Setting up a US subsidiary is a critical milestone for Israeli startups going global. Here's exactly how to do it — from entity selection to bank accounts.

# How to Set Up a US Subsidiary from Israel: A Step-by-Step Guide

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For Israeli startups looking to raise US venture capital, hire American employees, or sell to US enterprise customers, setting up a US subsidiary isn't just recommended — it's practically required. But the process involves more than just filing paperwork in Delaware. Here's a comprehensive guide to doing it right.

## Why Israeli Startups Need a US Subsidiary

Before diving into the how, let's clarify the why:

- **VC requirements**: Most US venture capital funds require (or strongly prefer) investing in a US entity, typically a Delaware C-Corp
- **Customer contracts**: Enterprise customers often require US-based contracting entities
- **Banking and payments**: US bank accounts, credit cards, and payment processing are far easier with a US entity
- **Employee hiring**: You need a US entity to legally employ people in the United States
- **IP and tax planning**: The corporate structure between your Israeli parent and US subsidiary has major implications for transfer pricing and tax

## Step 1: Choose Your Entity Type and State

### Delaware C-Corp (Recommended)

For venture-backed startups, a Delaware C-Corporation is the gold standard. Here's why:

- **Familiar to investors**: VCs know Delaware corporate law inside and out
- **Flexible capital structure**: Easy to create multiple classes of stock, issue options, and handle conversions
- **Court of Chancery**: Delaware has a specialized business court with extensive precedent
- **No state income tax on out-of-state revenue**: If you don't have employees or significant activity in Delaware, you won't owe Delaware income tax

### What About LLC?

LLCs are pass-through entities and are generally not suitable for VC-backed companies. Israeli tax authorities may also treat US LLCs as transparent entities, creating complex tax situations.

## Step 2: Incorporate the Entity

1. **Choose a registered agent** in Delaware (required). Services like CSC, CT Corporation, or Registered Agents Inc. cost $100-300/year.
2. **File a Certificate of Incorporation** with the Delaware Division of Corporations. Standard filing takes 3-5 business days ($89 filing fee).
3. **Adopt bylaws** and hold an organizational board meeting.
4. **Issue founder shares** and file an 83(b) election within 30 days if applicable.
5. **Obtain an EIN** (Employer Identification Number) from the IRS. This is your company's tax ID.

## Step 3: Set Up Banking

Opening a US bank account from Israel used to be extremely difficult. Today, several options exist:

- **Mercury**: The go-to for Israeli startups. Fully online application, no branch visit required
- **Relay**: Another startup-friendly option with easy remote opening
- **Chase/SVB**: Traditional banks that require more documentation but offer full-service banking

You'll need your Certificate of Incorporation, EIN, bylaws, and identification for all authorized signers.

## Step 4: Structure the Parent-Subsidiary Relationship

This is where most startups make costly mistakes. Key decisions include:

### IP Ownership

Where does the intellectual property sit? This decision affects your tax liability in both countries. Options include:

- **IP in the US entity**: Simpler for US investors, but may trigger Israeli exit tax implications
- **IP in the Israeli entity**: Better for Israeli tax incentives (Preferred Enterprise regime), but requires a transfer pricing agreement with the US subsidiary
- **Cost-plus model**: The Israeli entity develops IP and charges the US entity cost + markup (typically 10-15%)

### Transfer Pricing Agreement

If both entities exist, you must have a transfer pricing agreement that defines how intercompany transactions are priced. This isn't optional — it's required by tax authorities in both countries.

### Intercompany Agreements

Document all arrangements between the entities:
- **Service agreement**: Which entity provides what services to the other
- **IP license agreement**: If IP is in Israel, how is it licensed to the US
- **Cost sharing agreement**: How R&D costs are allocated

## Step 5: Tax Registration and Compliance

### Federal Taxes
- File **Form 1120** (US corporate tax return) annually
- File **Form 5472** reporting transactions with the Israeli parent (mandatory, with $25,000 penalty per form for non-compliance)
- File **FinCEN BOI report** (Beneficial Ownership Information) — new requirement

### State Taxes
- Register for state tax in any state where you have nexus (employees, office, significant sales)
- File state income tax returns accordingly
- Consider sales tax obligations if selling to US customers

### Israeli Tax Obligations
- Report the US subsidiary on Israeli corporate tax returns
- Ensure transfer pricing documentation is maintained
- Consider withholding tax on dividends and royalties (reduced under the US-Israel tax treaty)

## Step 6: Set Up Operations

- **Payroll**: Use a provider like Gusto, Rippling, or Deel for US employees
- **Accounting software**: QuickBooks Online or Xero, integrated with your Israeli accounting
- **Legal counsel**: Engage both US and Israeli attorneys for ongoing corporate governance

## Timeline and Costs

| Step | Timeline | Cost |
|------|----------|------|
| Incorporation | 1-2 weeks | $500-1,500 |
| EIN | 1-4 weeks | Free |
| Bank account | 1-3 weeks | Free-$50/month |
| Transfer pricing setup | 2-4 weeks | $3,000-10,000 |
| Total setup | 4-8 weeks | $5,000-15,000 |

## How Aleph Accounting Helps

We've helped hundreds of Israeli startups set up their US subsidiary the right way — from entity formation through transfer pricing agreements and ongoing dual-country compliance. Our team handles both Israeli and US accounting, so nothing falls through the cracks.

## Frequently asked questions

### What should you know about Step 1: Choose Your Entity Type and State?

For venture-backed startups, a Delaware C-Corporation is the gold standard. Here's why:

### What should you know about Step 3: Set Up Banking?

Opening a US bank account from Israel used to be extremely difficult. Today, several options exist:

### What should you know about Step 4: Structure the Parent-Subsidiary Relationship?

This is where most startups make costly mistakes. Key decisions include:

### What should you know about Step 5: Tax Registration and Compliance?

Federal Taxes - File Form 1120 (US corporate tax return) annually - File Form 5472 reporting transactions with the Israeli parent (mandatory, with $25,000 penalty per form for non-compliance) - File FinCEN BOI report (Beneficial Ownership Information) — new requirement