Legal and Tax Essentials for Czech Companies Expanding to the US Market

Expanding to the United States is a logical step for growth for Czech companies; however, the American market offers not only immense potential but also complex legal and tax challenges. Entering the market requires precise preparation, as errors in corporate structuring or ignoring tax obligations can lead to significant fines. Expert legal guidance from our Prague-based law firm is therefore crucial for success overseas.

Quick Summary

• Choosing the legal structure is key: Establishing an LLC or C-Corporation in the USA has a fundamental impact on your tax obligations, shareholder liability, and corporate governance. It is not just administration, but a strategic decision with long-term consequences.
• Tax and reporting obligations never end: US authorities require the filing of forms and tax returns even if your US company has no income. Ignoring these obligations leads to high penalties.
• Employment in the USA has its own rules: From visa processing to payroll and workers' insurance, the US HR system differs from the Czech one. The USA applies the principle of "at-will employment," which, however, has its limits.
• Legal and contractual documentation must comply with US law: American contracts operate on Common Law principles. What is not written in the contract practically does not exist, and statutory protective mechanisms known in the Czech Republic are often absent here.

The US market – why it is attractive, but why the journey is complex

The reasons for the interest of Czech entrepreneurs in the US market are clear. The United States represents one of the world's largest economies, characterized by a stable legal system and an ecosystem that supports innovation. Many Czech IT firms and manufacturers find opportunities here that would take years to develop in the Czech Republic.

The tax system is substantially more complex than in the Czech Republic, where individuals and companies face a combination of federal, state, and local taxes. The reality often looks different than many entrepreneurs imagine because American law is governed by both federal laws and the laws of individual states. There is no single legal framework for the entire territory, which complicates compliance requirements.

Our attorneys in Prague at ARROWS regularly handle the expansion of Czech companies into America. We see which mistakes are repeated and how expensive these mistakes can become. Experience has shown that it is most effective to have the right plan from the very beginning.

Choosing a state and legal form – the first critical decision

One of the most important decisions is choosing the state where you will establish your US company. It is not just a question of where to be physically located, but which state legal system to submit to. At first glance, it seems simple, but in practice, the choice of registered office has fundamental impacts.

Delaware, Wyoming, and Nevada are traditionally considered business-friendly states, offering lower registration fees and more flexible legal regulations. Delaware is particularly popular with companies that plan to attract capital from investors later or go public. It has a highly developed corporate legal system, the decision-making practices of which are well known to investors.

However, if you plan to have a physical presence in the USA, it will be necessary to register the authority to do business in every state where you will be actively operating. This means you cannot just choose one state and expect to operate everywhere without further steps. If you want to have employees or a physical branch, registration in that state becomes an obligation.

The choice of legal form between an LLC and a C-Corporation must be considered carefully, as it has a major impact on taxation and future entry of investors. An LLC is usually administratively more flexible and offers the possibility of pass-through taxation. A C-Corporation is a standard corporation that is preferred if you plan to sell the company later or issue employee stock options.

Our Czech legal team at ARROWS will guide you through the selection of the state and legal structure so that your decision corresponds to your company's long-term strategy. Expertise here is demonstrated by the ability to see further than just the initial registration and to avoid future complications.

What must I consider when choosing a state?

• If you want a structure for investors: Delaware is the traditional choice and the standard for startups seeking VC capital. If you are primarily interested in low costs, consider Wyoming or Nevada.
• If you plan a physical presence: It is often most advantageous to establish the company directly in the state where you will have an office or employees to avoid paying fees in two states.
• Tax aspects: Some states do not have state corporate or individual income tax, which can have a significant impact on the total tax burden.

Registering a US company – basic steps and their hidden costs

Registering a US company looks simple on paper. The company name is registered with the Secretary of State, founding documents are prepared, and the state fee is paid. However, the reality of the entire process is more complex and requires precision.

During registration, you must ensure that your name is not already taken and does not infringe on trademarks. The name must meet the specific requirements of individual states, such as the mandatory designation of the legal form like LLC or Corp.

Furthermore, you will need a Registered Agent, which is a person or service with a physical address in the given state. Many Czech entrepreneurs use professional services because a Registered Agent is a legal requirement for receiving official documents.

Obtaining an EIN from the IRS is free, but for foreign founders without a US Social Security Number, the process is administratively more demanding. Without this federal tax identification number, you cannot open a bank account, hire employees, or file tax returns.

