxation Treaty to avoid double taxation on US income.
Legal Requirements: Set up a US bank account and consider a Delaware LLC for easier tax filing.
Visa Considerations: Apply for an L-1 visa to legally work for the US client.
IT Contractor Working for Multiple Clients Remotely
Scenario: An IT contractor based in London takes on multiple clients in the US while working remotely.
Action Steps:
Tax Implications: Track all US-sourced income for IRS reporting, especially if US clients withhold taxes.
Legal Requirements: Use a registered agent for any US state in which clients are based.
Visa Considerations: Generally, a visa is not needed if work is done entirely remotely from the UK.
Leveraging LinkedIn
UK recruitment agencies are increasingly using LinkedIn to connect with top talent for US employer clients, capitalizing on the platform’s extensive user base of over 900 million professionals globally. With 70% of the US workforce currently open to new job opportunities, agencies can leverage LinkedIn’s advanced search capabilities to identify and engage passive candidates who possess the necessary skills and experience. By utilizing features like targeted job postings, personalized InMail outreach, and content sharing, agencies can effectively attract and connect with qualified candidates who may not be actively job hunting but are open to exciting new roles in the US.
The growth of the international recruitment marketplace presents a significant opportunity for UK agencies. According to the 2023 LinkedIn Workforce Report, job postings in the US have increased by 50% compared to the previous year, highlighting the demand for talent across various industries. UK recruitment agencies can enhance their visibility and credibility in this competitive market by building relationships through networking, engaging with industry professionals, and positioning themselves as thought leaders through insightful content. As they tap into LinkedIn’s powerful features, agencies can streamline their recruitment processes and successfully place candidates in rewarding positions within the US job market.
Recruitment agencies have the opportunity to receive money by recruiting a permanent position or a temporary position (short term) for the US employer. The greater the specialist recruiter the greater income you can earn within your niche. Establishing a good track record will ensure that your US clients will come back to you to fill other positions within their business.
Additional Resources
UK Government’s Guide on International Expansion
US Small Business Administration (SBA) for setting up in the US
IRS Guidance on Foreign Companies for tax and business structure information
FAQs
What is the best legal structure for a UK business expanding to the US?
Many choose an LLC or C-Corp for liability protection and tax efficiency.
Will I pay tax in both the UK and the US?
Not necessarily, . The UK-US Double Taxation Treaty can help avoid double taxation.
Do I need a visa to work for my US clients as a contractor?
Answer: If you work remotely from the UK, you typically don’t need a visa, but onsite work does.
How does state-specific tax impact my business?
Answer: State tax varies; popular states for business, like Delaware, offer business-friendly policies.
What data privacy regulations should I follow in the US
CCPA and similar laws may apply depending on client location and data handling practices.
Conclusion
Expanding a recruitment agency or consulting firm from the UK to the US presents great opportunities, but careful planning is essential. By understanding the tax structures, legal requirements, and visa options, you can set your business up for success. Whether you’re an IT contractor, management consultant, or recruitment agency owner, navigating these complex considerations will pay off in the long run.