A Summary of Relevant Aspects for Foreign Companies
Still being the largest single market in the world, the USA is traditionally one of the most important markets for foreign companies. After several years of successful imports into the United States, foreign companies are often faced with the question of whether it makes sense to have their own presence in the US market. The following article is intended to provide a brief guide to support decision-making:
I. Federal and State Law
In the United States, laws and judgments exist both at the federal and at the state level. However, the powers of individual US states are more pronounced than in other countries, where the regulatory powers of the states are often limited to certain areas. In the USA, the principle applies that federal law is only applied in exceptional cases, for example in the areas of immigration law and patent and trademark law. The extent to which state and federal law compete and interact in certain areas must be examined on a case-by-case basis. Foreign companies wishing to have their own presence in the United States should be aware that different regulations may apply depending on the sector, activity and specific state.
II. Choice of the Legal Form of a Subsidiary
A foreign company planning to enter the US market must first choose the appropriate legal form for its US business. The most common types are corporations, limited liability companies (LLC) and partnerships. Each type has advantages and disadvantages; they differ with regard to the limitation of liability for management and shareholders, the taxation of profits and distributions as well as the involvement of management and shareholders. This can have considerable consequences, particularly in cross-border situations, which can differ considerably from the effects on US citizens.
Subsidiary. Of course, a foreign company is generally not obliged to conduct its business activities in the USA in the form of a US company, but can also open a dependent branch office/permanent establishment. However, this is usually not recommended for tax and liability reasons. We regularly advise our clients to set up an independent structure and design it in such a way that liability and US tax liability remain limited to it.
Establishment of a US Subsidiary. US companies of any kind are organized under state law. Each state has its own rules for the formation and administration of a company. The individual company types are briefly described below.
In theory, a company can be formed under the law of one state and have its registered office in another state. Whether or not this makes sense depends on the business activity and the shareholder structure. Clients frequently ask us about certain states because they hear in the media that these states are particularly advantageous. These are often Delaware, Nevada or Wyoming. It is important to understand that while the laws and precedents in these states may be meaningful to a foreign company, for the vast majority of cases this is irrelevant. It is not relevant for a foreign company with a 100% US subsidiary how pronounced the rights of a minority shareholder are in Delaware, for example. Accordingly, it must be examined on a case-by-case basis what is desirable and useful for the client.
On the different corporate forms:
Corporation: The formation of a corporation requires the submission of a Certificate of Incorporation to the Secretary of State of the respective founding state. This can usually be done online. In most states, the owners of a company (also known as “shareholders”) elect the directors or board members who determine the company’s policy and appoint the so-called “officers”, such as the president, vice president, secretary and treasurer.
U.S. corporate law provides for a specific approach to corporate governance. Management consists of officers and directors. The officers conduct the day-to-day business of the corporation, while the directors tend to exercise control functions. However, directors are usually significantly more involved in operating of the corporation. The extent to which this should be permissible can be determined in specific cases in the articles of association, the so-called Bylaws.
The management positions of a corporation may be held by foreign nationals who may also even live abroad. However, caution is required when exercising a dual function in a parent company and a subsidiary. This can become a problem under both liability and tax law.
In tax law, the disadvantage of the corporation is that profits are taxed at the level of the company, and then again taxes are levied on dividends when they are distributed. This can be avoided in certain circumstances. Here, too, the shareholder structure is a decisive factor. A “US tax resident” shareholder, for example, has the option of avoiding the taxation of the company by choosing taxation only at the shareholder level. This so-called “S-Corporation” is only possible under certain conditions.
The shareholders of a corporation are not personally liable for the actions or liabilities of the company. This exclusion of liability of the shareholders is subject to the observance and respect of the corporation’s own legal form. In certain circumstances, the shareholder and/or director may be held personally liable in the event of disregard or misuse of the corporate form for criminal acts. This is called “piercing the corporate veil”.
A contribution of equity capital at the time of formation or at a later stage is not required.