As of 2024, most companies must file a Beneficial Ownership Information (BOI) report with FinCEN. Failure to comply with this obligation risks high fines and possible criminal prosecution. This new obligation applies to both newly formed and existing companies.

A bank account is the next step, while US banks have significantly tightened requirements for opening accounts by foreign entities in recent years. You will need founding documents, an EIN, and personal details of all significant owners. Without a bank account, it is practically impossible to do business.

ARROWS law firm in Prague ensures for its clients that all steps are performed correctly and in the proper order, including fulfillment of the new BOI reporting obligation. In practice, it turns out that individual steps are interconnected, and a delay in one slows down the entire process.

Registration Obligations and Costs

• Annual Fees: Most states require the filing of an annual report and the payment of a fee. If you forget, you risk administrative dissolution and penalties under local state laws.
• Mandatory BOI Reporting: Reporting Beneficial Ownership Information to FinCEN is a one-time obligation that must be updated whenever there is a change in the reported data.
• Tax Forms and Returns: You must file a tax return starting from the very first year, even if you have no income. Omitting information forms is punishable by heavy fines.

Tax Obligations – Forms You Must Not Forget

The US tax system is one of the most complicated aspects of American business. While in the Czech Republic there is a single tax administrator, in America you must deal with the federal IRS, state authorities, and often local governments.

If you own a C-Corporation or an LLC with a single foreign owner, you are obligated to report transactions with related parties using Form 5472. The form must include details of transactions such as capital contributions, loans, purchases, or sales.

The penalty for failing to file or filing an incomplete Form 5472 is very high and applies to each report and year. This rule applies even if your US company has no taxable income but there has been a movement of capital. Many entrepreneurs mistakenly believe that an inactive company does not need to report anything.

If you have a C-Corporation, you will file Form 1120, which is the federal income tax return for corporations. The filing deadline is usually the middle of the fourth month after the end of the tax period.

Sales Tax is another complex topic, as there is no federal VAT in the USA. If you exceed a certain sales limit or number of transactions in a given state, you must register and remit tax, even if you do not have a physical branch there.

Without proper records and specialized software or advice, the risk of error is high, and tax assessments with penalties can arrive several years retroactively. All of this creates hundreds of possible combinations that require professional oversight.

Forms and Deadlines

• Form 5472: Mandatory for foreign-owned companies for transactions with related parties; failure to file is punishable by a $25,000 fine.
• Form 1120: Tax return for C-Corporations with a standard deadline of April 15th.
• Sales Tax: The obligation to register arises upon exceeding turnover or transaction count thresholds in a specific state.
• FBAR: If a US entity holds foreign accounts with a value exceeding $10,000, a reporting obligation to FinCEN may arise.

Employment in the USA – From Visa Matters to Payroll

If you want to employ workers in America, you are entering a highly regulated environment. Whether it involves local workers or relocated Czech employees, the rules are strict.

To relocate a Czech employee to America, you will need a work visa, as the standard ESTA travel authorization does not allow for productive work. Most commonly, the L-1 visa for managers and specialists or the E-2 investor visa is used.

Employment without the appropriate visa is illegal and carries the risk of employee deportation and a ban on entry to the USA. Employers face heavy fines if these rules are violated.

If you hire local workers, you must verify their right to work in the USA using Form I-9. US authorities conduct audits, and missing or incorrectly completed forms can lead to sanctions.

Payroll management in the USA is complex because the employer must withhold federal tax, state tax, and social security and Medicare contributions. Furthermore, the system of withholdings and contributions varies from state to state.

Workers' Compensation insurance is mandatory in most states, and employing people without it is illegal. This insurance covers medical expenses and a portion of wages in the event of an injury.

While benefits are not always mandatory, they are a standard expectation for high-quality candidates in the labor market. Correct HR process setup is therefore essential for competitiveness.

Our attorneys in Prague at ARROWS law firm can help you secure legal advice for obtaining visas and setting up employment contracts. We also ensure compliance with labor regulations to help you avoid unnecessary risks.

Common Employment Mistakes in the USA

• Working on ESTA: A frequent mistake, as business meetings are permitted, but actual work for a US branch is not.
• Missing Workers' Compensation: Can lead to lawsuits and fines from state authorities.
• Contractor vs. Employee Classification: If you hire people as independent contractors but they effectively function as employees, you risk tax reassessments and penalties.

