Thanks to factors like changing consumer preferences, increased demand for healthier foods and the popularity of premium indulgent treats, the U.S. food and beverage market continues to grow, with a projected annual growth rate of 6.34% this year.
That makes U.S. expansion an attractive proposition for foreign food manufacturers and distributors. But successfully entering a new market requires strategic entity structuring that balances tax optimization and asset protection. To avoid unexpected tax burdens, compliance complications and liability exposure, learn how the right entity choice is critical for success.
Structuring decisions: What works (and what doesn’t)
As we’ve advised numerous clients, getting your entity structure right from day one can save you from expensive tax pitfalls and complex restructuring in the years ahead. So what’s most suitable for foreign food companies? It depends on your individual situation and growth goals.
Here’s a brief overview:
S-Corporation. S-Corps offer attractive benefits, including pass-through taxation and straightforward compliance requirements, making them popular among U.S. businesses.
However, this structure may not be an option, as federal tax law restricts S-Corporation ownership to U.S. citizens and residents only.
C-Corporation. In a C-Corp, profits and losses do not flow through to owners, meaning foreign owners will not need to file U.S. personal income tax returns.
But C-Corporations’ profits are subject to double taxation, meaning they’re taxed at the corporate level and again when dividends are paid to shareholders. This double taxation can impact overall tax efficiency and cash flow.
Limited liability companies (LLCs). LLCs offer foreign food companies key benefits like pass-through taxation, operational flexibility and cash distributions based on actual generation — ideal for seasonal food businesses.
However, the U.S. withholds taxes quarterly on foreign partners’ income share at top rates, regardless of actual distributions received. This can create unexpected cash flow issues that outweigh the structural advantages for many foreign owners.
Branch office vs. subsidiary?
There are two principal ways to expand a business into the U.S.: Opening a branch office or setting up a subsidiary. A branch operates as an extension of the foreign parent company, not a separate legal entity. As such, all profits and losses flow directly to the foreign parent company, creating a single worldwide entity for tax purposes.
The risk? Branch operations expose the entire foreign parent company to U.S. legal liability. For food businesses facing product liability risks, environmental concerns or employment-related litigation, this exposure can be significant.
A subsidiary creates legal separation between domestic operations and the foreign parent, limiting liability exposure to U.S. assets. Subsidiary structures may also provide greater flexibility for future changes in ownership, strategic partnerships or eventual sale of U.S. operations.
State selection: Regulatory and operational factors
When making decisions on business locations, food companies must evaluate franchise taxes (if applicable), gross receipts taxes and property taxes on manufacturing equipment and facilities. While some U.S. states offer more favorable corporate tax structures, others impose higher rates but provide access to larger consumer markets and distribution networks.
You may also be eligible for tax credits and incentives, which also vary widely by state, county and city.
Beyond taxation, food manufacturers must navigate regulatory oversight from the FDA, USDA and state health departments. Companies should also assess each state’s approach to environmental regulations, zoning requirements for food manufacturing and labor laws that may affect daily operations.
When experience matters
At Magone & Company, we’ve served the food manufacturing and distribution industries for over 30 years. From tax and compliance laws to technology, we help our food manufacturing and distribution clients navigate entity structure decisions that support business growth — while minimizing tax obligations and legal risks. Reach out today to see how we can support your expansion plans.