Limited Liability Company. Another possible form of company is the Limited Liability Company (LLC). In particular, it offers the shareholder the limitation of liability of the corporation, combined with the tax privilege of the partnership. Compared to the corporation, the LLC offers more flexibility in terms of company management and financial decisions. It is recommended that the shareholders of an LLC, the so-called “Members”, sign a memorandum or articles of association, the so-called “Operating Agreement”, which regulates the business activities and organization of the LLC.
Like a corporation, the LLC has its own legal personality that is independent of the shareholders. The personal liability of the partners is therefore limited to their investments. Similar to a corporation, creditors have only access to the private assets of the shareholders under very limited circumstances. This is only the case if the partners ignore the business identity of the LLC or use it merely as a pretext to avoid the liability of the parent company.
Foreign tax authorities (e.g. in Germany) are often very critical of the LLC, so income from LLC activities may be taxed on a case-by-case basis. This can lead to significant tax related issues, such as double taxation that does not lead to a benefit under the Double Taxation Agreement (this name is somewhat misleading, it is actually a a treaty to avoid double taxation). Under certain circumstances, the LLC may be useful for our foreign corporate clients, but a very precise case-by-case assessment is required.
Partnerships. A foreign company can also form a partnership by forming a business or investment company with another shareholder or company with the aim of doing business together and making a profit in the USA. Although a written agreement is not required in order to enter into a partnership, it is always advisable to conclude a written memorandum of association in order to secure evidence. Partnerships do not readily offer the same benefits as corporations and LLCs with respect to the exclusion of liability of shareholders. This, however, can still be achieved through intelligent structuring.
III. Bank Relations and Payment Transactions
It can be difficult for a foreign company to open a bank account or obtain credit in the USA. This also applies to US start-ups held directly or indirectly by a foreign company. We help our clients through a network of personal contacts with US banks that has been developed and established over many years.
IV. Contract Law
US Contract law for companies. In principle, contract law is first and foremost the responsibility of the individual US states. However, there is a federal law, the so-called Uniform Commercial Code (abbreviated UCC), which should serve as a model for the individual states in the interest of harmonizing the regulations between the states. Many federal states have adopted the UCC unchanged and thus converted it into state law. Some states have adopted the UCC Code with amendments. Overall, the UCC has led to a US-wide standardization of the regulations that is advantageous for business transactions.
Distribution agreements and joint venture agreements are usually of particular importance to our clients. We negotiate such agreements with the US partners in close consultation with our clients. This also applies to license agreements and company acquisitions. The examination of the licensee’s turnover and the legal situation of the company to be acquired is an important part of our contractual work. Of course, regular purchase agreements and sales contracts are also highly relevant.
Generally, in the USA a contract does not have to be concluded in writing. However, it is also true that an oral contract is difficult to prove in general and especially in detail. Written contracts are therefore the absolute norm in company law. US contracts are almost always much more comprehensive and detailed than foreign contracts. There are several reasons for this. On the one hand, the lack of legal norms that make many contractual regulations unnecessary in other countries. On the other hand, US courts have a tendency to find the interpretation of any contract primarily in the contract itself. All this results in considerably more detailed contracts, often with apparently repetitive and even redundant regulations.
Applicable Law, Place of Jurisdiction for Disputes, Clause on Attorney’s Fees. In the United States, each party pays its own attorneys’ fees. This also applies if one party prevails in a legal dispute. A statutory right to reimbursement of attorneys’ fees exists only in exceptional cases. A corresponding clause should therefore be anchored in any US business contract. A clause on the place of jurisdiction and applicable law is also recommended. It is quite possible to agree on foreign law and a foreign place of jurisdiction. This is primarily a question of negotiating position. Caution is required when applying a particular US law and the jurisdiction of a US court. Depending on the legal system and also on which court has jurisdiction, this can have very significant effects on a potential case, both in terms of costs and in terms of judgment.