The expansion of an Israeli startup into the USA can often become one of those major milestones – a great way to gain access to Capital, Customers, Long-term strategic partnerships; However, there is an added layer of financial, regulatory and operational complexity associated with this new direction.
Many founders have a tendency to underestimate the impact that expanding into the US as an Israeli startup will have on the business and its financials. Without the right structure in place from the beginning, the company will likely find itself facing issues with Compliance, inconsistencies in its Reporting and Inefficient Operations.
This playbook details the primary financial issues that need to be addressed when an Israeli Startup enters the US Market.
- Correctly Structuring the U.S. Entity From Day 1
The key to successfully expanding into the US is the Legal and Financial Structure of the Company. The most common approach for Israeli Startups is to create a U.S. Subsidiary (Delaware C-Corp) that is a wholly owned subsidiary of the Israeli Parent/Operating Company. This legal structure will have an impact on the following areas:
Tax exposure in both the US and Israel
Transfer pricing requirements
Revenue Recognition and Cost Allocation
Expectations of Investors and Governance
If an Entity is improperly structured before the Company starts business in the US, this can create Long-term tax efficiences and Compliance Risk that are not able to be easily corrected in the future.
- US Tax System Overview
The US tax landscape has many components that contribute to its complexity. The four primary classifications of taxes that should be considered when entering the US market are:
- Federal Taxes
- State Corporate Taxes
- State Sales Taxes
- Employment Taxes & Payroll Compliance
Israeli businesses entering the US market should determine their:
- Tax Presence (Nexus)
- Allocation of Revenue from Multiple Jurisdictions
- Compliance to Transfer Pricing Policies
- Management of Intercompany Charges
Israeli businesses that fail to properly address any of the above-mentioned issues face severe penalties, audits, or reputational issues.
- Developing a Financial Reporting Framework that Supports Growth
As a company expands into multiple countries, its financial reporting setup will have to evolve beyond basic book-keeping and incorporate several key components to support that growth:
- Financial Statements on a Global Basis
- Financial Reporting in Multiple Currencies (i.e. ILS, USD)
- Compliance with US GAAP/Investor’s Expectations
- Monthly/Quarterly Reporting Cycle
- Financial Data Available for Board of Directors’ Use
Companies using ERP Systems (NetSuite, Priority, etc.) will have to ensure their system can accommodate the company’s financial reporting needs without requiring manual inputs.
- Intercompany Transactions and Transfer Pricing
Intercompany transactions are one of the most complicated parts of growing globally. These transactions may include the following:
- Charging the US company for services rendered from the Israeli company to the US company
- Assigning R&D Costs, Sale Costs, and Overhead Costs to Multiple Legal Entities
- Establishing Arm’s Length Price According to Tax Authorities
- Documenting Pricing for Transfer Pricing Purposes and Being Audit Ready
Having a formal transfer pricing policy is required in both the US and Israel.
- Integrating Finance with Growth Operations
As companies continue their expansion path, they will need to ensure financial processes/systems continue to support their expanding operations, including:
- Integrating Finance with CRM, Billing, and Payroll Systems
- Implementing Approval Workflows and Internal Control Mechanisms
- Monitoring Cash Flow Across Multiple Legal Entities
- Utilizing Financial Data in Support of Hiring & Expansion Decisions
When finance and operations are properly aligned—finance is a catalyst for driving strategic growth instead of being a reactive function.
- Startups Commonly Make Many Different Mistakes When Expanding into the US
Many companies experience some of the same challenges as they increase their presence in the US, which include:
- Delaying Developing Their Financial Infrastructure
- Using Spreadsheets to Manage Their Consolidation
- Failing to Properly Understand Their Tax Obligations
- Not Aligning their Reporting Standards in both Israel and the US
- Underestimating their Compliance Complexity
Startups who run into any of these challenges will experience negative results to their growth and increase the risks to their organization.
- The Significance of The Chief Financial Officer’s (CFO’s) Leadership in Expanding into the US
A strategic CFO plays an important role in ensuring a company can achieve scalable, successful entry into the US.
Some of the following tasks that a CFO manages include:
- Developing Financial Architecture Across Multiple Legal Entities
- Establishing Compliance Across Multiple States
- Creating Reporting Systems That Help Employees Make Decisions
- Serving as a Resource to Operations, Investors, and Regulatory Agencies
To accomplish all of those tasks, many startups use CFO-as-a-Service to provide them with the same level of expertise as a full-time, Executive level CFO without incurring the costs of hiring that executive full-time.
Conclusion
Although expansion into the US provides many opportunities for organizations, disciplined financial execution is critical to achieving that goal.
Successful organizations typically achieve success, not by moving faster than their competitors, but by building the right foundation at the start.
The establishment of a proper financial architecture and the establishment of compliance will create confidence with investors and achieve successful expansions.
