Entity Planning and Trade Compliance: Reducing Tariff Risk in U.S. Operations
Legal Considerations for Foreign Service Firms Facing U.S. Import Tariffs
While tariffs are usually associated with physical goods, their effects are also being felt by foreign service providers in the United States. Due to the increase in remote work and cloud infrastructure, foreign service firms in sectors like IT, software development, and legal support have grown rapidly in the U.S. over the past decade. However, recent tariffs, especially those under Section 301 targeting China, are causing these firms to reconsider their business models.
Although pure service companies remain largely unaffected, hybrid businesses that combine physical and digital offerings can be impacted. For example, if a cloud-based service provider includes hardware components, those physical goods may be subject to tariffs.
Indirect effects of tariffs are also significant. When U.S. clients in industries like manufacturing and retail are impacted by tariffs, they may cut back on spending on outsourced services, affecting foreign firms.
However, the U.S. remains an attractive market for service providers. To succeed, companies need to understand the distinction between goods and services, and structure their contracts and deliverables accordingly. By assessing their exposure and adapting their strategies, service providers can navigate the complexities of tariffs and continue to thrive in the U.S. market.
Scenario | Tariff Impact |
|---|---|
Foreign software company providing cloud services to U.S. businesses | None |
Foreign design firm shipping prototypes into the U.S. | Yes – tariffs may apply on physical goods |
IT services firm selling bundled hardware/software | Yes – tariffs on hardware |
Consultancy working with U.S. steel manufacturers | Indirect – client is tariff-affected |
🇺🇸 How U.S. Tariffs Affect Foreign Service Businesses
1. Direct Impact (Usually Not an Issue)
If your business offers services like consulting, software, design, or marketing and you’re not shipping any physical products into the U.S. then U.S. tariffs don’t directly affect you. Tariffs are taxes on goods, not services.
2. Indirect Impact (Still Possible)
Even if you’re only offering services, tariffs can still affect you if:
Your U.S. clients are in industries hit by tariffs (like manufacturing or retail), and they slow down spending.
You depend on imported goods (like hardware or materials) to deliver your service, and those goods are tariffed.
You sell services that come with hardware or software and those items are imported.
3. If You Sell Products Too
If your business also sends products to the U.S. even as part of a package with your services then tariffs might apply.
This includes:
Shipping products from abroad
Selling hardware and software together (like smart devices with software)
Importing equipment or tools for use in the U.S.
In that case, you’ll need to deal with customs, product classification, and possible tariffs (especially if importing from places like China).
4. Things to Think About
Even if you’re mainly a service business, you should still consider:
Are your U.S. partners or suppliers affected by tariffs?
Are you including physical goods in your service packages?
Are your contracts and pricing structures clearly separating goods from services?
Are you staying on top of tax and compliance rules?
How much does it typically cost to restructure a foreign business into a U.S.tariff friendly entity?
breakdown of potential costs associated with entity restructuring or formation that a foreign business might incur to reduce U.S. tariff exposure. These are illustrative figures and can vary depending on the state, industry, complexity, and legal support involved.
Cost Category | Description | Estimated Range (USD) |
|---|---|---|
Legal Fees – Entity Formation | Legal support to form U.S. LLC or corporation, draft governance docs, advise on structure | $2,000 – $7,500 |
Registered Agent Service | Required in most states for legal notice and compliance | $100 – $500/year |
State Filing Fees | Varies by state; includes incorporation or LLC registration fees | $100 – $800 |
EIN (Employer Identification Number) | IRS tax ID for U.S. entity; often included in legal setup | Usually free or included |
Foreign Qualification (If operating in multiple states) | Required to do business outside formation state | $150 – $750 per state |
Trade Compliance Review | HTS classification analysis, tariff strategy, customs audit prep | $1,500 – $5,000+ |
CPA or Tax Structuring Consultation | Advice on tax nexus, transfer pricing, and international entity relationships | $2,000 – $6,000 |
Customs Broker Consultation (if importing) | Guidance on tariff rates, bonded warehouse or FTZ setup | $500 – $3,000+ |
Foreign Trade Zone (FTZ) Setup (Optional) | Application, coordination with CBP, and site designation | $7,500 – $25,000+ (one-time) |
Annual Reporting & Maintenance | Ongoing compliance filings, tax reports, franchise taxes | $500 – $2,000/year |
Basic LLC in low cost state with legal and trade compliance review: $5,000 – $12,000
Comprehensive setup with FTZ or bonded warehouse and multi-state registration: $15,000 – $40,000+
When is this strategy worth it? When you do $1M or more in sales
If your company imports high value goods, or frequently bundles physical products with services, even a 10% tariff on $1M+ in goods could justify this investment quickly. Moreover, setting up a U.S. entity may open doors to better tax planning, customer confidence, and easier compliance.
Conclusion
While U.S. tariffs primarily target tangible goods, foreign service businesses particularly those with integrated or bundled offerings may face exposure if appropriate planning is not undertaken. The strategies summarized above can help mitigate risk and optimize cross-border operations. We recommend reviewing your business model and revenue streams in consultation with legal, tax, and trade compliance professionals to determine which structure best aligns with your risk tolerance and commercial goals.
Let us know if you would like us to facilitate consultations with select U.S. law and accounting firms.
Law Firms
Sandler, Travis & Rosenberg, P.A.
Husch Blackwell LLP
Kelley Drye & Warren LLP
Curtis, Mallet-Prevost, Colt & Mosle LLP
Accounting Firms
Crowe LLP
H&Co
Frazier & Deeter