Rooney Nimmo routinely advises non-U.S. businesses with respect to formation of stateside subsidiaries and other U.S. legal issues. Below we have provided a summary of some common legal issues foreign companies often encounter and should consider when establishing business operations in the U.S. Careful planning is very important, and experienced counsel in the early phases of formation can help avoid costly legal and tax problems later. Note that laws and rules change frequently in the dynamic U.S. legal system.
CORPORATE FORMATION
U.S.entities/structures used by domestic and foreign companies alike to conduct business in the U.S. include corporations,limited liability companies (LLCs), partnerships, limited partnerships, and branch offices. In order to select the most appropriate business structure, you should take into account the structure of the existing business, tax issues,facts regarding ownership, venture capital or other fundraising ambitions and the particular type of activity the business intends to undertake in the U.S. Each entity type requires distinct documentation and information for formation.
While foreign companies could conduct business in the U.S. without forming a new U.S. entity, it is essential to be aware of the legal and tax implications associated with doing so.Generally speaking, undermost tax treaties, U.S. tax liabilities for a company arise if the company is deemed to be engaged in a trade or business (“permanent establishment”) in the U.S.
You can incorporate in any state regardless of where you do business. However, Delaware is the best option and industry norm if your near term goal is to raise venture capital funding. In addition, many businesses incorporate in Delaware because the franchise tax and other costs are lower, and the Delaware Court of Chancery has extensive expertise in corporate law. The large body of Delaware case law also makes legal outcomes more predictable. Note that few businesses actually have a Delaware office. The corporation needs to qualify to do business in the state in which it operates. This does attract some light extra costs and additional annual paperwork requirements.
VENTURE CAPITAL FUNDING & TRANSACTIONAL
For those accessing the U.S. market, its scale and sources of growth funding can be an additional draw. U.S. venture capital funds are active on both coasts and in certain other clusters with New York City and Silicon Valley leading the way. Series A, B etc. investment rounds follow some fairly standard documents with certain deviations and can be accomplished for controlled flat legal fees. If positioned for acquisition we also regularly assist clients in M&A matters whether exiting or on the buy side. The M&A cycle of late, both here and in Europe has been very “hot.”
TAXATION
After formation, a new U.S. entity should apply with the Internal Revenue Service for an Employer Identification Number (EIN). The EIN identifies the company for federal taxation, payroll, and payment categorization purposes, is needed to open a bank account, and will be requested often by clients or counterparties. In addition to the state were you are incorporated (often the state of Delaware), the U.S. entity should also register with the tax or revenue department in the state(s) in which the company will be doing business.
Key forms of taxes in the U.S.are personal income (for individuals) and corporate income taxes(federal, often state, and sometimes city), employment taxes, sales and use taxes, real property tax and business license taxes. Other miscellaneous taxes also exist.
Corporate income taxes are assessed at the federal and, in most cases, state level. Federal corporate income tax rates depend on many factors and range from 15% to 39%. State corporate income tax rates vary by state. The New York State corporate income tax rate is generally 6.5%.Sales tax (much like VAT in Europe) is assessed in many states on sales of property delivered in the state, leases of tangible personal property, as well as on certain services in the state. Sales tax rates and rules also vary from state to state. Use tax generally applies to tangible personal property used, consumed, or stored in a state but purchased outside the state which would have generated sales tax had the sale taken place in the state.
Founders of emerging companies that move to the U.S. should be aware that they may be deemed U.S. tax residents after being in the U.S. for 183 days or more (can be less depending on historical facts), and therefore becoming subject to U.S. taxation on their worldwide income, including capital gains tax (CGT) (federal and applicable state taxes) upon the sale of stock. So while, under a foreign tax regime (such as the UK’s Entrepreneurs Relief scheme), a selling shareholder might benefit from a lower CGT rate (10%), if the selling shareholder has become a U.S. tax resident, his CGT could be considerably higher (e.g., 35% combined tax rate in New York City).
CUSTOMS / IMPORT COMPLIANCE
Depending on the sales terms according to which a foreign company is selling merchandise into the U.S., and whether or not the company has established a presence in the U.S., the company may be assuming the role of Importer of Record (IOR). The IOR has overall responsibility for clearing imported merchandise, and must exercise reasonable care when doing so.
Exercising reasonable care is especially critical and can be particularly complex when addressing the following areas of high compliance risk: (1) tariff classification; (2) customs valuation; (3) qualification for, and use of, free trade agreements; (4) record-keeping; (5) country of origin determination and marking; and (6) other government agency import requirements, such as the FDA, EPA, FCC, or Fish & Wildlife.
Failure to exercise reasonable care (either through negligence, gross negligence, or fraud) may result in, at a minimum, civil penalties ranging from two times the lawful duties, taxes, and fees that would have been due on the merchandise to an amount equal to the domestic value of the merchandise.
EMPLOYMENT
Federal employment laws, as well as the employment laws of many states,are generally favorable to employers and do not typically mandate the comparatively extensive benefits often granted in other countries (e.g., generous severance or redundancy payments).
Federal laws governing management-labor relations generally relate to unions but also grant non-union employees significant protections regarding discussion of terms and conditions of employment. Federal laws regulate overtime pay and working conditions and prohibit certain actions in the workplace, including sexual harassment and discrimination on the basis of factors such as race/color, religion, sex, national origin, age, disability, pregnancy, etc.
State laws vary but, like federal laws, tend to grant employers a significant amount of flexibility to hire and terminate employees, provided that termination or denial of employment is not discriminatory under state or federal laws. Many states recognize a common law doctrine stating that, in the absence of a contract or union agreement to the contrary, the employee maybe terminated at any time with or without cause. New York law, for example,does not mandate that any severance be paid to a terminated employee.
Neither federal law nor the laws of many states require much from an employer in the way of providing benefits to its employees, particularly smaller-sized employers. For example, under the Patient Protection and Affordable Care Act (ACA), employers with 50 or more full-time or full-time equivalent employees must offer affordable health insurance to those workers; on the other hand, businesses that employ fewer employees are exempt from the employer responsibility mandate. Nonetheless, it is common for employers that want to compete for the best talent to voluntarily provide certain employee benefits, such as medical insurance, retirement plans and parental leave. Laws governing the employment benefits area include the Employee Retirement Income Security Act (ERISA),the Family and Medical Leave Act (FMLA) and, in New York State, the Paid Family Leave Benefits Law. When an employer elects to provide benefits to its employees, the employer becomes subject to a number of federal and state requirements that may obligate the employer to continue coverage under those plans after an employee’s termination (e.g., health insurance continuation coverage at the employee’s expense, known as COBRA continuation coverage).
Post-employment restrictions, such as non-competition, and non-solicitation and non-service of clients or customers, are recognized and enforceable in many states, but not all states permit all types of restrictions. Although the exact test for enforceability varies from state to state, generally, restrictions are enforceable if they are necessary to protect the employer’s legitimate business interests, reasonable inscope (based on duration, geographic area, employee’s position, etc.) and not overreaching or unreasonably burdensome to the employee.Some states (e.g., Florida) have statutes regulating this area.
Lastly, it is important for new U.S. businesses to be aware of the distinctions between an employee(W-2)and an independent contractor(1099)worker. Erroneous misclassification (and improper avoidance of payroll taxes, etc.) can result insignificant costs and penalties and interest.
INTELLECTUAL PROPERTY
U.S. intellectual property laws make available important legal rights to owners of intellectual property. These rights can be valuable to operating businesses, raising capital, establishing and protecting brand value and pursuing exit strategies such as an IPO or sale. Methods for protecting intellectual property include registration of trademarks, copyrights, and patents. Where a technology or process cannot be protected under patent or copyright laws, it may be protectable under confidentiality agreements and trade secret laws.
A company entering the U.S. market should consider registering its intellectual property. Intellectual property registration can afford the registrant statutorily mandated benefits such as the possibility to recover attorneys’ fees and obtain double or treble damages in some circumstances.
At a minimum, an inbound company should, with assistance of counsel, undertake a trademark search of the brand or mark that the company intends to use in the U.S. This preliminary check or search will help to uncover if anyone in the U.S. is using the same or a similar mark. A company who is already using the mark or a similar mark, once aware of a market entrant, may wish to litigate the matter. The last thing a new inbound wants to do is defend a lawsuit.
BUSINESS AGREEMENTS
Written contracts range from complex, lengthy documents (such as distribution and master services agreements)to single-page agreements. The myriad of issues to consider when reviewing or negotiating a contract cannot be covered here. Nonetheless, when a company enters into a contract, it is especially key to review: the choice of law and venue provisions (which designate what jurisdiction’s laws will apply to the contract and where disputes will be resolved); indemnification provisions; waiver or warranty disclaimer provisions;and limitation of liability provisions. It is also important to think about contractual privity issues; that is, if a foreign parent company does not want to be subject to contractual liability involving the U.S. business, absent compelling tax or other reason, the U.S. subsidiary (and not the foreign parent) should enter into the contracts.
For efficient tax planning, multinational companies may wish to consider and put in place intercompany agreements.
IMMIGRATION PLANNING
If any non-U.S. nationals will be actively participating in business in the U.S., it is critical to consider immigration strategies. No person may enter the U.S. without appropriate status or documentation, or engage in employment in the U.S.without appropriate authorization. However, a foreign national may not necessarily need a visa to enter the U.S. Pursuant to the Visa Waiver Program, commonly known as “ESTA”, individuals from most Western European countries may enter the U.S. for limited business and tourist purposes for periods of up to 90 days, provided that they depart at the end of their authorized stay.
The Visa Waiver Program, however,likely will not suit most companies seeking to establish businesses in the U.S.on a long-term basis where foreign nationals are needed to assist with business growth.The visa categories best suited to business purposes in general are: B-1 (for short stays), H, E, and L. The B-1 visa is the most common nonimmigrant visa used by Europeans entering the U.S.for temporary business purposes. B-1 status requires that the visa holder stay in the U.S. only temporarily for business purposes (e.g., investigating opportunities, negotiating contracts, attending conferences, consulting with colleagues or establishing contacts) and not be gainfully employed in the U.S. H visas are for professional workers;E visas are for treaty traders and investors;and L visas are for intra-company transferees. Those seeking to establish new offices or operations in the U.S. typically apply for E and/or L visas. It is also possible to invest in the U.S. under the EB5 program and receive a green card.
In some cases, an individual looking to work temporarily in the U.S. maybe eligible for multiple types of visas, and determining and obtaining the most appropriate work visa can be a challenging endeavor. Moreover,immigration is an ever-changing landscape that is regularly the target of reform. Having experienced counsel to help you navigate the issues will streamline the process for you.
DATA PROTECTION POLICIES
If your U.S.-based or overseas business has any European Union (EU)-based employees, customers or clients, or does business in one or more EU Member States, you will need to consider data protection implications. The EU’s General Data Protection Regulation (GDPR), which came into effect on May 25, 2018, imposes fines of up to 4% of worldwide turnover or €20 million, whichever is greater, on non-compliant individuals and corporate entities, regardless of where in the world they are headquartered. There can also be lasting reputational damage when a violation decision is issued by a data protection authority, whether that authority is EU-based or in a non-EU country where authorities are empowered by a data protection framework agreement with the EU Commission.
Financial penalties and reputational damage can be avoided by implementing data protection policies, both internally and externally, which meet the minimum requirements under the GDPR. The U.S. Department of Commerce has a framework agreement with the EU Commission – the EU-U.S. Privacy Shield – which enables you to submit your U.S. enterprise’s data protection policies to the U.S. Department of Commerce for certification. This in turn helps safeguard against scrutiny by a data protection authority in the event of a complaint or data breach.
For further details regarding any of the areas discussed or if you wish to seek legal advice specific to your situation, please contact us at info@rooneynimmo.com. If you’re in the UK feel free to arrange a call or a meeting with our lawyers in London or Edinburgh.
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