Legal Documentation – American Contracts are not Czech Contracts

The US legal system is built on Common Law, which means that American contracts function on different principles than continental ones. The most important rule is: if it is not written in the contract, it cannot be relied upon.

In the Czech Republic, the Civil Code supplements what is missing in a contract, whereas in the USA, such an automatic safety net does not exist in many areas. Contracts are therefore much longer and more detailed to cover all eventualities.

The concept of "consideration" is key in American contract law because for a contract to be enforceable, there must be a mutual exchange of value. Gratuitous promises are often unenforceable and legally ineffective.

Another difference lies in the precise use of terminology, where the incorrect use of words can completely change the meaning of an obligation. The word "shall" in contracts usually denotes an obligation, while "may" denotes only a possibility.

Important clauses in American contracts include choice of law, dispute resolution methods, and limitation of liability. Arbitration is frequently utilized and is very common in the USA.

Lawyers familiar with US law will ensure that your contracts are enforceable and protect your interests. Professional assistance is essential here to prevent future disputes.

MicroFAQ: Basic Questions on US Contracts

1. Can a Czech lawyer prepare a contract under US law?
Without knowledge of the specifics of Common Law and the law of a particular state, this is very risky; therefore, the contract should be reviewed by a lawyer qualified in US law.

2. What if we have an oral agreement beyond the scope of the contract?
If the contract contains a specific "entire agreement" clause, oral arrangements are generally legally insignificant and unenforceable.

3. Can I limit my liability for damages?
Yes, this is common and recommended; however, courts may not recognize limitations of liability in cases of gross negligence or intentional misconduct.

American Reality versus Expectations – What Actually Happens

Theory is one thing, practice another, and although the American market is dynamic, bureaucracy can be surprisingly rigid. Examples include tax registration and bank accounts, where processes can drag on.

While incorporating a company can be fast, achieving full functionality in the form of an EIN and a bank account can take weeks or even months. Banks often reject applications from foreign owners without providing a reason due to internal risk policies.

Tax discipline is enforced more strictly in the USA, and the IRS has extensive powers with automatic penalties for late filings. American business culture is more direct and formal, where relying on oral agreements often ends up with lawyers.

Our attorneys in Prague at ARROWS help clients bridge the gap between Czech expectations and American reality. In doing so, we save your time and nerves and ensure a smoother expansion process.

Practical steps – from idea to a functional American company

If you are deciding on expansion, proceed systematically and do not underestimate preparation.

1. Define the goal: Clarify whether you plan for online sales, a branch, a warehouse, or just a holding structure.

2. Choice of state and entity: Decide between an LLC and a Corp and choose a state, whereby consultation with a tax advisor is necessary.

3. Registration and compliance: Ensure registration, obtaining an EIN, and reporting owners under BOI reporting requirements.

4. Operational setup: Open a bank account, set up accounting and payroll, and prepare legal documentation.

All these steps require time and expertise, which our Prague-based law firm will provide to ensure they are executed correctly.

Risk areas and how to avoid them

Risks and Penalties	How ARROWS assists (office@arws.cz)
Failure to file Form 5472: Fine of USD 25,000/year + increases for delays. Applies even to "dormant" companies.	Tax and reporting advisory: We monitor the obligation to file information forms and cooperate with US tax advisors.
Failure to comply with BOI reporting: Fine of USD 500/day.	Compliance: We ensure timely reporting of beneficial owners under the Corporate Transparency Act.
Poorly drafted contracts: Unenforceability of rights, lost disputes.	Contract preparation: We draft or review contracts according to US legal standards and protect your interests.
Illegal work on ESTA: Deportation, entry ban.	Immigration advisory: We secure the correct type of visa (L-1, E-2) for your key personnel.
Cancellation of registration: Loss of legal personality.	Corporate Secretarial Services: We monitor deadlines for annual reports and state fees.

Tax optimization and international aspects

When doing business in the USA, it is necessary to address the avoidance of double taxation, which is governed by the relevant treaty between the Czech Republic and the USA. It is important to understand how taxes in both countries interact.

The federal corporate income tax is currently 21%, to which state taxes are added. When paying dividends from the USA to the Czech Republic, a withholding tax applies, which is usually reduced thanks to the treaty.

For LLCs with pass-through taxation, the situation is more complex as profits are taxed at the member level. For Czech residents, this requires a specific tax return in the USA and a tax credit in the Czech Republic.

Our attorneys in Prague, in cooperation with tax advisors, will design a structure that is tax-efficient. This ensures compliance with the laws of both countries and the optimization of your tax burden.

Who can you contact?

MicroFAQ: Taxes and international aspects

1. Do I have to tax US profits in the Czech Republic?
Yes, Czech tax residents must declare worldwide income; however, tax paid in the USA is usually credited against the Czech tax liability.

2. How high are the total taxes?
It depends on the state and entity form, but a C-Corp pays an average effective tax of around 21–28% plus withholding tax on dividends.

3. Can I reduce taxes through expenses?
Yes, the USA recognizes a wide range of tax-deductible expenses if they are business-related and properly documented.

Czech-American business culture – the invisible pitfalls

Cultural differences can be a source of misunderstanding, as Americans are straightforward and result-oriented in business. Written form is essential here; if it is not in an email or contract, it is as if it never happened. In the USA, disputes are resolved pragmatically, often with the help of lawyers, which is not perceived as hostility but as part of the process.

Business compliance – what is often overlooked

In addition to taxes, you must address sector regulations and data protection, which in the USA is handled at the individual state level. If you target customers in California, for example, your website and processes must comply with their strict data protection laws.

MicroFAQ: Regulation and compliance

1. Does GDPR apply in the USA?
Not directly, but if an American company serves EU citizens, it must comply with GDPR, while different state laws apply to US citizens.

2. How do I find out which regulations apply to me?
We recommend conducting a legal audit before entering the market to identify all relevant regulations.

3. What are the risks of non-compliance?
There is a risk of fines from regulators and class-action lawsuits from consumers, which can be financially devastating for a company.

Conclusion

Expansion to America is a great opportunity for Czech companies, but it requires respect for local rules. America offers an environment that supports entrepreneurship but harshly punishes ignorance of the law. Careful planning and professional guidance are the best prevention against losses.

Our Czech legal team has extensive experience in establishing American companies, tax advisory, contract preparation, and visa agendas. Thanks to our membership in an international network, we have partners directly in the USA to handle local specifics.

ARROWS law firm in Prague will help you set up your business so that it is secure, efficient, and legally compliant. If you are interested in expanding to the USA, contact us at office@arws.cz.

FAQ – Most frequent legal questions regarding expansion to America

1. How long does it take to set up a company in America?
The state registration itself takes days to weeks, but obtaining an EIN, opening an account, and setting up processes realistically takes 1–3 months.

2. Which legal form should I choose – LLC or Corporation?
For most tech startups seeking investment, a Delaware C-Corporation is the standard, while an LLC may be more suitable for smaller businesses.

3. Should I be concerned about a tax audit from the IRS?
As long as you fulfill your obligations properly, there is no reason for concern; however, the risk lies in ignoring reporting requirements, where the IRS issues penalties automatically.

4. What if I want to relocate a Czech employee to the United States?
It is necessary to obtain a work visa, as the process is administratively demanding and requires meeting strict criteria under US immigration law.

5. How do American contracts differ from Czech ones?
They are longer and more complex because they cannot rely on a comprehensive civil code as in the Czech Republic and must cover all eventualities within the contract itself.

6. What are my obligations if the company is not yet active?
You are still required to file tax returns, submit BOI reports, pay state fees, and maintain a registered agent.

Disclaimer: The information contained in this article is for general informational purposes only and serves as a basic guide to the subject matter. While we strive for maximum accuracy, legal regulations and their interpretation evolve over time. To verify the current wording of regulations and their application to your specific situation, it is essential to contact our Prague-based law firm, ARROWS (office@arws.cz), directly. We assume no responsibility for any damages or complications arising from the independent use of information from this article without our prior individual legal consultation and professional assessment. Every case requires a tailor-made solution under the relevant legal framework; therefore, do not hesitate to contact our Czech legal team.

Read also:

• How to Open a Company or Branch in the Czech Republic as a Hungarian Business:
• Setting Up a Czech Subsidiary: Key Legal and Tax Considerations:
• How to Establish a Czech Company or Branch in Portugal: Legal Minimum and Practical Tips:
• How to Deregister a Dormant Company in the Czech Republic:
• Company Closure vs. Liquidation: What’s the Difference?: